funded pensions in central and eastern europe design and experience
DESCRIPTION
FUNDED PENSIONS IN CENTRAL AND EASTERN EUROPE Design and Experience. Agnieszka Chlon-Dominczak Geneva, October 9th, 2003. Countries implementing mandatory funded pension schemes. Population ageing. Dependency rate (65+/15-64). Pension expendiutre. Reasons for the multi-pillar reform. - PowerPoint PPT PresentationTRANSCRIPT
FUNDED PENSIONS IN CENTRAL AND EASTERN EUROPEDesign and Experience
Agnieszka Chlon-DominczakGeneva, October 9th, 2003
Countries implementing mandatory funded pension schemes
0
2
4
6
8
10
12
1997 1998 1999 2000 2001 2002 2003 ...
num
ber o
f cou
ntrie
s
HungaryKazakhstan
PolandLatvia
CroatiaEstoniaBulgaria
Macedonia
LithuaniaSlovakiaUkraine
Dependency rate(65+/15-64)
Population ageing
0
10
20
30
40
50
60
Bulg
aria
Croa
tia
Latv
ia
Esto
nia
Hung
ary
Pola
nd
Mac
edon
ia
Kaza
khst
an
num
ber o
f per
sons
old
er th
an 6
5 pe
r 100
per
sons
age
d 15
-64
2002
2050
Pension expendiutre
0
2
4
6
8
10
12
14
Croa
tia
Pola
nd
Mac
edon
ia
Hung
ary
Bulg
aria
Latv
ia
Esto
nia
Kaza
khst
an
% o
f GDP
Reasons for the multi-pillar reform
• to make the pension system sustainable in long run to reduce implicit pension debt to diversify risk
• to achieve better balance between collective and individual responsibility in the pension system
• to encourage additional savings• to develop and strengthen financial markets
Design
Minimum pensionsCountry Minimum pension
level(% of averagewage in 2002)
Qualifying period(women/men)
Structure of the guarantee
Hungary 17% 20/20 Financed from the state budget
Kazakhstan 20% 20/25 Financed from the state budget, topping-up pensionsreceived from the funded pillar
Poland 30% 20/25 Financed from the state budget, topping-up pensionsreceived from the first and second pillars.
Latvia 17% 10/10 In the first tier, financed from social securitycontributions.
Croatia 10,5%2 15/15 In the first tier, financed from social securitycontributions.
Bulgaria3 19% 15/15 In the first tier, financed from social securitycontributions.
Estonia 13% 5/5 In the first tier, financed from the state budget
Macedonia 41%
38%
35%
Over 30/35 years
Over 20/25 years
Over 15 years
Financed from social security contributions, topping-up pensions received from the first and secondpillars.
Changes in the PAYG
• to balance public pension expenditures
• to create room for financing the transition costs
Strategy Countryexamples
Going towards defined contribution
Poland
Latvia
Croatia
Reducing existing defined benefit
Hungary
Bulgaria
Estonia
Macedonia
Flat rate minimum benefit Kazakhstan
Contributions
• Tax treatment: usually EET• Size of contributions to funded component depends on capacity to finance transitions costs
0%
5%
10%
15%
20%
25%
30%
35%
Poland Latvia Bulgaria Hungary Macedonia Croatia Estonia Kazakhstan
non old-age first pillar second pillar not a funded scheme member
0%
5%
10%
15%
20%
25%
30%
35%
Poland Latvia Bulgaria Hungary Macedonia Croatia Estonia Kazakhstan
non old-age first pillar second pillar not a funded scheme member
Participation in the funded pillar
18 24 30 36 42 48 54 60
Hungary
Macedonia
Estonia
Latvia
Poland
Croatia
Bulgaria
Kazakhstan
mandatory
voluntary not allowed
Transition costs• Size depends on:
policy choices contributions members of funded system
individual choices• Examples:
Poland: 1.6% of GDP Hungary: 0.6% of GDP
• Financing: current tax revenues savings on pensions future revenues (debt)
Contribution collection
K azakh stan
C roa tia
S ep ara te in s t itu tion
P o lan d
B u lg aria (u n til 2 0 0 3 )
M ac ed on ia
S oc ia l S ec u rity A d m in is tra to r
L a tv ia
E s to n ia
B u lg aria (from 2 0 0 4 )
U n ified co llec tion w ith tax
C en tra lised
Hu ng ary
D e-c en tra lised
C on trib u tion c o llec tion
Supervision
C roa tia
M aced on ia
S ep ara ted
K azakh s tan
P o lan d
P artia lly con so lid a ted
H u n g ary
B u lg aria
L a tvia
E s ton ia
F u lly con so lid a ted
S u p ervis ion
Licensing• financial requirements:
minimum shareholder capital,• legal provisions and quality check:
presenting draft articles of association for the approval of the supervision
business plan information on the quality of the managers
