Transcript Funded systems in Central and Eastern Europe

PENSION REFORM
EXPERIENCES IN CENTRAL
AND EASTERN EUROPE
Agnieszka Chlon-Dominczak
Ministry of Economy, Labour and Social
Policy, Poland
Kiev, May 28th, 2004
Countries implementing mandatory
funded pension schemes
• 1998:
 Hungary
 Kazakhstan
• 1999:
 Poland
• 2001:
 Latvia
• 2002:
 Croatia
 Estonia
 Bulgaria
• 2003:
 Russia
• 2005:
 Macedonia
 Slovakia
• 200?
 Lithuania
 Ukraine
Reasons for the multipillar reform
• to make the pension
system sustainable in
long run


to reduce implicit pension
debt
to diversify risk
• to make the system
adjust to population
ageing
• to encourage longer
labour market
participation
• to achieve better
balance between
collective and individual
responsibility in the
pension system
• to encourage additional
savings
• to develop and
strengthen financial
markets
Design issues
• Most of the countries tend to leave
significant pay-as-you-go pillars
• System mandatory for the young, with
optional choice for older workers

(exception of Kazakhstan)
• Strong regulation and guarantees
• State often involved in collection of
contributions
Contributions
35%
30%
25%
20%
15%
10%
5%
non old-age pension contribution
•
•
•
•
•
first pillar
Kazakshtan
Croatia
Macedonia
Estonia
Slovakia
Hungary
Bulgaria
Latvia
Poland
0%
second pillar
Tax treatment: usually EET
Contributions to funded tier depends on the possible of transitions costs
Contribution is usually carved-out from the existing mandatory contribution
In Estonia, those that are in the funded tier pay 2% higher contribution
In Kazakhstan, existing contrubtion was divided between funded
contribution and tax
Contributions
35%
30%
25%
20%
15%
10%
5%
non old-age pension contribution
•
•
•
•
•
first pillar
Kazakshtan
Croatia
Macedonia
Estonia
Hungary
Bulgaria
Slovakia
Latvia
Poland
0%
second pillar
Tax treatment: usually EET
Contributions to funded tier depends on the possible of transitions costs
Contribution is usually carved-out from the existing mandatory contribution
In Estonia, those that are in the funded tier pay 2% higher contribution
In Kazakhstan, existing contrubtion was divided between funded
contribution and tax
Participation in the funded
pillar
Kazakhstan
Bulgaria
Croatia
Poland
Latvia
Slovakia
Estonia
Macedonia
Hungary
18
24
30
36
mandatory
42
voluntary
48
54
not allow ed
60
Transition costs
• Size depends on:
 policy choices


contributions
members of funded system
individual choices
Examples:

•


Poland: 1.6% of GDP
Hungary: 0.6% of GDP
• Financing:
 current tax revenues
 savings on pensions
 future revenues (debt)
Contribution collection
Contribution collection
Centralised
Separate institution
Social Security Administrator
De-centralised
Unified collection with tax
Kazakhstan
Poland
Latvia
Croatia
Macedonia
Estonia
Slovakia
Bulgaria
Hungary
Supervision
Supervision
Separated
Partially consolidated
Fully consolidated
Croatia
Kazakhstan
Hungary
Macedonia
Poland
Bulgaria
Latvia
Estonia
Slovakia
Design of funded
systems:
• Countries tend to limit:
 types of charges





contribution based
asset based
performance based
transfer fee
levels of charges

for all or for selected charge types
• Charges deducted only by managers
• In few cases: specific charges can be paid
directly from pension fund assets
Charge design in the
region
Country
Hungary
Kazakhstan
Poland (2004)
Latvia
Croatia
Bulgaria
Estonia
Macedonia
Slovakia
Limits on charge
structure
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Types of charges
admission fee
contributionbased fee
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asset
management fee
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performance fee
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Source: Agnieszka Chlon-Dominczak, Funded Pensions in Eastern Europe and Central Asia: Design and Experience
Paper prepared for the World Bank in co-operation with FIAP (2003)
Investment limits
Hungary
M a c e d o n ia
Min 50% in state bonds
C r o a tia
Po la n d
Min 50% in state bonds
K a z a k h s ta n
0%
20%
40%
60%
80%
100%
120%
% o f as s e ts
C o r p o r a te b o n d s , e q u ity a n d in v e s tm e n t f u n d s
M u n ic ip a l b o n d s
s h o r t- te r m b a n k d e p o s its
r e a l e s ta te
140%
160%
Foreign investment
60%
50%
40%
30%
20%
10%
•
Bulgaria
Poland
Kazakhstan
Croatia
Macedonia
Latvia
Hungary
Slovakia
0%
In Estonia: only investment in specified categories of foreign
investment, no quantitative limit
Guarantees
•
Rate of return guarantees:

