DC issues arising from the IORP Directive Challanges of the EU-12 Dr. Judit Zolnay Hungarian Association of Pension Funds STABILITAS CEIOPS Conference Frankfurt, 20.11.2007 1
EU Enlargement Brings Growing Diversity EU 15 (1995) 1957 France Belgium Germany Netherlands Italy Luxembourg 1973 1981-1986 1995 Denmark Greece Austria Ireland Portugal Finland Great Britain Spain Sweden Cyprus Czech Republic Estonia 2004 Hungary Latvia Lithuania Malta Poland Slovakia Slovenia 2007 Bulgaria Romania 2
Unconventional terminology World Bank terminology used in CEE countries State pension Mandatory, funded, privately managed scheme (personal plan) Voluntarily funded, privately managed pension scheme (personal plan) 1 st Pillar 2 nd Pillar 3 rd Pillar State pension Occupational pension schemes (Collective or personal accounts) Individual private pension provision EU (OECD, EFRP) terminology 1 st Pillar 1 st Pillar bis 2 nd Pillar 3 rd Pillar 3
Pensions in EU New Member States Background of pension systems in post communist countries Political and social heritage (BG, CZ, EST, HU, LV, LT, PL, RO, SK, etc.) Specific issues of the transitional economies Introduction of a second, fully funded and privately managed pension pillar funded through diversion of part of the social pension contributions World Bank s concept for multi-pillar social protection system (the Chilean model) aim is to reduce the implicit debt emerging in the PAYG social security pillars private pension systems contribute to a better allocation of social resources have a positive impact on the creation and growth of capital markets The important role of the government government as regulator, supervisor, financial guarantor or possible ultimate underwriter 4
Structure of pension schemes in CEE countries Country Transformation of the state pension system - Pillar I Mandatory private pension scheme - Pillar II Voluntary private pension plan - Pillar III Bulgaria 1993-1994, 1996 DC (1999) 2001 DC from 1994 Czech Republic DB PAYG 1993-1995, 2003 Not implemented DC from 1994 Estonia 1993, 1999-2002, German DB model DC from 2002 DC from 1998 Croatia 1998-1999 DC (1999) 2002 DC from 1999 Poland 1999, Swedish NDC model DC with guarantees from 1998 DC from 1998 Latvia 1995, 1998, 2000, NDC DC 2001 (2003) DC from 1998 Lithuania 1995, 2003-2004, basic pension plus earnings related DB component DC from 2005 DC from 2004 Hungary 1998, parametrically reformed DC from (1997) 1998 DC from 1993 Romania DC commenced on Sep 17 th, 2007 DC from May, 2006 Slovakia 1993, 2004, based on points system DC from 2005 DC 1996 Slovenia mandatory occupational DC for certain professions from 2000 DC with guarantees from 2000 Ukraine pension concept in 1993 enacted on July 9 th, 2003 from 2009 2004 5
CEE Regulation common principles (transitional economies) Centralized collection, by the public agency of contributions and arrears Individual contracts with members Individual accounts, regular statements of accounts and returns, etc. Asset management Competence, competition, incompatibility, benchmark portfolio, etc. Security of investments Investment policy and mandate Custodian (obligatory), reporting requirements Prudential supervision Multi portfolios Three portfolios to be offered (at least): Slovakia, Estonia, Latvia, Hungary (2009) Development from restrictions to prudent person rule Protection of members rights, data security Transparency of the system Performance measurement Publicity Standards of reporting and publishing performances 6
Specific issues of the CEE economies Mandatory, DC schemes Transfer of part of the state benefit obligation to privately managed funds Active population covered rather than groups of employees occupational funds The spectrum of switching policies no switch Czech Republic Slovenia voluntary for current and future workers Lithuania (2004) compulsory only for new entrants Hungary (1997) Slovakia (2005) compulsory for new and younger workers Poland (1999) Estonia (2002) Latvia (2001) Croatia (2002) Bulgaria (2002) Romania (2007) compulsory for all workers 7
Features of pension funds in CEE countries Contribution Workforce covered % of GDP Pension Fund Assets* Country Start Switching rate on payroll 2nd P 3rd P 2006* Bill n. 2015** Bulgaria 1/2002 born after 1959 2% grown to 5% 76.4% 16.4% 3.1% 0.78 4.89 bn Croatia 1/2002 oblig:<40; opt: 40-50 5% 75.1% 4.9% 6.5% 2.21 10.53 Czech Rep. - - not implemented - 71.2% 3.0% 5.26 24.77 Estonia 2002 oblig:=18; opt: 18-62 4% + 2% additional 74% 16.5% 6.4% 0.52 3.59 Latvia 2003 oblig:<30; opt: 30-50 2% growing to 10% 82% 8.5% 2.2% 0.26 5.82 Lithuania 2005 voluntary 4.5% 50% 0.8% 1.25% 0.32 4.83 Hungary 1/1998 oblig:new entrants<35 8% 67.5% 34.6% 9.9% 8.67 42.76 Poland 1/1999 oblig:<30; opt: 30-50 7.3% 82.8% 5.9% 11.1% 30.59 130.66 Romania 1/2008 oblig:<35; opt: 35-45 2% growing to 6% - - - 0 2.89 Slovakia 1/2005 oblig:<35; opt: 35-45 9% 58.5% 31.6% 3.1% 1.35 9.93 Slovenia 1/2000 - - 3.5% 20% 2.2% 0.86 4.24 Russia 1/2002 oblig:<40; optional to women<51; men<55 2-6% 51% 32% 2.2% *incl. mandatory and voluntary funds 8 **Source: Allianz Global Investors
