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No mass exodus from 2nd pillar

ONLY A FEW days remain for participants in the privately-managed second pension pillar to freely transfer back to the pay-as-you-go component of Slovakia’s old-age pension system. Though a lot of campaigning has gone on, it appears that history will not record any mass exodus among the 1.5 million people who are saving for their retirement in Slovakia’s second pillar, which was initiated by the previous centre-right government. During the voluntary opt-out period, the Labour Ministry, the government-run social insurer Sociálna Poisťovňa and private pension fund management companies have all swamped citizens with brochures vigorously arguing the pros and cons of staying in the second pillar.

ONLY A FEW days remain for participants in the privately-managed second pension pillar to freely transfer back to the pay-as-you-go component of Slovakia’s old-age pension system. Though a lot of campaigning has gone on, it appears that history will not record any mass exodus among the 1.5 million people who are saving for their retirement in Slovakia’s second pillar, which was initiated by the previous centre-right government. During the voluntary opt-out period, the Labour Ministry, the government-run social insurer Sociálna Poisťovňa and private pension fund management companies have all swamped citizens with brochures vigorously arguing the pros and cons of staying in the second pillar.

The director of Sociálna Poisťovňa, Dušan Muňko, sent a letter to about half a million people warning them of what he believes are the risks associated with the second pillar. The Labour Ministry has also been intensively engaged in what it calls a campaign to balance the one-sided and biased promotion that the private fund management companies waged before the second pillar was launched. And, the pension fund management companies responded by distributing their own leaflets suggesting that it is the ministry’s campaign which is misleading the public. By June 24,
approximately 26,000 participants had left the second pillar since last November and about 9,500 people had newly joined, according to information provided to the media by Muňko.

The government ordered the second pillar to be ‘reopened’ between November 15 last year and June 30, offering current participants the opportunity to voluntarily opt-out and transfer their pension savings back to the first pillar.

Normally such transfers would incur a penalty. The second pillar had also been opened between January and June 2008 and during that time more than 103,000 people left – and over 21,000 joined – the privately-managed second pillar.

The second pillar has been seen as a thorn in its side by the government of Prime Minister Robert Fico, who has repeatedly cited the global economic downturn and what he has called the endangered savings of second-pillar participants as the reasons for tampering with the current setup.

In May, Fico indirectly inserted the World Bank into the campaigning when he said that it had recommended reductions in contributions to the second pillar in Slovakia. Fico referred to statements that, according to him and Labour Minister Viera Tomanová, a World Bank representative made to a conference focusing on the operation of pension systems in times of economic crisis.

The Slovak Association of the Pension Fund Management Companies (ADSS) then published a letter signed by Shigeo Katsu, vice president for the World Bank’s Europe and Central Asia Region, suggesting the contrary.

The World Bank wrote that while it understands that countries under severe fiscal duress might need to resort to sub-optimal responses, “we have serious reservations about prolonged second pillar rate reductions especially when combined with a voluntary opt-out,” according to the letter that the Sme daily published on its website.

“Our broader messages are twofold: we would advise governments to avoid the temptation to respond hastily and make decisions now that are better made once more information is available on the depth and the duration of the economic downturn and to keep the focus on long-run challenges of putting in place a fiscally affordable pension system given the demographic trends in Slovakia and many other countries in Central and Eastern Europe which would require parametric changes to the pay-as-you-go system,” Katsu’s letter continued.

Minister Tomanová responded by accusing the ADSS of manipulating international institutions.

“They are shamelessly dragging international institutions into this conflict, whether I talk about the International Labour Organization, the International Social Security Association or other institutions,” said Tomanová, as quoted by the TASR newswire.

The letter that the World Bank wrote to ADSS will not influence the ministry’s policies in any way, the spokesman for the Labour Ministry, Michal Stuška, told The Slovak Spectator.

“The ministry in its decision-making is not influenced by correspondence which happens between third parties,” Stuška said. “However, the ministry always minimally takes note of different recommendations by relevant European institutions and authorities or discusses these at all the relevant forums.”

However, according to Stuška, the ministry does not plan to apply recommendations recently presented by different institutions in this area.

“The clear content of the communication of the Slovak prime minister and the labour minister was pointing at the openness of the discussion on the topic of pension systems at the international level, which is in sharp contrast with the local dimension and the objectiveness of discussion on the topic since the launch of pension reform in Slovakia,” Stuška said. He confirmed that the ministry is not proposing to make a change in the ratio of transfers to the pay-as-you-go system and to the second pillar. It would contradict the programme of the government, he said.

The state insurer, Sociálna Poisťovňa, drafted its current budget on the assumption that about 150,000 people would heed its warnings and return to the first pillar. However, it is now clear that this projection will not be met.

“It’s necessary to repeatedly warn that the interpretation offered by media that the Labour Ministry is trying to meet a sort of general plan of making people quit the second pillar is not correct,” Stuška said. “A certain pay-off of the debt towards citizens from the times of the one-sided campaign run at the time of the installation of the reform is necessary so that at least during the time of opening of the system they are able to make more responsible decisions.”

Stuška said that the basic interest of the ministry has been, and remains, that pension-savers who do not have the chance to actively participate in the second pillar for at least 30 years would leave the system during its open period.

“The assumption is that this goal will be met,” said Stuška, adding that “it also considers the decision of remaining in the second pillar to be a personal decision of each saver.”

The social insurer’s shortfall

“From a short-term point of view the shortfall in the income of Sociálna Poisťovňa might be around Sk5 billion {about €166 million],” Radovan Ďurana of the economic think-tank INESS told The Slovak Spectator. “These finances have been budgeted for the payment of old-age pensions but the insurer will miss them and thus the state will have to transfer money to the insurer so that it can meet its obligations.”

As for the long-term impact, Ďurana said that fewer people will be contributing to the pay-as-you-go system and thus the shortfall to Sociálna Poisťovňa from the contributions linked to the existence of the second pillar will be larger as well.

“It would, in the long-term, increase the demands for subsidising the insurer, until the moment when savers retire,” Ďurana said. “Their participation in the second pillar would then cut the expenses of the insurer.”

However, the social insurer has argued that savers who remain loyal to the second pillar are sticking to a risk of 70 percent losses with their pension savings invested in the financial and capital market.

“The information that Sociálna Poisťovňa provides about the second pillar is one-sided and cannot be considered objective,” Ďurana said. “The issue of future revenues is even misleading. The history of the performance of capital markets shows that regular savings with long-term investments have increased the value of savings.”

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