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Special Report

ESG: The metrics jigsaw


Reforms under political pressure

When campaigning gets underway for Slovakia’s autumn general election, pension reform will be one of the major issues.
Prime Minister Mikulás Dzurinda’s right-of-centre coalition has pushed through a far-reaching reorganisation of the pensions system, including parametric changes to the first pillar and the introduction of a funded second pillar. But the measures have been attacked by an opposition that on current showing is more popular than the government.
There is a Janus-like character to Slovak politics. The outside world sees the Dzurinda government as a competent group of reformers intent on pursuing the policies necessary to enable the country to enter the EU and Nato alongside its more prosperous neighbours and, since that was achieved in May 2004, to consolidate the gains and ensure early membership of the European single currency.
But the coalition was cobbled together in 1998 from a number of parties – ranging from right-wing liberals through centrists to former communists and ethnic Hungarians – to defeat the authoritarian administration of Vladimír Meciar. His controversial nationalist and populist policies and questionable methods had cost Slovakia its place on the fast-track to EU and Nato membership.
But the strains imposed by its ‘anyone-but-Meciar’ makeup were all-too evident domestically, and the post-1998 coalitions have been marked by intra- and inter-party disputes, walkouts and splits in which personality rather than policy differences have been major factors.
So in contrast with the ‘real politik’ reform agenda that has so impressed foreign observers and despite the imminence of September’s general election, the governing parties have pursued an internal ‘kindergarten politik’ that has cost them support at home.
For example, shortly after the last election a former defence minister formed an independent faction, Free Forum (SF), within Dzurinda’s Slovak Democratic and Christian Union (SDKÚ), itself a breakaway from the Slovak Democratic Coalition (SDK) that formed the core of the first post-Meciar alliance. The SF later defected from the SDKÚ and then from the government. More recently the business-friendly New Citizens' Alliance (ANO) was expelled from the coalition and its leader, TV entrepreneur Pavol Rusko, sacked as economy minister following a scandal over his personal finances. While in office Rusko appeared to direct much energy to discomforting the Christian Democratic Movement (KDH), another coalition partner. And somewhere along the line the government lost its slim majority.
But the electorate has also shown itself to be two-faced. The first post-Meciar government courted unpopularity by instituting basic macroeconomic reforms and, according to public opinion poll responses, was set to be punished in the 2002 election. But when the results were in Dzurinda was able to put together an even more reformist coalition.
“This was a surprise because the expectation was that Dzurinda would not be in the government,” says Viktor Kouril, a member of the board of the CSOB second pillar pension company, or dôchodková správcovská spolocnost (dss). “And the second coalition was even more right wing than the first so it was able to do programmes. It carried out two major reforms. The first was the introduction of an across-the-board flat tax at 19%. The second was the pension reform. Slovakia’s demographic evolution means the pay-as-you-go system is not sustainable but for the next several governments the reform will only increase the fiscal deficit and so will create political problems. So undertaking the pension reform took courage.”
The PAYG system had been in deficit since 1997. The changes, which came into effect at the beginning of 2004, encompassed two major innovations. The first was a gradual lifting of the statutory retirement age from an average of 55 for women and 60 for men to 62 for both, effective for men in 2006 and women in 2015. The second was a change to the pension formula so that those who earned more and paid higher contributions during their working life would gain a higher pension.
The funded system, which was launched in January 2005, is mandatory for new labour market entrants but voluntary for existing workers. It is funded by employers, who continue to pay 18% of a gross wage to the social insurance agency that runs the PAYG system, which in turn transfers half to the pension company chosen by those who have opted to join the second pillar and who will receive a reduced state pension on retirement.
The success of the reform rested on the number of employees who chose to join the system. In the event the take-up was greater than anticipated and by the end of their first year some 1.2m out of an economically active population of 2.1m had signed up compared with the most optimistic forecasts of 800,000, and a further surge is expected in the second quarter of this year before the June deadline by when a decision to join or stay wholly with the state system must be made.
But the very success has caused problems for the government. Under Meciar Slovakia had experienced what the OECD called a severe fiscal drift “which was more serious than in other post-transition countries”*. This was followed by what it called a firm fiscal consolidation in the 2000s “and Slovakia has become the most successful fiscal consolidator in central Europe in recent years”.
Initially, the fiscal cost of reducing the payments to the state system and paying current PAYG liabilities was estimated at a relatively moderate 0.4% of GDP for 2005, 1% for 2006 and 1.1% in 2007. But the greater take-up has led the government to revise its estimates to 0.8%, 1.3% and 1.4% of GDP respectively.
The reforms were attacked by the opposition. Despite his questionable reputation and record, Meciar has continued to be one of Slovakia’s most popular politicians and his Movement for Democratic Slovakia (HZDS), which remained the largest party in both the 1998 and 2002 general elections, was vociferous in its rejection of the reforms.
But since his defeat in the 1999 and then the 2004 presidential elections Meciar’s star has been seen to wane, and others are vying to steal his mantle as the enfant terrible of Slovak politics. The attempt by Rusko, who used to compare himself with Italy’s TV mogul-cum-premier Silvio Berlusconi, was short-lived. When he was sacked and ANO kicked out of the coalition few of his parliamentarians stayed loyal and followed him into opposition. Most followed ANO’s deputy chairman in continuing to back the government.
However, in September the government will face a formidable challenge from Róbert Fico, an articulate and charismatic politician who performs well on television and who marries a claim to represent what he calls a Bairite ‘third way’ with veiled attacks on the country’s Hungarian and Roma minorities. His party, Direction (Smer), is seen as having the potential to be the key element in the next administration.
Fico has successfully tapped into the discontent of many voters who contrast the government’s macroeconomically inspired claims to have raised national wealth with their own continued straightened circumstances.
