The government has suggested a reform which would consist of four pillars: two obligatory and two optional. The first pillar is based on the current inefficient system. It is essential to keep this scheme, however, for a gradual transition to individual accounts, but its role in the wider scheme should be limited as much as possible.
The second pillar includes individual accounts, thus identifying individuals' contributions to social insurance. The third pillar gives supplementary pension insurance companies a preferential status. Commercial insurance companies, mutual funds and banks are the last part of the social security system, the fourth pillar.
There are many arguments for why the assets in the second pillar should not be managed solely by the current social insurance company, Sociálna poisťovňa. If management of such a huge portfolio is concentrated, it can disturb the fixed income market, because the potential largest player - the social insurance company - will control the market without being forced to worry about profitability.
If participation in the second pillar were obligatory, and citizens could not influence investment policy or switch to another fund, it would give a free hand to the social insurance company to provide cheap financing of state debt or state owned companies.
The commercial sector is prepared to participate even in this second pillar level. For instance, the assets could be managed by mutual funds or pension funds, and the social insurance company could administer merely the interest on citizens' funds. Citizens should have the right to decide who manages their future pensions, and to choose between options based on the lowest costs and greatest efficiency. They should have a chance to switch to another fund to avoid losses, or if they are not comfortable with management of their assets.
A legal framework already exists for collective investment; the rules strongly emphasize risk diversification and transparency. Assets lodged in mutual funds are the sole property of contributors to these funds, and securities in portfolios have to be liquid and tradeable. A similar legal framework can be applied for pension funds.
Juraj Kotian is a research analyst at state bank Slovenská Sporiteľňa
19. Mar 2001 at 0:00 | Juraj Kotian