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THE SECOND PILLAR OF THE OLD-AGE PENSION SCHEME GETS READY FOR MORE CHANGES

Stability is scarce in 2nd pension pillar

STABILITY is one of the first words which jump into people’s minds when speaking about old-age pension schemes. But paradoxically this is what the Slovak scheme, and in particular its second – or capitalisation – pillar, has lacked the most. Since its launch in 2004 it has been changed more than 20 times and because of the change in government widely expected after the March 10 general election, it may change yet again. But as the rest of the world is changing too Slovakia's system needs to respond flexibly as well.

Pension savers will soon have four 2nd-pillar funds. (Source: SME)

STABILITY is one of the first words which jump into people’s minds when speaking about old-age pension schemes. But paradoxically this is what the Slovak scheme, and in particular its second – or capitalisation – pillar, has lacked the most. Since its launch in 2004 it has been changed more than 20 times and because of the change in government widely expected after the March 10 general election, it may change yet again. But as the rest of the world is changing too Slovakia's system needs to respond flexibly as well.

“All those involved in the second pillar have perceived the frequent revisions to the legislation [governing the second pillar] negatively, but on the other hand pension reform is not like setting up a bicycle [for a ride],” Radovan Ďurana of the economic think tank INESS told The Slovak Spectator. “Reality has been changing incessantly and it is necessary to respond to this and alter the conditions.”

Ďurana believes that it is not the frequency of the changes but the absence of long-term support from across the political spectrum that is harming the second pillar.

“The second pillar still does not have a solid foundation of trust even though it involves sums comparable to the annual amount collected in VAT,” said Ďurana.

The Association of Pension Fund Management Companies (ADSS) agrees that it is necessary to tune a system as complex as the second pillar continuously, and to do so based on experiences and trends encountered in the financial world.

“But as long as the fundamental and principal settings of the system as a whole are ceaselessly changed, this is ultimately to the disadvantage of savers and future pensioners,” Peter Socha, the chairman of the association, told The Slovak Spectator. “Management companies must then, willy-nilly, project into their decision-making such things as ‘political’ risk. It would be better if we could focus completely on specialised issues linked to management.”

The pension fund management companies are currently preparing to implement the latest round of changes, which come into effect on April 1.

The most recent amendment, approved by parliament last September, increases the number of investment funds that participants can choose from, reduces the scope of guarantees for savers that were enshrined in law in 2009, and mandates that young workers entering the labour force are again automatically enrolled in the second pension pillar, with the option to withdraw within two years if they wish to do so.

From April 1, a participant in the second pillar will be able to choose to put his or her savings into four kinds of investment funds: a bond fund, a balanced fund, a stock fund or a new type, the equity-linked index fund. Only the bond fund will be subject to state-mandated guarantees on investment performance.

“I perceive the rules valid as of April 1 to be a move towards the existence of funds [covered by] guarantees and funds [not covered by] them,” said Socha, adding that this change gives savers more opportunities to choose in what sort of fund they wish to invest.

Ďurana also welcomed the changes to the rules on guaranteed returns, which he said opened up more room for higher returns on savings. He said INESS also positively assesses the introduction of a cheaper index fund and the return to the opt-out principle when entering the second pillar. From the viewpoint of savers INESS would welcome renewed discussion about the necessity of saving, which Ďurana said for many people, especially younger people, would be a more advantageous alternative to investing in housing or education, at least to begin with.

After the election

The outcome of the election could prompt further changes and Ďurana said he would welcome new forms of saving as well as an increase in competition between pension fund management companies, with the possibility of an alternative use for a part of people’s savings. He also sees scope for a decrease in the maximum monthly contribution to the second pillar.

Pension fund management companies would welcome less frequent changes to the basic rules and agreement among political parties and experts on the terms of the second pillar in order to ensure greater stability.

“Of course, we are open to a discussion and are willing to contribute our comments and proposals about possible changes,” said Socha.

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