0% 20% 40% 60% 80% 100% 120% 140% 160%
Kazakhstan
Poland
Croatia
Macedonia
Hungary
% of assets
Corporate bonds, equity and investment fundsMunicipal bondsshort-term bank depositsreal estate
Investment limits
Min 50% in state bonds
Min 50% in state bonds
Foreign investment
• In Estonia: only investment in specified categories of foreign investment, no quantitative limit
0%
5%
10%
15%
20%
25%
30%
35%
Hun
gary
Latv
ia
Mac
edon
ia
Cro
atia
Kaz
akhs
tan
Pol
and
Bul
garia
Guarantees• Rate of return guarantees:
Relative to pension sector Kazakhstan Poland Croatia
Relative to benchmark: Hungary
• No rate of return guarantee: Latvia Bulgaria Estonia Macedonia
• Financing of guarantees: Mandatory reserves
Hungary Kazakhstan Poland Bulgaria Estonia
Guarantee funds Hungary Poland Estonia
Payouts• Mandatory annuity:
Hungary (pension fund or insurance company) Poland (providers not decided yet) Croatia (specialised companies) Bulgaria (licensed companies) Estonia (licensed insurance companies)
• Several options: Latvia (various annuity types - joint, variable, deferrals) Macedonia (annuity or scheduled withdrawal) Kazakhstan (once the system matures - annuities, currently
lump-sums are allowed)
Transparency and accountability
• Annual statements financial statements investment structure shareholders structure
• Valuation of assets• Information for participants
individual accounts (by mail, also by Internet or telephone)• Web site• Publishing investment results
Experience
Members
Funded system participants (ths) % of all contributors
Kazakhstan 5 141 100%Poland 10 990 76,4%Hungary 2 253 49,6%Bulgaria 1 115 48,40%Croatia 938 67,50%Estonia 210 35% (of choice group)Latvia 325 32%
Membersage distribution
• Similar age pattern in Poland and Hungary, despite different switching policies
• Other countries: in Estonia: 45% in the age group 20-25 and 32-34% in age group 26-60,
fairly equal distribution
0%
20%
40%
60%
80%
100%
Hungary Poland
above 55
40-5530-40
up to 30
Number of funds
Initial year 2002Kazakhstan 10+1 13+1Hungary 38 18Poland 21 17Bulgaria 8Croatia 7Estonia 6 15 fundsLatvia 6 11 plans
Concentration
0%
20%
40%
60%
80%
100%
1 2 3 4 5 6 7 8 9 10
% o
f tot
al m
embe
rs
Bulgaria
Estonia
Croatia
LatviaKazakshtan
PolandHungary
• Significant share of state funds in Latvia (76%) and Kazakhstan (46%)
Average size
0100200300400500600700
Pol
and
Kaz
akhs
tan
Bul
garia
Cro
atia
Hun
gary
Latv
ia
Est
onia
thou
sand
per
sons
Market structureTRANSFERS BETWEEN FUNDS
• Fewer transfers among funds than expected: in Hungary around 1% of members changed funds In Poland the number of changes is growing:
1.4% in 2000 1.7% in 2001 3.1% in 2002
in Kazakhstan: mostly transfers from state to non-state pension funds share of state pension fund decreased from 82% in 1998 to 46% in 2001 smaller movements between private funds
in Latvia: in 2003 c. 12% participants changed from state to private pension funds
Assets(USD MLN)
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
1998 1999 2000 2001 2002
mill
ion
USD
Hungary Kazakhstan Poland
Assets• Role of pension funds as institutional
investors:
stock market capitalisation
pension funds' equity
% of stock market in pension funds:
Hungary 6,28 0,16 2,6%Poland 6,19 2,13 34,4%
Investments
0%
20%
40%
60%
80%
100%
Pola
nd
Kaza
khst
an
Hun
gary
Bulg
aria
Cro
atia
GDS Equity Others
c
Design of funded systems:• Countries tend to limit:
types of charges contribution based asset based performance based transfer fee
levels of charges for all or for selected charge types
• Charges deducted only by managers• In few cases: specific charges can be paid directly
from pension fund assets
Charge design in the region
Types of chargesCountry Limits on charge
structure admission fee contribution-based fee
assetmanagement fee
performance fee
Hungary Kazakhstan Poland Latvia Croatia Bulgaria Estonia Macedonia
Source: Agnieszka Chlon-Dominczak, Funded Pensions in Eastern Europe and Central Asia: Design and ExperiencePaper prepared for the World Bank in co-operation with FIAP (2003)
Impact of fees in selected countries
Poland2001
Polandnew law
2004
Kazakhstan2001
Kazakhstannew law
2002
Croatia2002
Croatia –draft law
Up-front fee(% contribution) 8.5* from 7.0 to
