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Second pension pillar opened again

SAVERS who are investing in the private pension pillar will have a three month window to pull their money out. 

(Source: SME)

SAVERS who are investing in the private pension pillar will have a three month window to pull their money out and redirect it to the state-run system after parliament passed changes to the pension system via a fast-tracked proceeding on February 4.

Between March 15 and June 15 those unhappy with their returns in the so-called second, private pension pillar will have the option of redirecting their money to the public pay-as-you-go pillar. The opposition perceives the opening as a further destabilisation of the old-age pension scheme and as a way to cover budget shortfalls in the deficient public pension systems and experts warn that an aging population means the first pension pillar remains unsustainable in the long term.

“In view of the level of pensions being offered to people for their savings, the participation of a certain group of people in the second pillar is not advantageous,” wrote the Ministry of Labour, Social Affairs and Family in materials advocating opening the second pillar.

Savers will therefore be able to leave the system within a three-month period, taking with them also their savings to the social security provider Sociálna Poisťovňa.

As in three previous periods when the pillar was opened up, people will also be able to join.

“The second pillar makes sense, but only for a certain category of people in terms of their income and age,” Labour Minister Ján Richter said as cited by the TASR newswire.

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.

Prime Minister Robert Fico welcomed the passage of the revision recalling that the reasons behind the government-sponsored measure is the evidence that the pensions for people who were saving for retirement in the second pillar for 10 years as calculated by insurance companies are “ridiculously small”.

“We’re also aware of the fact that there are still hundreds of thousands of people that have no chance of having a higher pension from the first and second pillar than what they would get if they stayed only in the first one – either due to their age and/or due to having no salary,” Fico said as cited by TASR.

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

The Association of Pension Funds Management Companies (ADSS) calls for cooler heads.

“There is a uselessly large hysteria around how pensions will be paid out and what the amount of pensions from the second pillar will be,” Stanislav Žofčák, the head of the association told media February 2. “Savers will have a possibility to decide whether to stay in the second pillar or to leave it.”

The ADSS also sees as very difficult to say who should stay or leave the second pillar.

“Nobody, neither us, mister prime minister or mister minister know who is there uselessly and who is not,” Viktor Kouřil from ADSS said, adding that he is only willing to accept that those who are very close to retirement age, have worked for the whole life for minimum wage and have now three to four years to retirement, will have a combined pension from the first and second pillar lower than if they had saved in the first pillar alone.

Opposition and experts critical

The opposition heavily criticised opening the second pillar.

“Every opening of the second pillar destabilises the two-pillar pension system more and more,” said Most-Híd Chairman Béla Bugár as cited by TASR, noting that this is the fourth time that the second pillar has been opened.

Ivan Švejna, Most-Híd MP and vice-chair, added that by opening the second pillar the government wants to acquire money for its politically popular social measures. He noted that if savers move from the second pillar to the first one, they also transfer the money they’ve saved. The first pay-as-you-go pillar serves for payment of current pensioners, so if the government acquires these extra resources it will have an easier time scraping together money that it would otherwise be pouring into the first pillar.

Independent MP Jozef Kollár estimates that the government’s move may transfer around €400 million into the first pillar. Slovak Democratic and Christian Union (SDKÚ) MPs Pavol Frešo and Ľudovít Kaník criticised the Fico government for not explaining how it wants to guarantee pensions in, say, 20 years. They warn that if the second pillar is made dysfunctional, people in 20 years will have to retire not sooner than aged 75, according to TASR.

Vladimír Baláž from the Institute for Forecasting of the Slovak Academy of Sciences warns about the unsustainability of the first pillar, too.

“The pension paid out by Sociálna Poisťovňa really momentously looks like more generous compared with pensions offered by commercial insurance companies,” Baláž told the Pravda daily. “But is it clear for a long period of time that it is disproportionally high with respect to the sustainability of the system.”

According to Baláž, already now pensions of those with higher wages paid from the first pillar are quite drastically cut and will continue to be reduced while this will negatively impact the people who pay the most into the pension scheme, but because of their higher age were not recommended to enter the second pillar.

Baláž also recalled that the state needs to subsidize Sociálna Poisťovňa annually with hundreds of millions of euros from sick leave and other funds as Sociálna Poisťovňa is not able to collect enough money for payment of pensions from the first pillar. He warned that the situation will worsen as the ratio of workers paying payroll taxes per pensioner worsens.

“Thus it is more than clear that those who would like to have a better pension in the future, could not reckon on the first pillar only,” Baláž told Pravda. “They have to secure incomes for old age from several sources – Sociálna Poisťovňa, second and third pillar, as well as from private savings. Politicians can promise something different, but it will not be them who will pay pensions.”

Baláž predicts that the aging population will require more reforms to the first pillar. He expects that in the end the state might be able to guarantee to a pensioner from the first pillar only a kind of a social dose for survival. According to Baláž, the design of the second pillar 10 years ago was not ideal when primary notions were that about 300,000 people would enter it and allocate about 3 percent of their gross wage. In the end about 1.5 million did, allocating up to 9 percent of their wages.

“This, of course meant a huge shock for public finances and deepening of the deficit of Sociálna Poisťovňa,” said Baláž.

Baláž said there is no simple formula for determining who will be better off saving in the second pillar. He recalled that while two-thirds of those in the second pillar have wages lower than the average and thus they theoretically should not enter the second pillar, many of them are young people who are just beginning their career.

“To make an informed decision means take into consideration the combination of age, income and the type of employment,” Baláž told Pravda.

In respect to the criticism of too low pensions offered from the second pillar Baláž recalled that a private insurer offers only a pension it can afford from saved money as the second pillar is not, contrary to the first pillar, subsidised.

At the beginning of 2015, about 3,000 pensioners were able to apply for payment of pensions from the second pillar. So far 221 of them have used this possibility. 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), have made them offers through the central bidding information system managed by Sociálna Poisťovňa. Afterwards, pensioners-to-be are meant to choose the best offer for them. Fourteen savers have already also signed agreements with insurance companies, Sociálna Poisťovňa reported.

 

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