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Pension reform in the Slovak Republic: Progress and overview

Marek Lendacký Ministry of Labour, Social Affairs and Family Slovak Republic. Seminar "Pension Reform in Eastern Europe, Experiences and Perspectives" Kiev, Ukraine, May 27-28, 2004 President Hotel Kyivsky. Pension reform in the Slovak Republic: Progress and overview.

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Pension reform in the Slovak Republic: Progress and overview

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  1. Marek Lendacký Ministry of Labour, Social Affairs and Family Slovak Republic Seminar "Pension Reform in Eastern Europe, Experiences and Perspectives" Kiev, Ukraine, May 27-28, 2004 President Hotel Kyivsky Pension reform in the Slovak Republic:Progress and overview

  2. Outline of Presentation • Pre reform period • Past and future demographic environment • Implicit pension debt • Basic documents • Early reform measures • Main reform – I. pillar • Main reform – II. pillar (structure, features) • Implementation stage • Why second pillar reform strategy

  3. Pre Reform Period • Transformation from planned to market economy • Worsening of economic and demographic situation • Social security financed completely from state budget • Czech and Slovak Republic divorce (1993) • Old social security law (1988) – covered all parts of social security • PAYG-financing with very low reserves • Big redistribution (very progressive formula) • Preferential treatment (special working categories) • High contribution rate (28 % total) • Low retirement age (M – 60Y, W – 53-57Y)

  4. Past Demographic Environment * According to Population and Housing Census 2001

  5. Future Demographic Environment

  6. Implicit Pension Debt

  7. Explicit Surpluses and Deficits of the Current Pension System as a % of GDP Balance of the Reformed I. Pillar without increasing the Retirement Age

  8. Basic Documents • Concept of transformation of the social sphere (1995) • State social support • Social assistance • Social insurance • Concept of social insurance reform (2000) • Sickness insurance • Work injury insurance • Pension security • I. pillar (covered by Social Insurance Law – as from1.1.2004) • II. pillar (covered by Law on old-age pension savings – as from 1.1.2005) • III. pillar (covered by Law on supplementary pension savings – now amending)

  9. The New Slovak Three PillarPension System • Two-Pillar Mandatory System • Voluntary System I. Pillar UNFUNDED II. Pillar FULLY-FUNDED III. Pillar VOLUNTARY

  10. Contribution rates as from 1. 1. 2005

  11. First Pillar Reform – Social Insurance Law • New benefit formula (strictly neutral) • New indexation principle (Swiss indexation) • Increased assessment period (10+) • Increased retirement age (62 both genders) • Preferences abolished (universality) • New definition of disability • Entitlement conditions for W-w’s, W-er’s pensions equalized

  12. Timing of the reform – basic element of the success in the case of Slovakia • 2002 – election year, new reform oriented government (4 political parties) • Strong emphasis for the pension reform with substantial funded element • 2003 – the year of preparation and amendment of the pension reform laws • Beginning 2004 – minority in the Parliament, „hard time“ for any deep reform • Opposition partially supported the reform, unions wanted smaller II. Pillar • Conclusion - if the pension reform not passed in 2003 – it would be no strong reform

  13. Second Pillar Introduction – Law on old-age pension savings • Mandatory for those who have never been insured by Social Security • New single-purpose companies – Pension AM Companies, transfer through CR in Social Insurance Agency • Contribution rate 9 % paid solely by the employer • 10 years minimum savings period requirement • Special transitory reserve fund • Saver’s ownership of pension fund’s money • Annuities paid by life insurance companies, free disposal paid by Pension AM Companies

  14. Structure of the II. pillar Financial Market Authority DEPOSITARY Social Insurance Agency Central Registry PF-Cons PF-Bal PF-Gr Pension AM Company Saver Employer or State

  15. Implementation stage – task of the day • Law on old-age pension savings adopted in December 2003, after president veto again in January 2004 • 2005 – Year of secondary regulations (also possible amendment of the Law) • Around 10 secondary regulations, couple of manuals • 2 working groups (MoL, MoF, FMA, SIA) • Consultants (local and foreign)

  16. Expectations • Relatively small local market • Expected nb. of people joining II. pillar – around 1000000 (30 - 50 % of the workforce) • Expected nb. of applicants – around 5 • Assets under management in first year – around 10 bln SKK (around 300 mil USD) • Each next year – additional 450 mil USD

  17. Second Pillar Reform Strategy –Right way? • Diversification of sources of financing - security • One-time privatization resources - effectivity • Shift to mixed DB and DC system - balancing • Part of IPD removed – responsibility • Attempt to acquire possible higher capital market return in comparison to labour market return - challenge • Level of knowledge of financial principles in financing the old - age improved - education

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