Pension reform in Slovak republic 18 th October 2006, Bucharest J úlia Č illíková National Bank of Slovakia

2 Contents Historical reasons for pension reform Legal framework Key principles of new pension system Some figures from 2nd pillar, fees and guarantees Some figures from 3th pillar Potential risks to the new pension system

3 Historical reasons for pension reform 1 st and 2 nd pillar: - negative demographic development - high rate of redistribution - low retirement age/ elongating lifespan - high payroll taxes - pensions depend mainly on earnings reached during last working years 3rd pillar: - assets: more than 14 mld. SKK / clients: more than necessity of separation of savers’ property from company’s assets

4 Evolution of pension reform Slovak government decided in the government statement in 2002, that the old system must be transformed into a system: - providing adequate pension benefits - with increased importance of voluntary pension schemes In January 2003 the concept of reform was created, focusing on: - preservation of financial stability of the whole pension system - diversification of financial sources for pensions’ funding - raising of personal interest of population on its own conditions in retirement

5 Legal framework 1 st pillar Act No. 461/2003 Coll. on social insurance 2 nd pillar Act No. 43/2004 Coll. on old-age pension savings 3 rd pillar Act No. 650/2004 Coll. on supplementary pension savings

6 Key principles of new pension system 1 st pillar – pay-as-you-go system 2 nd pillar – mandatory, fully funded defined contribution system (from January 2005) 3 rd pillar – voluntary pension scheme, contributory defined (exists from 1996, from 2005 ongoing transformation)

7 2 nd pillar - saving on saver’s personal pension account - the aim is to assure an income in old age or in case of death to his/her survivors - the height of pension depends on: 1. the amount of money that the saver saved on the personal pension account 2. the net rate of return on the savings - savers’ pension savings are heritable - assets (pension savings) are managed by Pension asset management companies (PAMC) competing on the market with the license granted by FMA/NBS

8 2 nd pillar The employer (self employed person, voluntarily insured person, state or Social Insurance Agency) is obliged to send 9% of the wages (base of assessment) to the Social Insurance Agency. Average monthly wages of employees in economy of Slovak republic is as of 2. quarter SKK (without entrepreneurs incomes and including incomes of armed forces - data are adjusted by statistical estimate of non-registered wages). The Social Insurance Agency is responsible for collection of contributions in the first and second pillar. After receiving money from employers SIA transmits corresponding amount of money to the personal saving account of the saver in the respective PAMC.

9 2 nd pillar September , 514 million of people became involved in 2nd pillar (of this 9 thousands of people compulsorily) Savers’ structures Men Women – 29 years savers (most numerous category) 30 – 34 years savers – 70 years600 savers Over 70 years10 savers

10 2 nd pillar PAMCs are obliged to establish three types of funds : - Conservative pension fund (only bond and monetary investments and transactions to constrain currency risk) - Balanced pension fund (shares up to 50% of the assets, bond and monetary investments at least 50% of the assets) - Growth pension fund (shares up to 80% of the assets) The value of assets in the respective pension fund invested in issues of issuers domiciled in the territory of Slovak republic shall be at least 30% of the total volume of assets in the pension fund.

11 Allianz – Slovenská dôchodková správcovská spoločnosť Aegon, d. s. s., a. s. ČSOB d. s. s., a. s. ING dôchodková správcovská spoločnosť, a. s. VÚB Generali dôchodková správcovská spoločnosť, a. s. Winterthur d. s. s., a. s. Prvá dôchodková sporiteľňa, d. s. s., a. s. Sympatia – Pohoda, d. s. s., a. s. PAMCs

12 PAMC Growth pension fund Balanced pension fund Conservative pension fund Number of savers Winterthur AS DSS VUB Generali ING ČSOB AEGON Net asset value as of June 30, 2006 in thousands of SKK

13 Investment allocation in conservative pension funds as of June 30, 2006 PAMCMoney marketObligations Aegon100%0% AS DSS55,78%44,22% ČSOB75,03%24,97% ING79,70%20,30% VÚB Generali61,00%39,00% Winterthur94,20%5,80% Sum (weighted average) 71,64%28,36%

14 Investment allocation in balanced pension funds as of June 30, 2006 PAMCMoney marketObligationsStocks Aegon76,61%6,78%16,61% AS DSS51,12%38,70%10,18% ČSOB52,38%36,90%10,72% ING67,20%23,60%9,20% VÚB Generali66,66%24,06%9,28% Winterthur82,30%7,60%10,10% Sum (weighted average) 65,55%24,17%10,27%

