1. PENSION REFORM EXPERIENCES IN CENTRAL AND EASTERN EUROPE Agnieszka Chlon-Dominczak Ministry of Economy, Labour and Social Policy, Poland Kiev, May 28th, 2004

2. Countries implementing mandatory funded pension schemes 1998: Hungary Kazakhstan 1999: Poland 2001: Latvia 2002: Croatia Estonia Bulgaria 2003: Russia 2005: Macedonia Slovakia 200? Lithuania Ukraine

3. Reasons for the multi- pillar reform to make the pension system sustainable in long run to reduce implicit pension debt to diversify risk to make the system adjust to population ageing to encourage longer labour market participation to achieve better balance between collective and individual responsibility in the pension system to encourage additional savings to develop and strengthen financial markets

4. Design issues Most of the countries tend to leave significant pay-as-you-go pillars System mandatory for the young, with optional choice for older workers (exception of Kazakhstan) Strong regulation and guarantees State often involved in collection of contributions

5. Contributions Tax treatment: usually EET Contributions to funded tier depends on the possible of transitions costs Contribution is usually carved-out from the existing mandatory contribution In Estonia, those that are in the funded tier pay 2% higher contribution In Kazakhstan, existing contrubtion was divided between funded contribution and tax

6. Contributions Tax treatment: usually EET Contributions to funded tier depends on the possible of transitions costs Contribution is usually carved-out from the existing mandatory contribution In Estonia, those that are in the funded tier pay 2% higher contribution In Kazakhstan, existing contrubtion was divided between funded contribution and tax

7. Participation in the funded pillar

8. 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)

9. Contribution collection

10. Supervision

11. 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

12. Charge design in the region Source: Agnieszka Chlon-Dominczak, Funded Pensions in Eastern Europe and Central Asia: Design and Experience Paper prepared for the World Bank in co-operation with FIAP (2003)

13. Investment limits Min 50% in state bonds

14. Foreign investment In Estonia: only investment in specified categories of foreign investment, no quantitative limit

15. Guarantees Rate of return guarantees: Relative to pension sector Kazakhstan Poland Croatia Slovakia 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

16. Payouts Mandatory annuity: Hungary (pension fund or insurance company) Poland (providers not decided yet) Croatia (specialised companies) Bulgaria (licensed companies) Estonia (licensed insurance companies) Slovakia (insurance company) 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)

17. 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

18. Assets (USD MLN)

19. Investments in 2002

20. Concentration in 2002 0% 20% 40% 60% 80% 100% 12345678910 % of total members Bulgaria Estonia Croatia Latvia Kazakshtan Poland Hungary Significant share of state funds in Latvia (76%) and Kazakhstan (46%)

21. Early experience with charges Charge levels are different across countries They reflect the legal design, supervision practices and competition Economies of scale are hardly observed

22. 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

23. Conclusions MEMBERS 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

24. Conclusions ASSETS 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

25. Conclusions COSTS AND CHARGES Costs still relatively high Necessity to work on the cost reduction: eliminating excessive guarantees increasing client’s awareness

26. Conclusions Multi-pillar schemes – a new blueprint for the region? Implemented in 8 countries 2 more are joining in 2005 Considered in further two Political economy considerations: limitations of intra-generational redistribution by a shift to the DC increasing public deficit (particularly important in the new EU member countries) lower public control over private asset managers winners and losers Experiences up to now: high participation fast increase of pension savings concerns regarding transition financing

27. Issues for the future Elements of success: prudent supervision prudent investments equity foreign investments transparency and accountability keeping costs low re-thinking guarantees