IF THERE were such a competition, Slovakia’s second pension pillar would probably win the world title and certainly the central European crown for most frequently modified pension scheme.
After offering a series of opt-out opportunities to the 1.5 million people who currently save for their retirements in the privately managed second pillar of Slovakia’s pension system, the government has cut the fees that the pension fund management companies can charge clients to administer the funds.
However, Prime Minister Robert Fico is still not happy with the way the pension fund management companies, which entered the system as part of the previous, centre-right government’s pension reforms, operate and he now plans to produce a new rule for the second pillar. This rule will state that that the growth in yields of privately managed funds must at least match government-set rises in the state-run pay-as-you-go pillar.
“Today is the day when the Slovak government has definitely lost all patience with the pension funds management companies,” said Fico on October 7, as he announced the new plan, as quoted by the TASR newswire. “They were lying when they lured people into their traps.”
The prime minister described the second pillar as a “sophisticated fraud” and suggested that the move would defend the interests of savers.
Finance Minister Ján Počiatek has now been given several weeks to draft an amendment to the law on old-age pension saving.
However, economists say that while the pay-as-you-go system can be politically influenced, the private pension pillar in fact depends on the moves of the economy.
The opposition Slovak Democratic and Christian Union (SDKÚ) suggested that what the Fico team now aspires to do is to regulate global stock markets with a law passed by the Slovak Parliament.
According to Eugen Jurzyca of the SDKÚ, this will be just another set of laws that achieves nothing except attracting media attention. His colleague Ivan Štefanec said that now the government is coming to the point where it will not have the money to pay pensions from the first pillar and wants to bring the second pillar closer to the pay-as-you-go system.
“It is only camouflage, designed to cover mistakes and the waste of public funds,” said Štefanec, as quoted by the SITA newswire.
Observers also suggested that if the government manages to force the pension fund companies to guarantee savers’ gains at the level of pension valorisation, the way businesses are run in this segment might change for good.
On March 11, the Slovak parliament adopted a revision to the law on old-age pension saving. Beginning on July 1, 2009, the fixed fee for administration of second pillar pension funds was cut from 0.065 percent to 0.025 percent of the net monthly value of the participant’s assets in the fund. It also introduced a new, variable fee, dependent on the actual yields of the pension funds.
“The government has significantly changed the motivation of pension fund management companies,” Radovan Ďurana, of the Institute of Economic and Social Studies (INESS) economic think tank, told The Slovak Spectator. “The calculation of their revenues from fees is tuned in such a way that their administrators are motivated to achieve low revenues with minimal risks.”
According to Ďurana, eventual losses would significantly affect their business results so they are motivated to invest only in relatively safe securities and even term deposits.
“The system of fees motivates them to sell securities, which in the case of long-term investments could bring appropriate gains for the savers,” Ďurana said.
Ďurana said that the paradox of the state’s proclaimed desire for privately managed funds to match public fund growth is that that the government is having to take on more debt and borrow funds from investors in order to boost first pillar pensions, while it is precisely the second pillar pension fund management companies which are buying a considerable share of state securities to fund that debt.
“For example last year the pensions were valorised [i.e. raised to reflect inflation and other costs] by 6.95 percent, which is considerably more than the annual appreciation of growth funds in the pre-crisis period,” Ďurana said.
Pension fund management companies said that the government’s interventions have been endangering their operations as well as reducing, over the long term, the value of the pensions of those participating in the second pillar.
Ivan Barri, the executive director of the Association of Pension Fund Management Companies (ADSS), told The Slovak Spectator in March 2009 that Slovakia was turning into the “cheapest pension savings system in the world”.
However, Labour Minister Viera Tomanová has asserted that the March amendment has not prevented pension fund management companies from investing in equities. She said that the legislation has not had any impact on the investment strategy of pension fund management companies.
“The fact that pension fund management companies have adopted a more cautious approach at present, as their money is at stake, is in a certain way a disadvantage for savers, but it is fully the decision of pension fund management companies,” she said as quoted by SITA.
Ďurana said that the minister’s statements about the funds’ freedom to invest is factually correct, but does not paint the whole picture.
“The pension fund management companies can decide where to invest but they do so within a frame that the law defines for them,” Ďurana said. “Since the motivation of their activities is, understandably, appropriate and sustainable profit, and under the current rules this can be achieved only with investments with low-yield risk, it is thus logical that their freedom to invest is significantly limited.”