Peter P

1
Peter PénzešPension Funds Regulatory Department
National Bank of Slovakia
Private pension system in Slovakia
CEIOPS OPC Meeting, Frankfurt am Main, 7
September 2007
2
Slovakia at a glance
EU Member May 2004
Population 5 393 637 (2006)
Working population 2 301 400 (2006) i.e. 43 of population
Retired population 960 989 (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 2005
• 1st pillar
• overview
• 2nd pillar and 3rd pillar
• overview
• contributions
• investments
• benefits
• Final remarks

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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

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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

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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.)

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1st pillar(since 1907)
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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

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2nd pillar(since 2005)
12
2nd pillar overview

• separation of 2nd pillar institutions assets
  from assets of its members (pension fund)
• members 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

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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

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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)

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2nd pillar overview (cont.)

• Allianz Slovenská DSS, a.s.
• Aegon, d. s. s., a. s.
• Axa d. s. s., a. s.
• CSOB 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 sporitelna, d. s. s., a.
  s. Allianz
• Sympatia Pohoda, d. s. s., a. s. ING

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

• 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

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

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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

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2nd pillar - contributions
9
18
-0,5
members SIA PAMCs

• each member is allowed to be member of only one
  PAMC
• contribution ceiling triple the previous year
  monthly average salary

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2nd pillar contributions (cont.)
Source NBS, own calculations
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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 members 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 members monthly contribution.

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2nd pillar - investments
Allocation of pension funds investments Allocation of pension funds investments Allocation of pension funds investments Allocation of pension funds investments
Bank deposits Bonds Shares and mutual funds
Conservative funds 38 - 55 38 - 62 0
Balanced funds 17 - 41 21 - 68 11 - 16
Growth funds 18 - 43 22 - 63 14 - 20
Problem too conservative Possible solution
charging based on performance?
as of 30 June 2007
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2nd pillar - investments
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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)

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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

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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

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3rd pillar(since 1996)
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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)

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3rd 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

31
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3rd pillar overview (cont.)

• separation of the 3rd pillar institutions assets
  from assets of its members (supplementary pension
  fund)
• members contributions go to its personal pension
  account
• account balance is inheritable
• voluntary participation of both employees as well
  as employers
• tax incentives

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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

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3rd pillar overview (cont.)

• 5 SPAMCs
• 13 supplementary pension funds
• 716 383 members (as of December 2006)
• 21,5 bln. Sk / 637 mil. of assets (as of
  December 2006)
• (approx. 1,3 of GDP)

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35
3rd 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
3rd pillar overview (cont.)
as of December 2006
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37
3rd pillar overview (cont.)

• 3rd pillar security mechanisms
• the same as in the 2nd pillar
• Guarantees in the 3rd pillar
• no guarantees

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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 members account balance
  from the Contributory pension fund to the
  Paying-out pension fund.

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3rd pillar - contributions
members PAMCs

• 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 members 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 members account balance

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3rd pillar - investments
Allocation of the supplementary pension funds investments Allocation of the supplementary pension funds investments Allocation of the supplementary pension funds investments
Bank deposits Bonds Shares and mutual funds
37,11 56,23 7
Problem too conservative, the same picture as in
the 2nd pillar Possible solution charging based
on performance?
as of 30 June 2007
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42
3rd pillar investments (cont.)

• 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

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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

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Final remarks
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Final remarks

• Tax issues
• 2nd pillar ETE
• contributions tax free
• investment returns taxed
• benefits tax free
• 3rd pillar ETT
• employees 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

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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)

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• Thank you for your attention!
• peter.penzes_at_nbs.sk