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More changes for second pillar

IN RESPONSE to the small payments going to the first pensioners-to-be from the second, private, pension pillar, Prime Minister Robert Fico says he will look for ways to allow those savers to move their money back into the state pension programme.

The second pillar will open, again.(Source: Sme - Peter Žákovič)

IN RESPONSE to the small payments going to the first pensioners-to-be from the second, private, pension pillar, Prime Minister Robert Fico says he will look for ways to allow those savers to move their money back into the state pension programme.

Many view the tactic as a way to plug the already existing shortfall in the state pension system, the so-called first pillar, and the political opposition warns that Fico would use the additional cash to finance additional social benefits to help boost his prospects, with a general election set for 2016.

Experts point out that already now the state subsidises the pay-as-you-go pillar and warn that due to negative demographic trends this pillar remains unsustainable, with payouts set to rise as the baby boomer generation retires and fewer workers from younger generations contributing. Insurance companies and pension fund management companies insist what the second pillar needs more than anything else is stability.

Fico believes that most of the 1.5 million people who are saving in the second pillar are actually disadvantaged.

“Nearly 1 million people who have invested in the second pillar won’t have a higher pension than if they arranged it through [social security provider] Sociálna Poisťovňa,” said Fico on January 21, as cited by the TASR newswire. “It seems to us that the most convenient solution of how to provide these people with a possibility to freely decide is to open up the second pillar.”

The opposition sees the reopening of the second pillar as the way to tap the money for short term gain.

“The Fico government decided to open the second pillar because it again wants to get to money from savers, by which it wants to finance its social packages through which it wants to buy voters,” Ľudovít Kaník from the Slovak Christian and Democratic Union (SDKÚ) told the Sme daily. Kaník served as the labour minister when the second pillar was launched.

This would be the fourth time since the private pillar was created in 2005, that a government allowed savers to pull their money out. On the three previous occasions a total of 260,000 savers left it which meant that their savings of about €491 million returned to state coffers, the Pravda daily wrote.

“We perceive opening of the second pillar as a response to hysteria, which broke after the Institute of Financial Policy published its calculations, which even though that they were shown to be incorrect, were enough to disrupt in a short period of time trust in the arising annuity market,” the Association of Pension Funds Management Companies wrote in a statement cited by the TASR newswire.

Parliament needs to adopt a law to re-open the pillar. For now there is no detailed information about when and under what conditions the pillar would re-open. Labour, Family and Social Affairs Minister Ján Richter is now going to negotiate the details with other institutions involved – pension fund management companies and the National Bank of Slovakia (NBS). As Fico said, the amendment could be adopted by parliament under the fast-tracked regime in the upcoming parliamentary session set to start on January 27, TASR wrote.

For the time being nearly 1.5 million Slovaks, who allocate 4 percent of their gross wage into the second pension pillar, have saved about €6.5 billion in total.

Based on the statistics of the Labour Ministry, there are 350,000 savers in the second pillar, who do not have any income and 450,000 savers have incomes up to €500 per month. About 380,000 savers have incomes up to €1,000. In general, the second pillar is recommended for those with incomes above the average monthly wage, meaning more than €800.

At the beginning of 2015, initially about 3,000 to-be pensioners were able to apply for payment of pensions from the second pillar. So far a few dozen of them have done so. Based on their savings in the second pillar, three insurance companies, Allianz – Slovenská Poisťovňa, Union and Generali, which have obtained licenses for payment of pensions from the National Bank of Slovakia (NBS), will make them offers through the central bidding information system managed by Sociálna Poisťovňa. Afterwards, pensio-ners-to-be are meant to choose the best offer for them.

Given the short savings period, the first payouts from the second pillar are low, between €8 and €12 per month, the Hospodárske Noviny economic daily reported. This means that if they sign contracts with an insurance company about paying pensions, their pension from the first, pay-as-you-go, and second pillar would be lower by between €10-50 than if they had remained in the first pillar, Pravda wrote. Experts ascribe this to the short time of saving as the second pillar was created only 10 years ago, a low sum of savings and the crisis, as well as expectations that with the longer operation of the pillar and longer savings this would change.

Vladimír Baláž from the Institute for Forecasting of the Slovak Academy of Sciences believes that today’s 30-year olds would be not able to keep the standard of living of current pensioners when they retire without their own savings. Already now the state subsidises the first pillar with about €1 billion annually.

The so-called demographic problem would cause that while today 1.6 employees pay payroll taxes per pensioner, this ratio will be 1:1 in 2030 and only 0.74 employee per pensioner in 2060, Baláž told Pravda.

The Institute of Financial Policy (IFP) a governmental think tank, compared pensions offered by the insurance companies from the second pillar. While IFP’s conservative scenario calculated the monthly pension for a 59-year old applicant with €21,500 saved in the second pillar at €82.70, offers by the insurers were €66, €71 and €82, thus only one offer was close to the IFP’s calculation. The IFP did not specify which insurer bid which offer. The IFP also calculated margins of insurers between 32 percent and 6 percent in case of the conservative scenario.

According to Jozefína Žáková, the general director of the Slovak Insurance Association (SLASPO), insurance compa-nies proceed strictly according to the valid legislation, the law on insurance and the law on old age pension saving. She added that only on the basis of such a proceeding the insurers were able to obtain a license from the NBS. She refuses that the insurers work with a 30-percent margin, the SITA newswire wrote.

The current old-age pension scheme consists of three pillars: the first - pay-as-you-go - pillar, the second – capitalisation – pillar, and the third - supplementary - is voluntary. After the second pillar was launched, it allowed those who joined to pay 9 percent of their gross wage into the second pillar and another 9 percent into the first pillar while those who did not join the second pillar, allocated all 18 percent into the first pillar. In 2012, the Fico government decreased the share paid to the second pillar to 4 percent.

The average old-age pension in Slovakia amounted to €400.20 per month at the end of December when more than 1 million pensioners received it.

 

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