Confusion reigns after pension amendment

THE SLOVAK parliament has modified the country's pension system, but not even the legislators are perfectly sure what the future system will look like.

THE SLOVAK parliament has modified the country's pension system, but not even the legislators are perfectly sure what the future system will look like.

Parliament approved an amendment to the social-insurance law on October 30 that opens up the capitalisation pillar of the pension system for six months. More than 1.5 million people who have been saving for their pensions in private accounts administered by pension fund management companies will be able to reconsider their decision and quit the so-called second pillar between January 2008 and June 2008.

The government's original idea was to open up the system both ways, to let in people who wish to enter the second pillar but missed the deadline for doing so back in 2006.

But shortly after the amendment passed, parliament also approved an earlier proposal from opposition Slovak Democratic and Christian Union (SDKÚ) MP Iveta Radičová, who had suggested that people who didn't enter the second pillar by June 30, 2006 would not be allowed to enter it at all.

All this leaves the fate of the legislation up in the air, because two contradicting amendments have been passed.

Former labour minister Radičová has already said that President Ivan Gašparovič should veto the law, and thus make it possible to clear up the legislation. The MPs voted on a proposal that was no longer relevant, she said.

But current Labour Minister Viera Tomanová does not think the president should veto the law.

"The second vote should have not happened at all," Tomanová said, as quoted by the Sme daily.

The modified legislation was supported by 76 MPs (the minimum required for the proposal to pass) and opposed by 55.

The capitalisation pillar, or second pillar, was one of the main attributes of the Mikuláš Dzurinda cabinet's old-age pension reform.

Clients redirect 50 percent of their social insurance fees into the capitalisation pillar and the rest goes into the first pillar, the pay-as-you-go-system administered by the public social security provider Sociálna Poisťovňa. The first pillar is 100-percent insurance-based, with disbursements that reflect the monthly amount paid into the account and the length of the savings' lifespan. The third pillar is a voluntary supplementary saving system.

However, the law also stipulates that as of next year, the second pension pillar will be voluntary for people born after December 31, 1986, who will have the option of entering within six months of starting their first job.

The state will no longer pay the contributions for those who collect disability pensions. However, those on parental leave and caregivers would still have their contributions covered by the state.

The amendment also stretches the minimum savings period for pension eligibility in the second pillar from 10 years to 15 years, and toughens conditions for early retirement, the SITA newswire reported.

Pension companies confused

The private pension fund management companies themselves are a bit confused by the law. Ivan Barri, the executive director of the Association of Pension Funds Management Companies (ADSS), said it is too soon to comment on the law and that the association will wait to see what changes it will actually bring.

"We will have a better idea about the impacts of the law next year," Barri told The Slovak Spectator.

However, the pension companies have been against opening up the second pillar since Prime Minister Robert Fico's government first raised the idea.

"We have said it all along that opening up the second pillar lacks a concept," Barri said. "Increasing the saving period from 10 to 15 years is also changing the rules in the middle of the game.

"We have tried to discuss this with the cabinet at an expert level, but our voice has not always been heard," Barri added.

"We only hope that the consequences will not be catastrophic."

Pension fund management companies also 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 Labour Ministry estimates that about 30,000 savers would quit the capitalisation pillar during the six-month opt-out period.

Meanwhile, 126,277 people have signed a petition to protect the second pillar that the opposition parties initiated earlier in October.

The net value of policyholder assets in licensed pension fund management companies in Slovakia was more than Sk46.6 billion (€1.4 billion) as of the end of October, SITA reported.

Fico has been pouring criticism on pension fund management companies since taking over his post. Earlier this year, the prime minister compared the companies to pyramid schemes and said that their losses might endanger the future payout of pensions. In mid-September, Fico's government also asked the companies to secure more guarantees for clients who have entered the capitalisation pillar.

Earlier this year, 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.

Šramko said the system will work if it is kept compulsory. The system, as it was designed, pushes the government to keep the shortfall of the social insurance system under control and cut deficits. The government should use its own resources to cover the deficit, rather than lowering payments to the capitalisation pillar, he added.

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