Making the third pillar more attractive

Saving in the first, state, and the second, private, pension pillars, does not need to be sufficient for satisfactory income in the retirement age. The Labour Ministry as well as experts advise to involve more the third, supplementary, pension pillar, when its prospects have not been fully used yet.

“I see the future of pensions in some state pillar and then in voluntary supplementary [pension] insurance,” said Ján Richter, who resumed his labour minister position after the March parliamentary election, in mid-January, adding that there should be much bigger motivation also for employers to participate in the interest of people to care about their social security during retirement.

This way Richter admitted that future state pensions might be poor. Thus he would like to see the third pillar, into which also employers can contribute for their employees, more attractive for savers, while experts and supplemental pension-fund management companies call for a bigger involvement of the third pillar in the old-age pension scheme too.

“The third pillar should become a clear employer’s pension scheme and should be at least as robust as the second one,” Ján Šebo from the Institute of Savings and Investments (ISI) told The Slovak Spectator, adding that because of its setting and parameters it cannot compete with the second pillar for now.

Supplementary pension-fund management companies (DDS) agree that the third pillar should be a strong part of the entire old-age pension scheme consisting of three pillars.

“The average old-age pension accounts for less than half of the average wage,” Karel Žyla, spokesperson of DDS AXA in Slovakia and the Czech Republic, told The Slovak Spectator. “Everybody should create a reserve for retirement. Exactly for this kind of saving the third pillar is designed and thus it is a very important link in the pension scheme.”

DDSs and experts call for changes to make the pillar more attractive for savers as well as employers.

Ageing Slovakia

Forecasts predict reduction of average old-age pensions to 33 percent of the average wage. Currently it is more when in 2015 it was 46.55 percent when the average pension was above €400 and the average wage was €883 in 2015. Prognosticators predict such a decrease also due to the expected demographic development when Slovakia should have three times more pensioners in 2060 than now. Currently there are 700,000 people over age 65 – in 2060 their number is forecast at almost 2 million. Such ageing of the society, when according to Brussels Slovakia will be one of the worst, will also mean less people in productive age able to generate pensions for those retired.

Due to prognoses of the demographic development and other factors pressing on sustainability of the basic pension system and its subsequent tightening, the Labour Ministry sees as inevitable to support voluntary forms of pension savings as it is common in other developed European countries, Michal Stuška, spokesperson of the Labour Ministry, told The Slovak Spectator, adding that savings in the third pillar will be increasingly a source for raising standards of living during retirement or for financing an early retirement of those unable to find a job.

A priority of Labour Minister Richter is support for the third supplementary pillar and in general making voluntary saving for retirement via various means and instruments more attractive.

“Primarily it will be necessary to assess after certain time the measures which returned the supplementary pension saving in 2013 to its original relevance and resumed its attractiveness and again reduced its cost rate, especially for the saver,” said Stuška.

Third pillar and changes adopted

The voluntary pillar was set up in 1996 to supplement the pay-as-you-go pillar, and later the old-age pension scheme was extended by the second, private or capitalisation, pillar. The first idea was to offer people, who did not have enough money in the first pillar, an option to save in a supplementary pillar and ensure financial stability in retirement age while employers were allowed to increase savings of employees by their contributions. Since 2007, it has been the only product on the market in which an employer can save money for its employees and include this into tax expenses.

Now about 700,000 people save in the third pillar while there are four DDSs united in the Association of Supplementary Pension Companies.

DDS Tatra Banka registered 189,000 savers in 2015 when employers contribute approximately to three out of four active savers. The average monthly contribution of an employer is €30 while savers send to their accounts €20 per month, specified Marcel Haniš of DDS Tatra Banka. DDS AXA registers about 120,000 savers when the average contribution of savers was €13.9 while the average contribution of employers was €26.4 in 2015, according to Žyla.

“The weak side of the third pillar is that the coverage rate of the employed has remained somewhere around 35 percent and it has ceased to grow,” Tomáš Virdzek of ISI told The Slovak Spectator.

The third pension pillar has undergone several changes since its launch, while the latest adjustments became effective as of 2014. Within the changes the Labour Ministry partly returned the possibility to reduce income taxes by saving in the third pillar. Originally those who saved for pensions within the third pillar could deduct €400 per year from their tax base, resulting in an income tax reduction of €76, now they can deduct up to €180 and save €32.2 in income tax.

Šebo perceives the changes to the third pillar as a way of making real sense of such a form of saving for retirement in which also the employer takes over co-responsibility for the result of saving.

“Systems of savings with significant participation of employers are standard in developed countries and after the compulsory, often pay-as-you-go pension schemes, the second biggest,” said Šebo, adding that the employers are rewarded for this responsibility with the possibility to deduct their contributions from their tax base up to 6 percent of paid wages. “We have to objectively admit that this is the main motivation that keeps this scheme alive.”

Possible changes

“The stagnation of the third pillar is obvious,” said Vrdzek. “Thus if the current setting of the third pillar is preserved, we expect rather a reduction of the extent of coverage of the population, which is exactly not a positive development.”

Haniš indicated that even though DDS Tatra Banka registers an increasing interest of employers in contributing to savings of their employees, making the third pillar more attractive for employers by tax benefits might make it a standard as it is in several western European countries of the EU.

“If we do not make the third pillar more attractive, then after the stagnation of the number of savers their number would decrease as the number of savers entitled for pension from the third pillar will increase,” said Haniš.

The Labour Ministry, even though it indicated some changes to the third pillar before the March parliamentary elections, does not plan any changes for now, yet in the future Slovakia will be affected also by results of the legislative process in the European Union. As Stuška specified, Slovakia will have to transpose by May 2018 at the latest the directive of the European Parliament from April 16, 2014 on minimum requirements for enhancing worker mobility between EU member states by improving the acquisition and preservation of supplementary pension rights. Additionally, approval of another directive, on the activities and supervision of institutions for occupational retirement provision, is expected later during 2016. Afterwards Slovakia will have to transpose it into its legislation within two years.

“Especially the second directive will bring several changes in the field of supplementary pension saving,” said Stuška.

ISI experts see several areas in which changes may improve the third pillar. Firstly Šebo and Virdzek propose to integrate the third pillar into the pension scheme for it to become an integral part, meaning linking to the central information offer system enabling a client to choose from various offers and combinations of products. The second group of measures would address the offer of funds with a better ratio of price and performance. The third field is related to creation of a quality system for monitoring savings with elements of planning; which ISI is already working on.

“It is very important that people start saving for retirement also individually,” said Haniš of DDS Tatra Banka. “To live from a pension equalling approximately only one-third of an average wage will be very difficult. And you cannot save for a decent supplementary pension during five or 10 years. This requires a significantly longer period of time.”

Disclaimer: The articles included in the “Banking” supplement were created by authors enrolled in the educational programme organised by The Slovak Spectator in cooperation with the University of Economics in Bratislava. The programme seeks to train journalism students on how to cover business- and economy-related issues. The articles were prepared in line with strict journalistic ethical and reporting standards.

Author: Lukáš Burian and Tomáš Schügerl