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Peter Pénzeš Pension Funds Regulatory Department National Bank of Slovakia Private pension system in Slovakia CEIOPS OPC Meeting, Frankfurt am Main, 7.

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Presentation on theme: "Peter Pénzeš Pension Funds Regulatory Department National Bank of Slovakia Private pension system in Slovakia CEIOPS OPC Meeting, Frankfurt am Main, 7."— Presentation transcript:

1 Peter Pénzeš Pension Funds Regulatory Department National Bank of Slovakia Private pension system in Slovakia CEIOPS OPC Meeting, Frankfurt am Main, 7 September 2007

2 2 Slovakia at a glance EU Member:May 2004 Population: (2006) Working population: (2006) i.e. 43 % of population Retired population: (2006) i.e. 17,8 % of population Financial market supervisor and regulator: National Bank of Slovakia (integrated authority)

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

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

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

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

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

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

9 9 1 st pillar (since 1907)

10 10 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% 1 st pillar – overview

11 11 2 nd pillar (since 2005)

12 12 separation of 2 nd 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 2 nd pillar – overview

13 2 nd pillar – overview (cont.) 2 nd 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 members in all pension funds managed by a PAMC

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

15 15 2 nd 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. 2 takeovers in : Prvá dôchodková sporiteľňa, d. s. s., a. s.Allianz Sympatia – Pohoda, d. s. s., a. s.ING PAMCs:

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

17 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 2 nd pillar – overview (cont.)

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

19 2 nd pillar – overview (cont.) 2 nd 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) 19

20 2 nd pillar – overview (cont.) Guarantees in the 2 nd 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 20

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

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

23 23 2 nd pillar – contributions (cont.) Fee types and their ceilings in the 2 nd 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 1 st pillar institution (the Social Insurance Agency) deducts a sum corresponding to 0,5% of the member’s monthly contribution.

24 2 nd pillar - investments Allocation of pension funds’ investments Bank depositsBondsShares and mutual funds Conservative funds38% - 55%38% - 62%0% Balanced funds17% - 41%21% - 68%11% - 16% Growth funds18% - 43%22% - 63%14% - 20% 24 Problem: too conservative Possible solution: charging based on performance? as of 30 June 2007

25 2 nd pillar - investments 25

26 26 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 ) 2 nd pillar – investments (cont.)

27 27 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 2 nd pillar – investments (cont.)

28 2 nd 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 28

29 29 3 rd pillar (since 1996)

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

31 31 3 rd pillar overview (cont.) IORP Directive implementation Ring-fencing, special investment rules applicability left to discretion of 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

32 32 separation of the 3 rd 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 3 rd pillar overview (cont.)

33 3 rd 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 2 nd pillar PAMC Supplementary Pension Funds the same principles as in the 2 nd pillar except for minimum number of members

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

35 35 3 rd pillar – overview (cont.) 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. SPAMCs:

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

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

38 38 The SPC is obliged to establish two types of funds: at least one Contributory pension fund an investment strategy is entirely up to the 3 rd 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 3 rd pillar institution is obliged to transfer member’s account balance from the Contributory pension fund to the Paying- out pension fund. 3 rd pillar – overview (cont.)

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

40 40 3 rd pillar - contributions (cont.) Fee types and their ceilings in the 3 rd 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 3 rd pillar - investments 41 Problem: too conservative, the same picture as in the 2 nd pillar Possible solution: charging based on performance? as of 30 June 2007 Allocation of the supplementary pension funds’ investments Bank depositsBonds Shares and mutual funds 37,11%56,23%7%7%

42 42 Investment limits quantitative qualitative Investment limits linked to those in the 2 nd 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 3 rd pillar – investments (cont.)

43 3 rd 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 44 Final remarks

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

46 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: 1 st pillar deficit - more people than expected joined the 2 nd pillar ( expected vs actual members)

47 47 Thank you for your attention!


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