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Peter Pénzeš Pension Funds Regulatory Department National Bank of Slovakia

Peter Pénzeš Pension Funds Regulatory Department National Bank of Slovakia. Private pension system in Slovakia. CEIOPS OPC Meeting, Frankfurt am Main, 7 September 2007. Slovakia at a glance. Structure of the presentation. Pension reform 2004 – 2005 1 st pillar overview

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Peter Pénzeš Pension Funds Regulatory Department National Bank of Slovakia

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  1. Peter PénzešPension Funds Regulatory Department National Bank of Slovakia Private pension system in Slovakia CEIOPSOPC Meeting, Frankfurt am Main, 7 September 2007

  2. Slovakia at a glance

  3. Structure of the presentation • Pension reform 2004 – 2005 • 1st pillar • overview • 2nd pillar and 3rd pillar • overview • contributions • investments • benefits • Final remarks

  4. Pension reform 2004 – 2005 The Slovak population pyramid Source: OECD

  5. Pension reform 2004 – 2005(cont.) Source: SIA 5

  6. Pension reform 2004 – 2005(cont.) • Changes in the 1st pillar (higher retirement age) • Introduction of the 2nd pillar • Transformation of the 3rd pillar

  7. Pension reform 2004 – 2005(cont.) Design of the Slovak multi-pillar pension system (WB classification) • 1st pillar • since 1907 • public, pay-as-you-go system 2nd pillar • since January 2005 • private, personal, mandatory, fully funded, DC system 3rd pillar • since July 1996 (DB); transformation 2005 – 2006 (DB DC) • private, personal, voluntary, fully funded, DC system

  8. Pension reform 2004 – 2005(cont.) Legal framework of the Slovak pension system 1st pillar Social Insurance Act (No. 461/2003 Coll.) 2nd pillar Old-Age Pension Savings Act (No. 43/2004 Coll.) 3rd pillar Supplementary Pension Savings Act (No. 650/2004 Coll.)

  9. 1st pillar(since 1907)

  10. 1st pillar – overview • administered by the state owned institution - the Social Insurance Agency (SIA) • supervised by the Ministry of Labour • automatic enrolment of all workers and mandatory participation for self-employed with income over a certain level prescribed by law ; anyone can join voluntary • contributions:14% employer, 4% employee • assets are deposited on the 0% interest rate account in the State Treasury • benefits: old-age pensions, early old-age pensions, survivors’ benefits; automatic indexation of benefits on yearly basis • current replacement rate: 44,65%

  11. 2nd pillar(since 2005)

  12. 2nd pillar – overview • separation of 2nd pillar institution’s assets from assets of its members (pension fund) • member’s contributions go to its individual pension account • account balance is inheritable • January 2005 – June 2006 opened for all workers and self-employed individuals • since January 2005 automatic enrolment (default option – conservative fund) for new labour market entrants

  13. 2nd pillar – overview (cont.) 2nd pillar management institution - PAMC • a Pension Asset Management Company • legal personality - private joint stock company, professional investor licensed and supervised by the National Bank of Slovakia • the only task: management of the pension funds • de facto acts as an agent of members • no involvement of employers on management of PAMCs Pension Funds • a pool of assets jointly owned by the members • no legal personality • minimum 50 000 members in all pension funds managed by a PAMC

  14. 2nd pillar – overview (cont.) • 6 PAMCs • 18 pension funds • 1 545 916 members (as of June 2007) • 42 bln. Sk / € 1,2 bln. of assets (as of June 2007) • (approx. 2,4% of GDP)

  15. 2nd pillar – overview (cont.) Allianz – Slovenská DSS, a.s. Aegon, d. s. s., a. s. Axa d. s. s., a. s. ČSOB d. s. s., a. s. ING d.s.s., a. s. VÚB Generali d.s.s., a. s. PAMCs: 2 takeovers in 2005 - 2006: Prvá dôchodková sporiteľňa, d. s. s., a. s. Allianz Sympatia – Pohoda, d. s. s., a. s. ING

  16. 2nd pillar – overview (cont.) as of 2 March 2007

  17. Each PAMC is obliged to establish 3 types of pension funds with different risk-return relationship: conservative pension fund balanced pension fund growth pension fund 2nd pillar – overview (cont.) 17

  18. 2nd pillar – overview (cont.) as of 28 February 2007

  19. 2nd pillar – overview(cont.) 2nd pillar security mechanisms • Licensing • Prior approvals (fit and proper requirements) • Supervision by the NBS • Prudent person rules • Internal control • External audit • Depositary bank • Risk management (from January 2008)

  20. 2nd pillar – overview(cont.) Guarantees in the 2nd pillar • The Minimum Return Guarantee (MRG) • obligation of a PAMC to pay from its own assets to the assets of the pension fund in case of underperformance • to avoid major discrepancies among returns of pension funds • Social Insurance Agency • in case of fraud

  21. 2nd pillar - contributions • each member is allowed to be member of only one PAMC • contribution ceiling – triple the previous year monthly average salary 9% 18% -0,5%

  22. 2nd pillar – contributions (cont.) Source: NBS, own calculations 22

  23. 2nd pillar – contributions (cont.) Fee types and their ceilings in the 2nd pillar • the management fee max. 0,075% of the average monthly NAV of the pension fund (i.e. 0,9% of NAV p.a.) • the account maintenance fee max. 1% of the member’s monthly contribution (i.e. 1% of contributions p.a.) The 1st pillar institution (the Social Insurance Agency) deducts a sum corresponding to 0,5% of the member’s monthly contribution.

