Recent developments in the Slovak pension system. Peter Penzes World Bank International Insurance Symposium October 2012

Transcription

1 Recent developments in the Slovak pension system Peter Penzes World Bank International Insurance Symposium October 2012

2 Overview 1. General characteristics of the Slovak pension system 2. Major changes in the design 3. Underlying reasons 4. Challenges and lessons 2

3 Slovak pension system 1 st pillar since 1907 coverage: 100% public PAYG mandatory DB Social Insurance Agency Supervision: Ministry of Labour Repl.rate: 45% average salary 2 nd pillar (1st pillar bis) since 2005 coverage: 62% Private, individual accounts voluntary DC Private managers Supervision: NBS Supervision: NBS 3 rd pillar since 1996 coverage: 35% Private, individual accounts voluntary DC Private managers Supervision: NBS Supervision: NBS 3

4 Pension reform in the CEE region Hungary 1998 Poland 1999 Latvia 2001 Estonia 2002 Lithuania 2004 Slovakia 2005 Romania

5 Overview 1. General characteristics of the Slovak pension system 2. Major changes in the design 3. Underlying reasons 4. Challenges and lessons 5

6 Fees in administration fee (for Social Insurance Agency, central collection system) 0,5% 2. entry fee (for PAMC) 1% 3. management fee (for PAMC) 0,78% p.a. NAV 6

7 Major fee alterations as of July 2009 /April 2012 Changes in fees Success fee (2009) - calculated every month (about 5,6% of average return) + deduction of other expenses (costs of transactions, taxes, etc.) from pension funds assets Management fee (2012) - decreased from 0,78% p.a. to 0,3% p.a. of NAV Reasons 2009 positive incentive - reward good performance (tool: success fee) 2012 expensive system with low performance 7

8 Portfolios /3/2012 conservative pension fund (no equity) balanced pension fund (max. 50% of equity) growth pension fund (max. 80% of equity) 1/4/2012 added index fund passively managed Since 1/9/2012 Bonds fund Shares fund Other funds designed by providers 8

9 2005: Guarantees Internal benchmarks (relative guarantee): comparison of yields of the same type portfolios with an obligation of the management company to pay money to the fund from its own pockets 100% 80% 60% 40% 20% Structure of portfolios (as of March 2008 ) Market response Herding Low-risk portfolios 0% conservative balanced growth -20% bank deposits bonds+t-bills shares other assets liabilities Reg. limits 0% 50% 70% Reality 0% 14% 20% 9

10 2009: changes of the guarantees External benchmarks: a) conservative portfolio Average yield to remain stable over 6 months period Underperfomance: Management company to transfer money from its own pockets to the pension fund Sanctions b) balanced and growth portfolio The asset structure to match the benchmark compiled by management companies and disclosed in prospectus No sanctions 10

11 2009 guarantees market response Structure of assets in retirement pension savings (2009) mil. of bank accounts bonds treasury bills shares other 11

12 2009 Guarantees - Market Market response Sale of shares response 100% 80% Structure of portfolios (as of June 2011 ) Duration of portfolio<1 y 60% 40% 20% 0% conservative balanced growth -20% bank deposits bonds treasury bills shares other assets liabilities 12

13 2012: further changes of the guarantees Guarentees to remain only in bonds portfolios Comparing the average yields over the 5 years period Underporformance: Management company to transfer money from its own pockets to the pension fund 13

14 1/1/ /8/2012-9% Contribution rate Since 31/8/2012 Mandatory contribution rate 4% Voluntary add-on contribution 2% Since 2017 onward yearly increase of 0,25 pp until 6% (2024) Country perspective Estonia - 2% -> 0% (2009,2010) -> 2% (2011) -> 4% (2012) Latvia - 8% -> 2%(2009) Lithuania - 5.5% -> 2%(2009) Poland 7.3% -> 2.3% (2011) Hungary nationalisation ( ) Romania 2% - 6% (2016) frozen in 2009 at 2% 14

15 Entry&Exit Opt-in and opt-out window (01/09/ /1/2013) Opt- in for first time labour market entrants (until 35 years of age) Previous arrangements Automatic enrollment for the first time labour market entrants 1/1/ /11/2008 1/4/ /08/2012 Opt- in for the first time labour market entrants (6 months) 16/11/ /3/2012 Opt-in 1/1/ /6/2006 1/1/ /6/2008 ( entered) 15/11/ /6/2009 ( entered) Opt-out 1/1/ /6/2008 ( exited) 15/11/ /6/2009 ( exited) 15

16 Overview 1. General characteristics of the Slovak pension system 2. Major changes in the design 3. Underlying reasons 4. Challenges and lessons 16

17 Reasons: First pillar financing gap Source: Égert, B. (2012), The Impact of Changes in Second Pension Pillars on Public Finances in Central and Eastern Europe, OECD Economics Department Working Papers No. 942, OECD Publishing. 17

18 Reasons: Underestimations Expected No of 2nd pillar entrants: around Real No of 2nd pillar entrants: 1,5 mil. No upper age limit for entry 18

19 Reasons: Adverse macroeconomic development 15% 10% 5% 0% % 45% 40% 35% 30% 25% 20% 15% Conditions for entry and stay in the eurozone: General government debt < 60% GDP Budget deficit < 3% -5% 10% -10% Real GDP growth rate Budget deficit 5% 0% Fiscal Stability Treaty Budget deficit < 3% General government gross debt 19

20 Reasons: Poor performance of 2nd pillar funds 10% Growth funds 1,21 % p.a Balanced funds 1,52 % p.a 8% Conservative funds 2,60 % p.a. 6% Inflation 2,8 % p.a. 4% 2% 0% -2% -4% 01/01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/2012-6% -8% -10% Growth Balanced Conservative Inflation 20

21 Overview 1. General characteristics of the Slovak pension system 2. Major changes in the design 3. Underlying reasons 4. Challenges and lessons 21

22 Challenges in the design Low returns Financing gaps in public pension pillar (pressure on fiscal deficits) fiscal affordability needed in the short run Huge inception costs (agents) No economy of scale (dedicated pension managers too costly) Public and political consensus needed Not immune from political influence 22

23 Lessons Not easy to completely reverse the reform Bilateral investment treaties (protection of foreign pension providers) Ownership rights of savers Endowment Further alternatives for pension saving 23

24 Thank you for your attention Peter Penzes Senior Regulatory Expert Securities Market and Pension Savings Regulation Section National Bank of Slovakia t: e: peter.penzes@nbs.sk 24