Thomas Escritt looks at recent developments in the pensions systems of some of the regionís major economies
Czech Republic: Balancing on one pillar
Although the Czech Republic is the last country in Central Europe without a World Bank-style three-pillar funded pension system, its voluntary pension funds are one of the region's largest pools of assets, at some CZK200bn (€7bn), or 6% of GDP.
Despite a debate that dates back more than 10 years, all efforts to follow the regional trend in establishing a three-pillar system have been in vain. The most recent attempt came in 2010, when a committee of inquiry was established by the previous minority government's outgoing finance minister. The committee in the end recommended a move to a system for those under 40 based on a state pillar, a funded and mandatory second pillar and a third voluntary pillar. The new governing coalition of three right-wing parties committed itself to following through on the committee's proposals, but no details have been announced. Most expect a new system to be introduced within the lifetime of this government, though no changes are expected before 2011.
In the absence of fundamental reform, the legislative framework for the country's pension funds, effectively a specialised kind of life insurance, has been relatively stable.
Last August, legislation was introduced to discourage scheme members from switching precipitously to other pension providers. The legislation sets a fine of CZK800 for members who switch to a new fund within five years of joining another. Tax disincentives to withdrawing money from pension funds before the age of 60 were also introduced.
Although the formal investment rules that funds must adhere to are not very strict, they are in practice obliged to maintain a highly liquid, low-yielding portfolio to meet a legal obligation to guarantee positive profit sharing each year. This explains the unambitious investment portfolio typical of most members: pension funds have some 80% of their assets in Czech government bonds.
The industry is lobbying for a change to these guarantee rules that would allow for more growth-oriented portfolios. At the same time, the industry would like to see a modified governance structure for funds, which would replace the current life insurance model with a multi-fund structure with independent management companies. Under the current model, there is no legal split between members' assets held in the fund and the fund itself: the two are combined into one legal entity, access to which is sold as a product with rules about profit sharing. The previous government was considering introducing these changes, but its collapse followed by the arrival of a short-lived minority government prevented them from being enacted.
Hungary: Repatriating assets
If anyone thought that a landslide victory for the Fidesz party in April would bring badly needed stability after one year of minority government and two of financial crisis, events since have proved them wrong.
Since taking office, the conservative and populist party has radically restructured the government into seven super-ministries, promised to introduce a flat income tax and provoked an IMF/EU delegation to leave town by insisting on a windfall tax that will force financial institutions to cough up half their profits.
Despite the frenetic pace, the new government's policy platform is short on detail and, given that many civil servants still do not know, several weeks after the election, which new ministry they belong to, it is perhaps no surprise that even pensions experts are still unsure of where legislation affecting the sector is going to come from.
At least one proposal - to nationalise pension funds and use the HUF2,700bn in mandatory pension fund assets to shore up public financers - was briefly floated before being scrapped under pressure from the lenders that came to Hungary's aid two years ago. But questions over public finances mean the pension raid may yet reappear. Most changes to pensions regulation over the past 18 months have at the very least had the side-effect of funnelling pension assets into a stretched state budget.
One such change last year was a reduced cap on foreign currency investments in mandatory pension funds, which channelled more pension assets into government bonds. From 7 August 2009, balanced and classic (or low-risk) funds had to cut their exposure to 20% and 5% respectively by 31 December 2009, while growth funds have until 30 September 2010 to cut their exposure to 35%. The change will make it harder to build optimised portfolios, given the illiquidity of Budapest's stock exchange.
A further change, introduced last year, allowed those aged over 52 or already retired to opt back into the state pension, taking their assets with them. The option, open until 31 December, led 60,000 people to return HUF100bn to the state fund, a short-term boost that will create a financing burden for the next 15-20 years.
The same legislation also created penalties for switching pension schemes. Members are first forced to read a detailed information pack, and pay a HUF5,000 switching fee if they do move. If they switch twice in two years, they lose their entitlement to the yield guarantee available from the state pension guarantee fund, which compensates pension savers whose funds underperform the benchmark. The industry has welcomed this tough penalty, which should cut down on churn caused by overzealous sales agents.
Poland: Assault on fees
Poland's plans for pension policy this year are dominated by a spat between a populist group of ministers that would like to see stringent caps on the fees charged by pension funds and another group that hopes to maintain fees as they stand.