  24. 2nd pillar - investments Problem: too conservative Possible solution: charging based on performance? as of 30 June 2007

  25. 2nd pillar - investments

  26. 2nd pillar – investments (cont.) Investment limits • quantitative • qualitative Basic investment limits • conservative pension fund - only bonds and money market instruments in portfolio • balanced pension fund - bonds and money market instruments, max. 50% of equity in portfolio • growth pension fund - bonds and money market instruments, max. 80% of equity in portfolio)

  27. 2nd pillar – investments (cont.) Other investment limits • min. 30% of assets to be invested domestically • derivatives allowed only for hedging purpose – problem: sometimes hard to distinguish the purpose of the instrument • only indirect investment into real-estates allowed • totally 17 investment limits, all stipulated in law Problem: not very flexible Solution: more qualitative investment rules, risk based investment rules

  28. 2nd pillar - benefits • Programmed withdrawal + Life annuity • Life annuity • Survivors benefits (paid for the period of one year after the members’ death) Conditions for payment of the life annuity: • min. 10 years of membership • attainment of the retirement age • Programmed withdrawal paid by the PAMC • Life annuity paid by an Insurance Company • Survivors benefits paid by the PAMC/IC

  29. 3rd pillar(since 1996)

  30. 3rd pillar overview IORP Directive implementation • January 2005 – IORP Directive prudential requirements fully implemented to the Slovak 3rd pillar law • August 2006 - IORP Directive cross-border activities provisions implemented by an amendment to the 3rd pillar law • only 3rd pillar institutions fall under the IORP Directive • definition of the Slovak 3rd pillar institution is wider than IORP definition –personal pension system in Slovakia(however, most employers pay the contributions on a voluntary basis)

  31. 3rd pillar overview (cont.) IORP Directive implementation Ring-fencing, special investment rules applicability left todiscretionof the NBS Slovak Social and Labour Law: membership rules payment of contributions rules conditions for paying out benefits benefit plan legal relations between a member, a benefits’beneficiary, an employer and a IORP 31

  32. separation of the 3rd pillar institution’s assets from assets of its members (supplementary pension fund) member’s contributions go to its personal pension account account balance is inheritable voluntary participation of both employees as well as employers tax incentives 3rd pillar overview (cont.) 32

  33. 3rd pillar overview (cont.) 3rd pillar management institution - SPAMC • a Supplementary Pension Asset Management Company • legal personality - private joint stock company, professional investor licensed and supervised by the National Bank of Slovakia • the same principles apply as in case of 2nd pillar PAMC Supplementary Pension Funds • the same principles as in the 2nd pillar except for minimum number of members

  34. 5 SPAMCs 13 supplementary pension funds 716 383 members (as of December 2006) 21,5bln. Sk / € 637 mil. of assets (as of December 2006) (approx. 1,3% of GDP) 3rd pillar overview (cont.) 34

  35. 3rd pillar – overview(cont.) SPAMCs: Aegon d. d. s., a. s. Axa d. d. s., a. s. DDS Tatra banky, a. s. ING Tatry – Sympatia, d. d. s., a. s. Stabilita, d. d. s., a. s.

  36. 3rd pillar – overview(cont.) as of December 2006 36

  37. 3rdpillar – overview(cont.) 3rd pillar security mechanisms the same as in the 2nd pillar Guarantees in the 3rd pillar no guarantees 37

  38. 3rd pillar – overview(cont.) The SPC is obliged to establish two types of funds: • at least one Contributory pension fund • an investment strategy is entirely up to the 3rd pillar institution; however, quite strict investments limits • and one Paying-out pension fund • very strict investment limits (high liquidity) • when a member asks for payment of benefits that are paid by the SPAMC, the 3rd pillar institution is obliged to transfer member’s account balance from the Contributory pension fund to the Paying-out pension fund.

  39. 3rd pillar - contributions each individual is allowed to be member of several SPAMCs; no contribution ceiling 39

  40. 3rd pillar - contributions (cont.) Fee types and their ceilings in the 3rd pillar • the management fee max. 3% a year of the average yearly NAV of the pension fund • the SPAMC switching fee max. 5% of the member’s account balance in the first five years after concluding a contract with the member and max 1% thereafter • the termination settlement fee max. 20% of the member’s account balance

  41. 3rd pillar - investments Problem: too conservative, the same picture as in the 2nd pillar Possible solution: charging based on performance? as of 30 June 2007 41

  42. Investment limits quantitative qualitative Investment limits linked to those in the 2nd pillar with the few exceptions (no 30% limit on domestic investments, etc.) Problem: too restrictive for the system with voluntary participation Solution: more qualitative investment limits, risk based investment limits 3rd pillar – investments (cont.) 42

  43. 3rd pillar - benefits • life annuity • life annuity+ lump-sum settlement (max. 50%) • temporary annuity • temporary annuity + lump-sum settlement (max. 25%) • termination settlement Conditions for payment of the annuity: • min. 10 years of membership • age of the member – min. 55 years • temporary annuity, lump-sum settlement, termination setlement paid by the SPAMC • life annuity paid by an Insurance Company

  44. Final remarks 44

  45. Final remarks Tax issues 2nd pillar – ETE: contributions tax free investment returns taxed benefits tax free 3rd pillar – ETT: employee’s contributions tax deductible up to 12.000 Sk a year, employers’ contributions tax deductible up to 6% of employees’ salary investment returns taxed benefits taxed 45

  46. Final remarks Current regulatory challenges: • Low returns • Risk management • Transition from accumulation phase to pay-out phase • Depositary bank tasks • Internal control tasks Current political challenges: • 1st pillar deficit - more people than expected joined the 2nd pillar (700.000 expected vs. 1.500 000 actual members)

  47. Thank you for your attention! peter.penzes@nbs.sk

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