3.5 1 0 0.8 0.8
Management fee(% assets) 0.6 Up to 0.54 None 0.6
(0.28) None 1.2
Rate of return fee/‘performance fee’ (%return)
None Up to 0.06 10 15 25 None
Reduction in assets 17.4 14.4 10.3 16.5 29.3 26.4Reduction in yield 0.82 0.65 0.37 1.13 1.61 1.19
Source: World Bank (2003)
Charges - actual performance:
• Charge levels are different across countries
• They reflect the legal design, supervision practices and competition
• Economies of scale are hardly observed
Charges vs. size of pension funds
Kazakhstan and Poland:y = -0.1209Ln(x) + 2.926
R2 = 0.0389
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0 150 000 300 000 450 000 600 000 750 000 900 000
number of members
aver
age
char
ge p
er m
embe
r (in
ths
teng
e)
y = 10.502Ln(x) - 71.521R2 = 0.1763
30
50
70
90
110
130
150
170
190
0 500 000 1 000 000 1 500 000 2 000 000 2 500 000 3 000 000
number of members
aver
age
char
ge p
er m
embe
r (in
PLN
)
• Charge level does not depend on the pension fund size• Some economies can be seen in Kazakhstan• In Poland - bigger funds charges are higher
Kazakhstan 2001 Poland 2002
Early experience with costs
• Costs of initial year high: driven by sales and advertising
• Reductions in following years• Some costs imposed by the law
costs of guarantees and mandatory reserves costs of reporting costs of supervision
y = -0.8075Ln(x) + 10.638R2 = 0.6997
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0 150 000 300 000 450 000 600 000 750 000 900 000
number of members
aver
age
cost
per
mem
ber
(in th
s te
nge)
y = -18.783Ln(x) + 336.7R2 = 0.185
30
50
70
90
110
130
150
170
190
0 500 000 1 000 000 1 500 000 2 000 000 2 500 000 3 000 000
number of members
aver
age
cost
per
mem
ber
(in P
LN)
Charges vs. size of pension funds
Kazakhstan and Poland:
• More economies of scale than in the case of charges• In Kazakhstan - stronger than in Poland
Kazakhstan 2001 Poland 2002
Rates of return• Kazakhstan:
relatively high real returns, little disparity between funds
significantly better performance of state fund - different asset allocation
• Poland lower, but still above zero real
returns large differences between funds
• Hungary lack of comparable data in 2001 net fund returns at 6.1%
KAZAKHSTAN June 2000June 2001
October 2001October 2002
June 2002June 2003
Weighted average 6.81/% 6.50% 4.12%Non-state Accumulation Funds:standard deviation 1.01% 0.51% 1.96%Minimum 5.44% 5.33% -1.07%Maximum 8.70% 7.07% 5.41%State Accumulation Fund 5.14% 9.04% 5.19%
2000 2001 2002Inflation rate 13.2% 8.4% 5.9%Real wage growth 5.7% 9.5% 10.0%Bank deposit rate (nominal) 14.7% 12.8%% 11.0%
POLAND December 1999December 2000
December 2000December 2001
December 2001December 2002
Weighted average 4.5% 2.1% 14.5%Standard deviation 3.5% 3.5% 2.7%Minimum -0.9% -5.4% 6.3%Maximum 12.5% 6.3% 16.6% 2000 2001 2002Inflation rate 8.5% 3.6% 0.8%Real wage growth 4.2% 3.6% 2.7%Real bank deposit rate 6.5% 4.4% 3.8%
Administrative costsPOLAND
0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
2000 2001 2002
PLN
bn
sales and marketing
other costs
reserves and guarantees
ConclusionsMEMBERS AND MARKET STRUCTURE
• Overswitching or underestimation? distrust to the public system belief in private savings?
• Large concentration: biggest funds: bank or insurance backing
more efficient sales? earlier presence on the market?
• Little changes between funds design worked? outflow from public managers
ConclusionsASSETS AND INVESTMENT
• Assets will be growing at a fast pace• Increased investment in equity would be
desirable to diversify risk within pension system, not
only within funded pillar• Necessity to increase foreign
investment limits
ConclusionsCOSTS AND CHARGES
• Costs still relatively high
• Necessity to work on the cost reduction:eliminating excessive guarantees increasing client’s awareness
Conclusions• Trend towards multi-pillar schemes:
Implemented in 8 countries Considered in Slovakia
• Experiences up to now: high participation fast increase of pension savings concerns regarding transition financing
Issues for the future• Elements of success:
prudent supervisionprudent investments
equity foreign investments
transparency and accountabilitykeeping costs low re-thinking guarantees