The first attempt to address the question of funds' fees came in 2003, when the regulator passed a law that envisaged a gradual lowering of the fees charged as a percentage of contributions received. This forced a stepwise reduction in fees, with the aim of reaching the desired fee level of 3.5% of contributions by 2014.
Between 2004 and 2010 the maximum contribution was to be 7%, with further progressive reductions between 2011 and 2014. The legislation also forbade funds from offering preferential fees to new members - in effect banning loyalty programmes - and created a performance management fee of up to 0.005% of net assets under management per month. It also reduced a regressive cost schedule for net asset management fees - meaning that the greater the size of a pension fund, the less it could charge proportionately as an asset management fee.
This progressive fee reduction programme was abandoned in 2009, when the minister in charge of labour and social policy introduced legislation that forced cuts to reach the 2014 target immediately. From 2010, the maximum size of the upfront fee had to be 3.5% of contributions. The new legislation also set a lower absolute cap on the management fee that could be charged by the largest funds. Under the new law, the most a funds can charge in total is PLN15.5m a month. Under the previous regime, the largest fund size bracket was for those funds with more than PLN65bn in assets under management, on which funds could charge PLN20.1m as well as 0.015% of the total assets under management. The largest fund size bracket is now PLN45bn. Together, these measures will lead to a substantial cut in fees.
Jolanta Fedak, the minister for labour and social policy, plans further reforms to the system this year, though it remains to be seen whether these measures will be implemented in the face of opposition from elsewhere in the government.
Among the measures she proposes is a cut in the employer's contribution to the funded pillar from 7.3% to 3.0% - with the balance to be diverted to the unfunded pillar. This would increase the total contribution to the state pillar from 12.33% to 16.22%. Furthermore, savers who are five years from the official retirement age of 65 would have the option to move their savings from pension funds to the unfunded pillar. On turning 65, savers would have the option of using part of their savings for non-pension purposes.
Industry experts doubt whether private pension saving could survive these populist measures, but in any case Fedak may struggle to pass them over the opposition of other members of the government.
Romania: A long gestation
Romania's funded pension system was set up only in 2007. Given that the country has gone through four governments since that date, two of them with no parliamentary majority, it is no surprise that some of the primary legislation relating to the system has yet to be enacted.
The two key pieces of legislation relate to the establishment of a guarantee fund and to the funded pension system's pay-out phase. Both are scheduled to be adopted in 2010 or 2011. However, given that they were first promised for 2008, commitments to legislate in the current parliament should be taken with a pinch of salt.
Though no legislation has been drafted, the guarantee fund - if established - would insure the solvency of pension funds if they encountered difficulties in meeting their obligations. The payout law would establish a framework for products that would allow scheme members to move from accumulating assets in pension funds to receiving a regular income from their savings.
Even though the final framework of Romania's funded pension system has yet to be settled, there has been no shortage of secondary legislation over the past year, in the form of norms and regulations issued by the Comisia de Supraveghere a Sistemului de Pensii Private (supervisory committee for the private pensions system). The committee issues two sets of regulations: investment norms, which determine the investment practices that funds are allowed to follow, and valuation norms, which determine the way in which funds' assets must be valued. The last review was carried out and implemented in March 2009, and the next review is scheduled for mid-2011.
The March 2009 regulations are relatively liberal with respect to foreign investments: in theory, mandatory funds can invest all their assets abroad. The regulations specify asset allocation ceilings, but no minimums. For example, funds may have up to 70% of their assets in Romanian, EU or EEA government bonds, but only a 50% allocation to bonds with a maturity of less than one year. They may invest up to 50% of their assets in Romanian or EU equities, with a maximum allocation of 35% to either category. Funds may invest up to 15% of their net asset value in non-EU sovereign bonds, with an upper limit of 15% for US, Canadian or Japanese bonds and 5% for all other states.
There are plenty of other legislative proposals with little chance of being adopted. Opposition parties have made three identical proposals to create an ‘inflation guarantee' for second-pillar, mandatory funds. The guarantee would be made by the pension fund management companies - and the industry insists that this would bankrupt the pension system. A fourth proposal is even more explicit: it would disband the second pillar entirely. None of these four proposals is likely to become law.