Average or ceiling rates of fees and charges Bulgaria (UPF, OPF) Croatia Czech Republic Estonia Lithuania Hungary Poland Romania Slovenia Administration (management) fee on contributions up to max. 7 % 0,8% 7% 1,6% 10 % 4,5% (6% in 2007) 7% until 2010 2,5% 6% Asset management fees (on AuM p.a) shall not exceed 10% of the returns 0,8% + success fee not exceeding 25% of returns 1% 1,5% 1 % 0,8% (0,9% in 2007) 0,015-0,045% per month 0,6% 1,5% Transfer fee (deducted from personal account balance) <BGN 10 ( 5 ) 0,31% but 5% if transferred within 5 years 1% 0,1% 160 /80 PLN 1% definition stipulated by law stipulated by law market average market average stipulated by law stipulated by law stipulated by law stipulated by law market average Administration fee reduces to 3,5% in 2014 and cannot exceed 6⅛ % in 2011, 5¼ % in 2012 and 4⅜ % in 2013 9
Investment portfolios Conservative investment policies are dominant for different reasons: management aims to avoid financial or even moral responsibility in case of capital losses investment restrictions size of local equity markets (e.g. Baltic states) required guarantees (e.g. minimum rate of return, etc.) risk of currency exchange rate volatility Multi-funds (after Premium) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Other 6,1 1,2 0,4 2,7 1,3 0,1 Unit certificates 9 14,6 0,8 8,9 3,4 Real estate 0,2 0,9 0,7 0,5 Shares 7,8 10,2 9,4 32 6,4 38,7 4,5 Mortgages Corporate&o. bonds 1,4 3,3 1,1 19,3 20,6 35,7 Government bonds 74,1 77,1 68,1 62,3 50,8 24,8 41 Treasury bills 3,9 HU* CZ** CR** PL* BG* EST* SLO* Cash and bank 1,4 6,7 4,6 4,1 19,2 5,2 15,3 *Source: OECD Global Pensions 2005 10 **Source: Supervisory statistics 2006
Multi-funds Availability of different find risk profiles Guided freedom via age restrictions or automatic assignation if no choice is made Experience demonstrates improving return via multi-funds Baltic experiences in Estonia fund management has to offer 3 funds Conservative bonds; Balanced with up to 25% equities; Progressive with up to 50% equities cca. 70 % of the affiliates chose the most volatile progressive funds In Latvia fund management has to offer 3 funds over 55 % of the affiliates tolerates the risk of funds with highest ratio in equities In Lithuania 19%, 80 % and 1% of the affiliates joined to conservative, balanced or progressive portfolios, respectively Slovakia - fund management has to offer 3 portfolios: conservative, balanced and growth funds over 65 % of the affiliates tolerates the risk of funds with highest ratio in equities Hungary must to have from 2009 Conservative portfolio to those within 5 years to retirement Balanced portfolio to those within 5 to 15 years to retirement and growth portfolio to younger members 11
Mandatory Pension Funds in HUNGARY Pioneer among the post-communist countries in adoption of a multi-tier system active population had the option to join Pillar 2 from January 1 st, 1998 until August 31 st, 1999 initial guarantees (e.g. limiting switching members loss to 7% of public benefit) was discreetly withdrawn both market players and supervisors have learnt the lessons top items on the political agenda: stimulating better returns on members accounts and prudent regulation of the provision of annuity benefits Review of the regulatory framework reclines upon experiences of successive reforms in the CEE region (centralized collection, multi portfolios, unit based accounting, etc.) Number of members 3000 2500 2000 1500 1000 500 0 1339 1998 Membership, thousand persons 2021 1999 2280 2000 Number of members 2251 2001 2192 2304 2403 2002 2003 2004 2 698 2 511 2 655 2005 2006 2007Q2 in percent of active population 70,0% 65,0% 60,0% 55,0% 50,0% 45,0% 40,0% 35,0% 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% active population covered Assets in million Eurs 8000 7000 6000 5000 4000 3000 2000 1000 0 115 1998 353 1999 Assets in million Euros 664 2000 1 154 2001 assets in million euros 1 753 2002 2 153 2003 3 562 2004 4 830 2005 6 305 2006 7 459 2007Q2 in percent of GDP 8,0% 6,0% 4,0% 2,0% 0,0% 12 Market share
