Sections

CEE: Reforms go forward in -challenging economic climate

Related Categories

Thomas Escritt, Pirkko Juntunen and Krystyna Krzyzak outline forthcoming regulatory and legislative changes to pensions in Central and Eastern Europe

Bulgaria
AT THE END of 2008 there were nine professional pension funds, with some 221,000 participants and assets of BGN367m (€187.6m). The largest players are Doverie, with 37.5% of assets under management and 34% of members, Allianz Bulgaria, 20% and 16.4%, and Saglasie, 17.8% and 16.3%.

Last year the government agreed to implement proposals of the Financial Supervision Commission (KFN) to allow different risk levels (a multifunds system) in third-pillar funds and ease to a certain extent the investment restrictions for second-pillar funds. The implementation of these changes is planned for 2010.

Voluntary pension funds will offer three types of investment portfolios with different risk profiles - aggressive, balanced and conservative. The high-risk option will be able to invest up to 80% of assets in equities, while the equity cap for the balanced portfolio is 50% and for the conservative portfolio 15%. The plans also suggest changes to the investment laws for mandatory pension schemes, proposing an increase in the cap on equity investments from 20-25% and on corporate bond investments from 25-40%.

Croatia
AT THE END of March 2009, compulsory pension funds had 1.49m members and combined with the third-pillar funds there were 1.64m participants in the system. Total assets of the mandatory funds stood at HRK23.6bn (€3.2bn) at the end of March.

In response to the global crises and as part of wide-ranging efforts to curb the budget deficit in February 2009, Prime Minister Ivo Sanader said he was considering making it possible for individuals to switch their pension insurance contributions back into the first-pillar or state pay-as-you-go system. Additionally, deputy premier Damir Polancec and finance minister Ivan Suker were instructed to draft amendments to the Pension Insurance Act. They have argued it is time to change the parts of the reform that are not sustainable in the long run.

Czech Republic
ALTHOUGH POLITICIANS have failed to agree on a World Bank-style second pillar, the government approved significant changes to the existing system in April 2009. For the first pillar there was an extension to the minimum retirement age, which is now set to rise to 65 years for men and for women with no child or one child, by 2030.

The third-pillar proposals include separating the assets of members and pension companies, and introducing a multi-fund, lifecycle system with funds of different risk profiles tailored for different age groups. Those with a heavier weighting in equities would be aimed at younger members, while risk-averse, investment grade bond weighted schemes would offer capital protection for members approaching retirement. The new system would still attract tax relief and state contributions, but critically would no longer offer yearly guarantees of a positive return.

The proposals envisage the old system closing to new members but running alongside the new for a number of years until its members retire or switch.

The pension fund industry argues that younger members would be inclined to switch because of potentially higher returns. At present the guaranteed return forces pension funds to adopt a conservative, thus low-yielding, investment profile. The industry has generally been positive about the proposals, although it wants to see more details about the co-existence of the new and old funds.

However, the timing of the proposed legislation has been unfortunate. The government responsible for the proposals fell in March and although the pensions change has been relatively uncontroversial, a new government formed after the October 2009 general election could make changes. In any case, the reformed system is not expected to be in place before 2011.

Estonia
THE ESTONIAN government has responded to the budgetary impact of the financial and economic crises by suspending its contributions to the second pillar for two years from 1 June 2009. It plans to start paying 2% from June 2011 while citizens will pay 1%, and full contributions from both sides will be restored from 2012.

However, if the economy rebounds the government has promised to pay 6% over the next two years for those who opt to continue to contribute to their second-pillar pensions. This measure is intended to save EEK1.6bn in 2009 and more than EEK3bn in 2010.

Hungary
UNTIL 2008, funds were typically managed very cautiously, with high allocations to Hungarian state debt, mimicking their members' low risk appetites. In response, legislation was introduced in 2007 requiring funds to offer three separate portfolios with different risk levels. The system was available to funds from 1 January 2008 and became compulsory on the first day of 2009. But the timing was unfortunate, since funds that took the plunge early were badly affected by equity market turmoil in the final quarter of 2008.

The Hungarian Association of Pension Funds, Stabilitás, has expressed concern at government proposals to allow existing second-pillar fund members to transfer their deposits back into the social security system on a tax-exempt basis. This move, which would help to fund Hungary's high levels of public debt, is opposed by Stabilitás, which is concerned by the huge and negative impact it might have on funds' assets under management.

Pay-out legislation, which would require pension funds to pay out members' accumulated assets in the form of an annuity contract with an insurance company, is scheduled to be adopted in 2013.

Latvia
THE GLOBAL FINANCIAL and economic crises, of which Latvia is one of the hardest-hit victims, has had an impact on proposed pension reform. Plans to increase contributions to 10% of a salary have been reversed, with the government announcing that it would reduce the proportion of social payments from 8% to 2% until the end of 2010 and then increase them to 4% in 2011 and 6% in 2012.

The IMF asked the government to reconsider but the ministries of finance and welfare responded that reducing the payments into the second pillar was part of planned structural reform and the money saved would be used to cover the costs of several social security mechanisms and the budget deficit. The proposal was upheld by parliament on 23 April 2009.