Relative to pension sector





Financing of guarantees:

Kazakhstan
Poland
Croatia
Slovakia
Hungary
No rate of return guarantee:




Latvia
Bulgaria
Estonia
Macedonia
Mandatory reserves




Relative to benchmark:

•
•


Hungary
Kazakhstan
Poland
Bulgaria
Estonia
Guarantee funds



Hungary
Poland
Estonia
Payouts
• Mandatory annuity:
 Hungary (pension fund or insurance company)
 Poland (providers not decided yet)
 Croatia (specialised companies)
 Bulgaria (licensed companies)
 Estonia (licensed insurance companies)
 Slovakia (insurance company)
• Several options:
 Latvia (various annuity types - joint, variable, deferrals)
 Macedonia (annuity or scheduled withdrawal)
 Kazakhstan (once the system matures - annuities, currently
lump-sums are allowed)
Transparency and
accountability
• Annual statements
 financial statements
 investment structure
 shareholders structure
• Valuation of assets
• Information for participants
 individual accounts (by mail, also by Internet or telephone)
• Web site
• Publishing investment results
Assets
(USD MLN)
14 000
m illion USD
12 000
10 000
8 000
6 000
4 000
2 000
0
1998
1999
H u n g a ry
2000
K az ak hs tan
2001
P o la n d
2002
Investments in 2002
100%
80%
60%
40%
c
20%
GDS
Equity
Others
Croatia
Bulgaria
Hungary
Kazakhstan
Poland
0%
Concentration in 2002
Kazakshtan
100%
% of total members
Latvia
Estonia
Hungary
80%
Poland
Croatia
60%
40%
Bulgaria
20%
0%
1
•
2
3
4
5
6
7
8
9
10
Significant share of state funds in Latvia (76%) and Kazakhstan (46%)
Early experience with
charges
• Charge levels are different across
countries
• They reflect the legal design,
supervision practices and competition
• Economies of scale are hardly observed
Early experience with
costs
• Costs of initial year high:
 driven by sales and advertising
• Reductions in following years
• Some costs imposed by the law
 costs of guarantees and mandatory reserves
 costs of reporting
 costs of supervision
Conclusions
MEMBERS AND MARKET STRUCTURE
• Overswitching or underestimation?
 distrust to the public system
 belief in private savings?
• Large concentration:
 biggest funds: bank or insurance backing


more efficient sales?
earlier presence on the market?
• Little changes between funds
 design worked?
 outflow from public managers
Conclusions
ASSETS AND INVESTMENT
• Assets will be growing at a fast pace
• Increased investment in equity would be
desirable

to diversify risk within pension system, not
only within funded pillar
• Necessity to increase foreign
investment limits
Conclusions
COSTS AND CHARGES
• Costs still relatively high
• Necessity to work on the cost reduction:
eliminating excessive guarantees
 increasing client’s awareness

Conclusions
• Multi-pillar schemes – a new blueprint for the region?
 Implemented in 8 countries
 2 more are joining in 2005
 Considered in further two
• Political economy considerations:
 limitations of intra-generational redistribution by a shift to the
DC
 increasing public deficit (particularly important in the new EU
member countries)
 lower public control over private asset managers
 winners and losers
• Experiences up to now:
 high participation
 fast increase of pension savings
 concerns regarding transition financing
Issues for the future
• Elements of success:
prudent supervision
 prudent investments

equity
 foreign investments

transparency and accountability
 keeping costs low
 re-thinking guarantees
