SLOVAKIA’S pension scheme, with its so-called three pillars, has undergone quite regular changes since the idea was unveiled nearly ten years ago and significant changes were again advanced by the cabinet of Prime Minister Robert Fico at its meeting on July 7. The draft legislation is expected to be discussed by parliament during its July session.
The most significant change will be to cut the percentage amount that employees can contribute to their personal accounts in the so-called second pension pillar. The cabinet is also proposing to make participation in the second pillar completely voluntary once again. The cabinet also approved a change in the valorisation method used to increase current pension benefits flowing from the so-called first pension pillar.
The opposition Slovak Democratic and Christian Union (SDKÚ), whose coalition government overhauled Slovakia’s pension system when it took power in 2002, has stated that reducing the amount of contributions going to the second pillar is a form of nationalisation and said that maintaining the second pillar provides the only certainty that citizens will have pensions in the future.
“Liquidation of a strong second pillar, which the government has started, is liquidation of future pensions,” stated MP ¼udovít Kaník, a former labour minister from the SDKÚ, as quoted by the SITA newswire. “Simultaneously this means an unbearable increase in the load on public finances and pressure to increase the retirement age. The government, with the money of ordinary citizens, is securing the fulfilment of its political plans.”
The cabinet proposal is to limit employees’ contribution to their privately-administered savings fund to only 4 percent of salary rather than the current 9 percent.
The cabinet proposal also would permit savers in the second pillar to contribute additional funds from their income to future retirement benefits but contributions of only 2 percent or less could be deducted from a taxpayer’s tax base before calculating income tax.
The SDKÚ stated that the proposed changes would “cost Slovaks more than €500 million”.
“An average saver will lose €40 monthly and almost €500 annually,” stated Kaník. “Fifteen years after this change, his or her pension will be about 55 percent lower compared to the current setting.”
Freedom and Solidarity (SaS), another opposition party, agreed with the proposed changes to the first pillar but criticised the changes to the second pillar, stating that they would lead to its destruction.
The Association of Pension Fund Management Companies, an association of private firms administering savers’ funds in the second pillar, warned that if contributions are reduced, the amount that can be saved will not be enough to enable pensioners to live in a dignified way during old age, the Pravda daily wrote.
The Fico cabinet also proposes to reverse the current arrangement in which individuals first entering the labour market are automatically enrolled in the second pillar, with the option to leave within two years. The new proposal is for younger employees to be given the option of entering the second pillar at any time up to age 35.
The cabinet also advanced its proposal to ‘open’ the second pillar to enable those who currently participate in it to leave between October 1 and December 31 and designate all future contributions to the state-administered first pillar as well as for employees to elect to join the second pillar. The cabinet expects 60,000 employees to take this opportunity to leave the second pillar and 10,000 people to join it.
The cabinet originally proposed to keep this option to leave or join open for a six-month period but Finance Minister Peter Kažimír opposed the idea.
“I do not consider opening of the second pillar at another time to be a fully positive thing,” Kažimír stated, as quoted by SITA, adding that closing the pillar at the end of 2012 would help the private pension fund management companies plan their investment strategies for 2013.
The cabinet proposal means that the government will open the second pillar for a third time since 2008.
The number of funds in which savers can deposit their retirement savings in the second pillar is also proposed to be reduced from four funds to two, one of which will have a guaranteed investment return and the other will not. The basic period for monitoring the guaranteed investment return will be 10 years. The future of the other two currently existing funds would be left to the decision of the pension fund management companies.
The fees paid to pension fund management companies are proposed to change as well. The fee for administering a pension account will be reduced from 1 percent to 0.75 percent of net assets with another annual payment of 0.3 percent for the guaranteed funds and 0.6 percent for the non-guaranteed fund. The proposal also increases a fee that is to be paid based on the appreciation of a saver’s net assets from the current 5.6 percent to 10 percent of the net appreciation, with the cabinet stating that this would increase the motivation of the pension fund management companies to gain higher returns on participants’ savings.
The cabinet proposes to limit annual increases in current pensions received by almost 1 million retirees from the first pension pillar by a fixed amount during the next five years, rather than the current system based on changes in consumer prices and the average wage. In 2018 first pillar pensions would again be valorised by a certain percentage.
Beginning in 2017 the normal retirement age under the first pillar would be linked to the average life expectancy in Slovakia.
The cabinet said its proposal will introduce what it called ‘more solidarity’ into the state-administered pension pillar and make a retiree’s pension less dependent on one’s actual earnings before retirement, stating that this will help employees currently earning less than €786 per month, the national average monthly salary last year. Individuals earning more than 1.25 times the average monthly salary would get a proportionally lower pension than they would receive under the current calculation method.
The current old-age pension scheme in Slovakia consists of three pillars. The first is administered by the social security provider, Sociálna Poisťovňa. The second is the so-called capitalisation pillar managed by private companies. The third pillar is for voluntary supplementary contributions. While these brought some tax advantages in the past, such benefits no longer apply.
