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LAW'S OPPONENTS FEAR PRIVATE PENSION SYSTEM WILL CRUMBLE

Second pillar likely to open

THE RULING coalition overcame an apparent crisis to push through to the second reading the bill that opens up the capitalisation pillar of the pension system for six months.
The capitalisation, or second, pillar allows people to save for their pensions in private accounts administered by pension fund management companies. The bill would allow people to quit the pillar from the beginning of January 2008 until the end of June 2008.

THE RULING coalition overcame an apparent crisis to push through to the second reading the bill that opens up the capitalisation pillar of the pension system for six months.

The capitalisation, or second, pillar allows people to save for their pensions in private accounts administered by pension fund management companies. The bill would allow people to quit the pillar from the beginning of January 2008 until the end of June 2008.

Observers say the question now is not whether the bill makes it through the parliament, but rather in what form.

"The most important thing is that the system will open up for six months, giving people the option of whether they want to stay or quit," Prime Minister Robert Fico told the press, after he soothed tensions between Movement for a Democratic Slovakia (HZDS) boss Vladimír Mečiar and his party over the form of the social insurance act drafted by the Labour Ministry.

Parliament passed the bill to the second reading on September 24. Fico said the bill would create a social insurance system involving more solidarity, and the opposition sees it as a fatal blow to the social security reforms started by the previous government of Mikuláš Dzurinda.

The coalition will keep working to get better guarantees for clients of the private pension fund management companies so that they are shielded from losses or damages due to the performance of these companies, Fico said.

Earlier, Mečiar proposed to withdraw his coalition party's support for the bill that Smer Labour Minister Viera Tomanová's team designed.

Mečiar presented a list of conditions to Smer, including a demand that that a special fund be created to guarantee second pillar savers' deposits and yields before the state allows people to leave the second pillar. But the HZDS boss did not specify whether he wants the fund to be administered by the pension management companies or the state itself.

Mečiar also insisted that the system must open both ways, allowing those who missed the chance to enter the scheme in the first wave to do so during the six-month period when it is open for people to quit.

He also proposed changing the ratio of contributions to the second pillar. Currently, employers transfer 18 percent of employees' gross salary to the old-age pension system. One half of this sum goes to the state-run social security provider, Sociálna Poisťovňa, which constitutes the first pillar of the pension system. The remaining nine percent goes to private pension fund management companies.

Mečiar wanted the contrib-ution ratio to shift from from 9:9 to 12:6 for a period of three years. After that period, he proposed, contributions would gradually increase, the SITA newswire wrote.

The Labour Ministry estimates that about 30,000 savers would quit the capitalisation pillar during the six-month opt-out period.

Pension fund management companies have been careful about commenting on the recent developments.

"We do not know at this point which of the different suggestions will make it to the final version of the law," Ivan Barri, the executive director of the Association of Pension Funds Management Companies (ADSS), told The Slovak Spectator.

However, the pension fund management companies maintain that if too many people opt for returning to the first, pay-as-you-go pillar, the whole pension system might be destabilised.

The political opposition said the agreement between the HZDS and Smer has dramatically changed the draft, reducing it to a mere shadow of the original plan, according to Dzurinda, the Slovak Democratic and Christian Union (SKDÚ) chair.

The agreement removed the substance of the provisions that were designed to bring additional money and decrease the general government deficit, he said.

"Lowering the percentage paid to the second pillar is absolutely unacceptable," he told SITA. "It is thievery and a loan for the future. It is immoral."

The third coalition partner, the Slovak National Party (SNS), said it would work on a compromise. SNS leader Ján Slota said Mečiar's objections are worth discussing.

Fico's government has already asked the pension fund management companies to secure more guarantees for clients who have entered the capitalisation pillar.

"We are not reluctant to provide any guarantees, but these need to be defined in a way that benefits the clients," Barri told The Slovak Spectator in an earlier interview. "Any guarantee of returns on the long term brings lower returns. If investments are made into deals with 'guaranteed' returns, such as state bonds or bank deposits, you will have lower returns than those from more risky tools with a potential of higher returns."

Meanwhile, the country's central bank rose to the defense of the capitalisation pillar, saying the system is safe enough.

"Any change made to the second pillar now will mean larger problems in the future," said the governor of the National Bank of Slovakia, Ivan Šramko.

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