Pensions inspire debate

ALMOST half of Slovakia's working population joined the new pension scheme that replaced Slovakia's pay-as-you-go pension system in 2004. Citizens so far have deposited Sk17.3 billion in personal pension accounts. However, the ruling coalition says that the new scheme has its problems and changing some of the rules might make the system healthier.

ALMOST half of Slovakia's working population joined the new pension scheme that replaced Slovakia's pay-as-you-go pension system in 2004. Citizens so far have deposited Sk17.3 billion in personal pension accounts. However, the ruling coalition says that the new scheme has its problems and changing some of the rules might make the system healthier.

The Slovak Spectator spoke to Viktor Kouřil, member of the board of directors of VÚB Generali DSS, Tatiana Balážová, general director of ČSOB DSS, Frans van der Ent, general manager of Life & Pension ING SR and Dana Bunová, marketing manager of AEGON, about possible interventions to the system and what effect they might have on both the population and the pension fund administration companies (DSS) that operate on the Slovak market.

The Slovak Spectator (TSS): When giving hints about its programme the cabinet suggested changes to the country's pension reform, which was inspired by the Chilean model. By June 30, almost half of the working population joined the second capitalisation pillar. Some officials, however, suggested that instead of transferring half of the 18-percent payroll tax to the social insurer Sociálna poisťovňa, people should be transferring less. What impact would this change have on the future pension of people and the DSS?

Viktor Kouřil (VK): The state certainly can lower the percentages of payments to the pension funds administered by particular DSS, but it is changing the rules after the game had started. In the end it would certainly mean lowering the pension coming from the second pillar and a greater reliance on the amount of pension coming from the Sociálna poisťovňa. The final effect will be a lower pension for citizens and heavier burden on the Sociálna poisťovňa. Certainly, such a step will also worsen the economic situation of some DSS and will prolong the time that before they will see a return on their investments, but they will continue functioning. However, it will be up to the owners-shareholders, who are mostly strong banks and insurance houses, to determine what steps they may choose to take, if such changes take place.

Tatiana Balážová (TB): The goal of the reform of the pension scheme was to prevent the collapse of the system of pension savings due to demographic developments. Our company views the suggested changes in the amount of transfers to private funds negatively. Such an intervention to the second pillar could have an undesirable impact on the amount of savings of the contributors themselves but also on the functioning of the system. Weakening of the pension savings would affect people with lower income the most, this would spoil their prospect of achieving a higher pension.

Frans van der Ent (FE): This would have a dramatic effect on the future pension. People will invest less in their private pension. The level of pensions from the first pillar will always be dependent on politics, the second pillar should offer stability and be their own responsibility. For DSS companies a lower level of contribution from the savers would mean an immediate lowering in the amount of fee income. Due to current limitations of fee levels, the period for the return on the investments for the DSS is already around 10 years or longer. The worst aspect of changing the contributions level to the DSS however is that it would give a bad signal to the 1.4 million inhabitants who just decided to join the second pillar based on the current conditions.

Dana Bunová (DB): Lowering the transfers to the private pension funds would first of all affect the volume of savings on the accounts of the clients, which are his or her personal property and would influence the expected pension after reaching retirement age. It would also mean a serious impact on the planned economic results of the DSS.

TSS: The labour minister said that the entry to the second pillar should be voluntary for people who will be entering the labour market instead of the obligatory entry to the second pillar. Would this move dramatically reduce the number of people using the private pension accounts?

VK: I am certain it is a good proposal. Everybody should have a choice whether or not to join the second pillar. Though, it is true that based on our experiences we assume that the absolute majority of young people will decide to save in private funds. As an example, in VÚB Generali, 65 percent of the clients are younger than 35 years.

TB: It is true that changes to the pension reform can open up many questions among the savers. If the entry to the private second pillar becomes voluntary we can expect fewer people entering the pillar than the current system assumed. However, we do not see the switch to a voluntary system a threat compared to the change to the percentage of payments to the private funds.

FE: The yearly group of newcomers is estimated around 50,000 employees on an annual basis. So in the short term it would not dramatically change the current number of 1.4 million participants. But the mandatory entrance of newcomers is one of the fundamentals of the whole reform of which you can not change one element without threatening the whole system. Especially the newcomers have by definition the right age to build up a reasonable and safe pension via DSS.

DB: It is a sensitive issue, which calls for in-depth analysis of the impacts on the clients and the DSS themselves. It is possible that this intervention will have a negative impact on the effectiveness of the whole system, since it will require a continuation of an active approach of the DSS during the campaigning process and persuading new clients about the advantages of joining the system, which will increase their costs of advertising and the campaigns. In the long-term it could mean a drop in the number of people joining the second pillar.

TSS: DSS has already indicated that massive changes to the pension reform would impact their investments that they have already made to the system. Some have even said that they would consider suing the country for their losses. Is your company concerned about eventual losses?

FE: Yes, this is a serious threat for every DSS and also for us. Change in contribution levels must imply a higher level of management fees which is not good for the savers. Again: you can not change just one element without putting the whole system at risk.

VK:If the conditions fundamentally change and the shareholders conclude that their investments are threatened, including the returns on their investments, they will decide in their headquarters, which are located all over Europe, about the legal steps they might take. It really will not be the management in Bratislava who will make that decision. As far as our company is concerned, we have calculated different developments and have generally informed our shareholders of the risks.

TB: The operation of DSS is designed decades in advance and the business plan is built accordingly. Fundamental changes pertaining to the pension savings can be reflected in the later profitability of the invested funds and also on the change of investment intentions. Eventual losses will affect not only the DSS but also each one of the 1.5 million clients who have entered the second pillar.

DB: Our company decided about entering the Slovak market based on the declarations of the Slovak government and the prepared legislation pertaining to the capitalisation pillar. We based our business plan and strategies on these declarations. Fundamental changes to the reform could impact the planned return of investments.

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