Voluntary Pension Funds in HUNGARY in 1998 cca. 300 voluntary pension funds, mostly employment based favourable impact on growth by the pension reform (Pillar 2) in 2007 the market is dominated by the bank or insurance based funds (no. of funds 66) Major reason for the concentration: gradual cut in tax and contribution allowances employer benefit schemes cafeteria - employees choice of immediate benefits (health funds etc.) Operation of workplace pension fund too costly reduces competitiveness 1600 Membership, thousand persons 35,0% 3500 Assets in million Euros 3,5% Number of members 1400 1200 1000 800 600 400 200 0 940 1052 1078 1157 1 378 1 248 1 307 1 360 1181 1218 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% active population covered Assets in million Eurs 3000 2500 2000 1500 1000 500 0 402 624 850 1189 1608 1494 2195 2542 2850 3082 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% Market share 1998 1999 2000 Number of members 2001 2002 2003 2004 2005 2006 2007Q2 in percent of active population 1998 1999 2000 2001 assets in million euros 2002 2003 2004 2005 2006 2007Q2 in percent of GDP 13
IORP Directive What it is? Where we are? The pan-european occupational pension fund directive (2003/41/EC) aims to provide a framework for the operation and supervision of occupational pension schemes, which includes regulations on cross-border schemes, auditing and accounts, trust exemptions and introduces prudent pension investing. The council of ministers of the European Union adopted the directive on 3 June 2003. It was published in the Official Journal of the European Union on 23 September 2003, which obliged every member state to transpose the requirements of the directive into their national legislation within two years. The directive allows cross-border affiliation and the opportunity to set up pan- European pension funds, giving greater freedom of choice for company sponsors. Member states that have implemented the directive in full are Denmark, Estonia, Germany, Greece, Hungary, Ireland, Latvia, Luxembourg, Malta, the Netherlands, Poland, Portugal and Sweden. 14
Legal relevance of the IORP Directive in Hungary Mandatory Pension Funds (assosiation): Individual DC No relevant prudential EU legislation applicable (1408/71 Regulation) Part of the social security system 2nd pillar (World Bank) Voluntary Pension Funds (assosiation): Individual DC No relevant prudential EU legislation applicable 3rd pillar (World Bank) Pension Insurance (joint stock company, assosiation) Directive 2002/83/EC Occupational Pension Funds (joint stock company) Occupational DB/DC Directive 2003/41/EC Entry in force 1 January, 2008 15
Possible scepticism regarding occupational pensions Social and cultural differences between EU-15 and new member states from former East European block Transposition of the IORP directive (2003/41/EC) Pan European funds are competitors of existing Pillar 2 and Pillar 3 products and institutions CEE Pillar 2 and 3 pension funds meet the major criteria (e.g. DC schemes, individual contracts, personal accounts, fully funding, transparency) argued that the introduction of occupational pension institutions might be in conflict with Article 137 item. 4 of the European Community Treaty, according to which each member state is entitled to define basic elements of its social security system Maastricht criteria contributions diverted to funded pension pillar cannot be taken into account as an adjustment to the budget deficit (Eurostat methodology) Terms and costs of employment have substantially changed after the transition Payroll costs of employers adverse impact on the competitiveness of private sector Labour force turnover, unemployment impact on job security grey and black economy, entrepreneurs etc. large segments of the society are left uncovered 16
meur BAT Total 16000 14000 12000 10000 8000 6000 4000 2000 0 The biggest players Pension Funds of Multinationals, 2005 17 HP IBM Nestle Unilever ABB Aventis Nokia Nordea Alcatel Du Pont Ericsson Novartis Siemens Philips Shell
The local players is CEE meur Largest Fund Groups in CEE 7000 6000 5000 4000 3000 2000 1000 0 ING Winterthur Allianz Aegon Generali 18
Advantages of a pan-european Pension More transparent management of risk and liabilities The possibility of greater cost controll Enhanced employee mobility Pan- European investment policies cater to employees local needs and requirements 19
Challenges The Directive has not proved universally popular IORPs are expected to be used for DC schemes, although record keeping and administration requirements are onerous Political pressure upon the funded pension systems Competition with national security system (pillar 1) (Lack of) solvency criteria Regulation and technical issues regarding the provision of benefits Size of national money and stock markets Cost of guarantees EU harmonization Effectiveness of qualitative versus quantitative supervision 20
The Present. The Future? 21
There is always a way to do it better...find it. Thomas Edison Thank you for your kind attention! 22