Lithuania
AT THE BEGINNING of 2009, the then newly elected government opted to cut second-pillar contributions from 5.5% to 3% for two years.

The measure was controversial and after being passed by parliament it was vetoed by then President Valdas. However, his veto was later overturned by a parliamentary vote.Subsequently, the government decided to further reduce contributions to 2% from the second half of 2009 until the end of 2010.

It announced that the measure would be at least partially compensated by an increase in contributions to 6% from 2011. Discussions on allowing members to opt out of the second pillar are currently on hold.

Poland
WITH THE REGION'S largest population, 38.5m, Poland's second pillar is by far the largest in the CEE, with a membership of 14m at the end of the first quarter of 2009 and assets of PLN137.7bn (€31.6bn).

Legislation for pension payouts was passed in late 2008. Up until age 65 open pension fund (OFE) members will receive programmed drawdown payments via the ZUS. At the same time they retain their rights as members of OFEs, including capital accumulation on their funds and transfer rights to another OFE. This system, which took effect in 2009, affects women, who can retire at age 60. (The retirement age for men is 65.) After reaching 65, the remaining proceeds in a member's OFE account, irrespective of sex, will be transferred to the pension providers and likely paid out in the form of annuities.
At present there is still no legislation dealing with this, and it is as yet unclear who will pay out the annuity products from 2014.

Collectively the OFEs form the largest class of institutional investor in Poland. They were relatively heavily invested in equities, many being close to their 40% limit in 2007, and sustained heavy losses in the 14 months after asset values peaked in the last quarter of 2007. As a result the funds' equity allocation had fallen to around 21% by March 2009.

In 2009 the European Commission, which has long argued that the 5% limit on non-domestic investment breaches the EU principle of free movement of capital, referred Poland to the European Court of Justice.

Regulatory attitudes towards the second-pillar scheme hardened in 2009 following the previous year's poor results and the impact of the global financial crisis on the state budget. In May 2009 parliament voted to halve the maximum level of fees charged by pension societies to 3.5% of the value of contributions paid into the funds from 7% from 2010, not by 2014 as foreseen earlier. These changes have recently been approved by the president and are likely to come into force from 2010.

Romania
ROMANIA IS THE LATEST central and eastern European country to execute a private pension reform, implementing a new system only in 2007. Legislation for a mandatory second pillar was introduced first, by Law no 411/2004 regarding pensions, with Law no 204/2006 on voluntary third-pillar pensions following two years later. But in the event the third pillar was introduced some months before the second.

The state supervisory authority in charge of pension funds (CSSPP) is considering introducing lifecycling funds in the second pillar, but no consensus has yet been reached.
In addition, there is trade union pressure to introduce mandatory monthly inflation guarantee returns for second-pillar funds, for which pension fund companies would have to pay. Parliament has rejected this proposal three times, but another vote is expected in the autumn. Industry associations argue that such a move would destroy the second pillar.

Slovakia
PRIVATE SECOND-PILLAR pensions were introduced in 2005 as a compulsory system for all new entrants to the labour market who had not previous been insured by the Social Insurance Agency. However, a year after the system's inception, a new coalition government headed by Robert Fico of Smer-Socialna Demokracia began a campaign against Slovakia's second-pillar system that continues to this day.

Fico has variously accused the second pillar of draining resources from the first pillar, misselling to clients and providing lower benefits to members than they would have received had they remained in the first pillar.

In November 2008, the government used the deterioration of pension fund performance following the global financial crisis to reopen the second-pillar opt-out, with members having until the end of June 2009 to decide whether to stay or leave.

In March 2009 parliament lowered fund management fees, from 0.065% of monthly average net asset value to 0.025% of average net assets from 1 July 2009. However, the biggest blow has been the introduction of a performance fee/guarantee requirement. From July 2009, a pension asset management company (dss) must have in place a guarantee account to ensure each fund's principal over a six-month period. Funds that make a profit entitle the management company to a fee of a maximum 5.6% of yield. If the fund makes a loss the company is not entitled to any performance fee and must make up the balance, from a guarantee account or failing that from its own assets.
The new system will in practice force all funds, irrespective of their originally designated risk horizon, to sell equities and operate conservative, low-growth structures.

Slovenia
UNSPECTACULAR RETURNS as well as the lack of mandatory membership have led to growing concern about the future for pensioners. More than 40% of the working population has no supplementary provision, while Slovenia's low birth rate makes the state pension system increasingly unsustainable.

Since 2007 a government working group has been examining the system and is due to report towards the end of 2009.

However, the IMF - which recently advised the government to raise the retirement age and change the current state pension indexation from wages growth - acknowledges that while the government may provide further incentives for private pension provision, more fundamental systemic changes would prove politically unfeasible.

The articles on this page are abstracted with kind permission of the European Federation for Retirement Provision (EFRP) from its forthcoming report CEEC Forum, Facing Up to the Challenges.

 

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • IN-2412

    Closing date: 2018-02-28.

Begin Your Search Here