15 Investment allocation in growth pension funds as of June 30, 2006 PAMCMoney marketObligationsStocks Aegon75,16%6,00%18,83% AS DSS50,23%37,24%12,53% ČSOB47,97%38,77%13,27% ING63,70%22,80%13,50% VÚB Generali65,41%23,50%11,09% Winterthur81,00%6,80%12,20% Sum (weighted average) 65,20%21,98%12,82%

16 Fees PAMC is entitled to charge 2 types of fees: - fee for pension fund asset management may not exceed 0.08% of the average monthly net asset value of the pension fund (includes all costs of PAMC related to asset management in a pension fund with exception of taxes related to assets) - fee for working of personal pension account is set at 1% of the amount of a monthly contribution of a saver Social insurance agency deducts a sum corresponding 0.5% of a monthly contribution

17 Fees for managing of pension funds as of June 30, 2006 PAMC Growth pension fund Balanced pension fund Conservative pension fund Aegon0,069% 0% AS DSS0,07% ČSOB0,07% 0% ING0,08% VÚB Generali0,08% Winterthur0,08%

18 Guarantees The Social Insurance Agency guarantees in extenso of the solidarity reserve fund for damage caused by a decision, procedure or other performance of PAMC and its depository that is in contradiction with generally binding legal regulations and that resulted in damaging the assets in the pension fund. Whenever after elapsing of 24 months since the day when PAMC started creating a pension fund, the average yield of the respective pension fund may not be lower than - 90 % of the average yield of market competitors at conservative pension funds, - 70% of the average yield of market competitors at balanced pension funds, - 50% of the average yield of market competitors at growth pension funds. Within five days since breaching of the this condition or since finding out the breach of this condition by NBS, PAMC is obliged to transfer, from its own property to the asset of a pension fund, assets in such a value, that the average yield of the respective pension fund attains at least the average yield of its competitors.

19 3 rd pillar The System of complementary pension savings which has already existed in Slovakia is in the process of transformation. According to the Act No. 650 Coll. all complementary pension insurance companies that had operated in the field of pension savings before January 1, 2005 had to submit transformation project to FMA/NBS. The set up of new company was pre - conditioned by granting a new license. Three licenses have already been granted, the fourth and last one will be granted in the near future.

20 3 rd pillar - collecting of contributions from participants and their employers - the aim of supplementary pension savings is to allow to participants acquiring of complementary pension income in old age or in case of completion of executing certain specific professions - the height of supplementary pension depends on the amount of money that the participant saved on the personal account and the net rate of return on the savings - assets are managed by Supplementary pension companies (SPC) competing on the market with the license granted by FMA/NBS

21 3 rd pillar SPC is obliged to manage no less than 2 funds: - at least one “subscription” pension fund (with different investment profiles) - one “paying-out” pension fund Investment profile of the “subscription” pension funds shall follow the same principles which are stipulated in the Act on old-age pension savings. “Paying-out” pension fund – when member asks for redemption of benefits in the form of withdrawal with temporary annuity, SPC is obliged to transfer its balance from the “subscription” pension fund to the “paying-out” pension fund. The investment profile of this fund has to follow the same investment strategy and limits as the conservative pension funds in the 2 nd pillar.

22 SPCs ING Tatry – Sympatia, d. d. s., a. s. (ING T-S) Winterthur d. d. s., a. s. Doplnková dôchodková spoločnosť Tatra banky, a. s. (DDS TB)

23 NAV and number of participants as of June 30, 2006 (in thousands of SKK) SPC NAV Participants Subscription fund Paying-out fund Winterthur DDS TB ING T-S

24 Investment structure as of June 30, 2006 (in thousands of SKK) Investment Bank accounts Obligations Shares Others Liabilities Sum

25 Potential risks to the new pension system -more people than expected joined the 2 nd pillar -impact on liquidity of Social Insurance Agency -endangered fulfilment of Maastricht criteria (Euro 2009) Possible solutions: -change in proportion of contribution (9:9 →12:6) -voluntariness in 2 nd pillar (allow to savers exit 2 nd pillar and return exclusively to the 1 st pillar)

26 Thank you for your attention!