“When the finance minister says real income is rising, the electorate thinks he means the money in their pocket and so they think he is lying,” says Vladimir Jesko, pensions expert on business newspaper Hospodarske noviny. “Fico takes advantage of this, saying salaries remain the same but the price of basics like gas and electricity are going up, and we need to fight the government because it has sold off the companies that are raising the prices.”
And a key element in Fico's support is that he consistently refuses to spell out a detailed policy programme, choosing instead to launch intermittent policy initiatives.
Denouncing what it calls the government’s “radical shift from the European social model and socially oriented market economy towards the classical model of a neo-liberal and conservative society” Smer’s website condemns the “governmental concept which in more precise terms urges revolution in the pension system tailored according to the ‘Friedman-Chile’ model which ultimately and to a large extent means privatisation of the pension assurance and a drop in pension incomes of large numbers of citizens. Smer fully supports the pension reform, however, still within the current continuously run system with reinforcement of a principle of merits.”
Not surprisingly, the government has asked for a clarification of the Smer position.
“Last autumn Dzurinda challenged Fico to spell out his alternatives to the government’s measures in a public debate,” recalls Jesko. “But although whenever Fico talks about pension reform he says that the current system should be abandoned, he has nothing to offer in its place. Instead, he responded that first the government needed to clear up allegations of coaxing opposition deputies to cross the floor by buying their support and that only when that was explained he would discuss his alternative pension proposals.
“And this has been his basic tactic whenever challenged, that first some other issue has to be cleared up and then all will be revealed. He has never really offered an alternative but I don’t think that the electorate understands this. Perhaps people in Bratislava have a better grasp of events but while people in the provinces are not necessarily politically less sophisticated, they have higher unemployment, are poor and want to believe his promises and so will vote Fico.”
But what does Fico’s lack of clarity mean to the industry? “I’m a professional and I don’t understand what Smer wants to change,” says one industry source who did not wish to be identified. “If we understand we can do it, whether it is provide better coverage or whatever. But we just don’t know.”
One of the reasons may be that Fico does not yet know just what he would do were he in office. “Smer has very little expertise in the economy and in the pensions area,” notes Jesko.
But do the pension companies fear that a Smer-led government might try to undo the reform?
“We are hearing these signals from the left-orientated parties and I think that this is part of the game that they are playing now to score some political points ahead of the next election,” says Richard Kolárik, deputy chairman of Allianz-Slovenská dss. “But there is very little likelihood that some significant changes would be made to the pension system because there will probably be some 1.2-1.3m savers in the system by then and that’s half of the economically active population, which is quite an big electoral power. So I don’t think that any future government will be able to change the system dramatically.”
But a future government could tinker with the details.
“The law makes it mandatory for new entrants to the labour market to enter the second pillar but it could be made voluntary,” says Kouril. “While we would not be happy, such a change would not endanger the dss companies. Looking at past birth figures we expect 50,000 new clients into the system annually and I think we could persuade them to enter the system.
“Much more dangerous would be to play with the portion which goes to the second pillar. The 50:50 split with the first pillar is a political decision that could be altered by parliament and probably a skilful political marketing campaign that said 9% is not good, 6% would be enough, would not pose problems for a government. But it would really hurt the dss companies because they all have their break-even period 10 years or so out, so if their income was reduced by one-third this period would double. I believe that this would harm the reform itself. In exchange for having a lower deficit in the short term there would be long-term damage to the system.”
“They could consider changing the funding of the pension funds,” agrees Kolárik. “But certain investors have put a lot of money into this business and have based their business plans on certain fixed assumptions. And if these were changed governments could face some legal actions.”
Dusan Doliak, chief operating officer at Winterthur dss, would favour a more forthright approach: “I can imagine a direct mailing to each of the system’s clients pointing out the implications to each person’s contributions and pensions and carrying the phone number of Smer.”
“People appreciate that they can see where their money is going,” adds Kolárik. “It is very clear that there is a certain amount of money going into their account each month, they can see it through the internet, they get their account statements and they know that this is the money that they own or this is the money that relatives can inherit in the future. And it makes them feel safe.”
Much will also depend on the parliamentary mathematics. Opinion polls suggest the next government will be a coalition. A poll by the local Dicio agency released last month found that had a general election been held in the second half of December Smer would have taken 37.1% of the vote, the HZDS 11.5% and Dzurinda's SDKÚ 11.2%. Coalition members the ethnic-Hungarian SMK and the KDH would have a combined 18.5% and the SF, which supports the government from outside, 5.5%. Meciar’s old coalition partner, the nationalist SNS, would have taken 6.2%, while ANO would not have made the 5% threshold required for parliamentary representation.
So is a Smer/HZDS coalition a possibility? Jesco thinks not. “Many people compare Fico to Meciar and, yes, they have very strong and similar personalities, so they could not be in the same government.”
But what about an alliance between the HZDS and the reformers to defeat a common enemy? “As a whole we are pro-reform but we want reforms that are accepted by the people,” says Anton Blajskom, a founding member of the HZDS and its spokesman on welfare issuese.
He portrays the differences between the HZDS and the government as being around details rather that principles, but adds: “Under no circumstances would we stop the reform and start again, Slovakia cannot afford to do this. We see the reform as a positive thing.”
But would the reformist parties co-operate with the HZDS? “The Christian democrats have said that they would oppose co-operation with HZDS with or without Meciar’s participation because it is the same party that robbed the nation before 1998 while the SDKÚ has said yes to the HZDS but no to Meciar,” says Jesco. “It’s not clear whether HZDS could accept such a position as it’s a one-man party. Similarly, I think that Smer without Fico would lose support very fast.”
*OECD Economic Surveys: Slovak Republic, September 2005

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