1. 1 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

2. 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. 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. 4 Past Demographic Environment * According to Population and Housing Census 2001

5. 5 Future Demographic Environment

6. 6 Implicit Pension Debt INPUTS Working (insurance) periodWorking (insurance) period Real wage growth indexReal wage growth index Real old age pension indexReal old age pension index Replacement ratio (net/gross)Replacement ratio (net/gross) Real discount rateReal discount rate OUTPUTS IPD Old AgeIPD Old Age IPD Old age pensionersIPD Old age pensioners IPD Active MembersIPD Active Members IPD TotalIPD Total IPD pensionersIPD pensioners IPD Active MembersIPD Active Members INPUTS Working (insurance) periodWorking (insurance) period Real wage growth indexReal wage growth index Real old age pension indexReal old age pension index Replacement ratio (net/gross)Replacement ratio (net/gross) Real discount rateReal discount rate OUTPUTS IPD Old AgeIPD Old Age IPD Old age pensionersIPD Old age pensioners IPD Active MembersIPD Active Members IPD TotalIPD Total IPD pensionersIPD pensioners IPD Active MembersIPD Active Members INPUTS Working (insurance) periodWorking (insurance) period Real wage growth indexReal wage growth index Real old age pension indexReal old age pension index Replacement ratio (net/gross)Replacement ratio (net/gross) Real discount rateReal discount rate OUTPUTS IPD Old AgeIPD Old Age IPD Old age pensionersIPD Old age pensioners IPD Active MembersIPD Active Members IPD TotalIPD Total IPD pensionersIPD pensioners IPD Active MembersIPD Active Members INPUTS Working (insurance) periodWorking (insurance) period Real wage growth indexReal wage growth index Real old age pension indexReal old age pension index Replacement ratio (net/gross)Replacement ratio (net/gross) Real discount rateReal discount rate OUTPUTS IPD Old AgeIPD Old Age IPD Old age pensionersIPD Old age pensioners IPD Active MembersIPD Active Members IPD TotalIPD Total IPD pensionersIPD pensioners IPD Active MembersIPD Active Members

7. 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. 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. 9 The New Slovak Three Pillar Pension System  Two-Pillar Mandatory System  Voluntary System I. Pillar UNFUNDED II. Pillar FULLY-FUNDED III. Pillar VOLUNTARY

10. 10 Contribution rates as from 1. 1. 2005 Monopillar systemDuopillar system I. pillar II. pillar employeeemployeremployeeemployeremployeeemployer Sickness insurance 1,4 % –– Old-age insurance 4 %14 %4 %5 %–– Old-age savings --–––9 % Disability insurance 3 % –– Reserve fund –4,75 %– –– Work injury insurance –0,8 %– –– Garanty insurance –0,25 %– –– Unemployment insurance 1 % –– Health insurance 4 %10 %4 %10 % TOTAL 48,6 %

11. 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. 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. 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. 14 Structure of the II. pillar Pension AM Company Financial Market Authority Central Registry Employer or State PF-GrPF-ConsPF-Bal Social Insurance Agency DEPOSITARY Saver

15. 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. 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. 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