1. 1 Pension Reform in Central and Eastern Europe Elaine Fultz Senior Specialist in Social Security ILO Budapest

2. 2 Regional trends: 1.More individualized benefits –reduce redistribution –count more years of work –Notional defined contribution (NDC)

3. 3 2. Retirement Ages – New EU States Current lawMenWomen Czech Rep.1995,2003increasing to 63 by 2013 by 2 months/year Increasing to 59-63 (depending on no. of children raised) by 4 months/year in 2013 Estonia1998, in force 2000 63 Increasing to 63 in 2016 by 6 months/year Hungary1996increasing to 62 in 2001 by 1 year every second year Increasing to 62 in 2009 by 1 year every second year Latvia1998increasing to 62 in 2003 by 6 months/year Increasing to 62 in 2008 by 6 months/year Lithuania1994, 2000increasing to 62.5 in 2003 by 6 months/year Increasing to 60 in 2006 by 6 months/year Poland1998 (in force, 1999) 65, with early retirement eliminated beginning in 2007 60, with early retirement eliminated beginning in 2007 Slovak Rep.2003Gradual rise to age 62Same as for men Slovenia19996361

4. 4 Retirement Ages – Stability Pact Countries of South Eastern Europe Current law, year of enactment MenWomen Albania200361 in first half of 2004 with 35 years of contributions, gradually increasing to age 65 by 6 months per year (increases at mid year). 56 in first half of 2004 with 35 years of contributions, gradually increasing to age 60 by 6 months per year (increases at mid year). Bosnia and Herzegovina 1998 & 2001, B&H 65 in 2004 with 20 years of contributions, or any age with 40 years of contributions. Same as for men. 2000, Republika Srpska Same as for BiH but with option for early retirement at age 63 in 2004 and 64 in 2005. Same as for men, plus option of age 58 in 2004 and 59 in 2005 with 20 years of contributions or, with 35 years of contributions, at any age. Bulgaria199962.5 in 2004 increasing to age 63 in 2005.57.5 in 2004 increasing by six months per year to 60 in 2009. Croatia199863 in 2004, increasing to age 65 in 2008 by 6 months per year 58 in 2004, increasing to age 60 in 2008 by 6 months per year FYR Macedonia200064 in 200460.5 in 2004 increasing by 6 months per year to 62 in 2007 Moldova199862 in 2004 with 30 years of contributions57 in 2004 with 30 years of contributions Romania200062 years, 5 months in mid 2004 with 35 years of contributions, gradually increasing to age 65 in 2014 57 years, 5 months in mid 2004 with 30 years of contributions, gradually increasing to age 60 in 2014 Serbia and Montenegro 2003, Serbia 63 with 20 years of contributions; 65 with 15 years of contributions; 53 with 40 years of contributions. 58 with 20 years of contributions; 60 with 15 years of contributions; 53 with 35 years of contributions. 2003, Montenegro 60.5 in 2004 with 40 years of contributions, gradually increasing to age 65 in 2013 by 6 months per year. 55.5 in 2004 with 35 years of contributions, gradually increasing to age 60 in 2013 by 6 months per year.

5. 5 3. Unified collection systems: Latvia1996 Slovenia1996 Estonia1999 Hungary1999 Croatia (Tax Authority + REGOS)2001 Bulgaria2002 Albania2003 Romania2004

6. 6 4. Pension privatization in the new EU member states Countries with mandatory, commercially managed individual savings account Countries without such scheme Hungary (1998)Czech Republic Poland (1999)Lithuania Latvia (2001)Slovenia Estonia (2002) Slovak Republic (2003)

7. 7 Status of Pension Privatization in SEE Countries Countries with mandatory, commercially managed individual savings account Countries without such scheme Bulgaria (2000)Albania Croatia (2002)Bosnia and Herzegovina Macedonia (2002) Romania (2004) Serbia Montenegro (2003)

8. 8 5. Laws Authorizing Voluntary Pension Funds in new EU member states CountryStart year Czech Republic1994 Estonia1998 Hungary1994 Latvia1998 Lithuania2000 Poland1999 Slovenia2000 Slovak Republic1996

9. 9 Laws Authorizing Voluntary Pension Funds in SEE Countries CountryYear of enactmentYear of implementation Albania1995-- Bosnia and Herzegovina -- Bulgaria2000 Croatia20022003 FYR Macedonia-- Moldova-- Romania 2004-- Serbia and Montenegro --

10. 10 6. Issues and Problems: a. Transitional financing costs b. Negative investment returns c. Delay on private benefit package

11. 11 Transitional financing costs in Poland Chlon, Agnieszka, "The Polish Pension Reform of 1999," in Fultz, E., Ed., Pension Reform in Central and Eastern Europe, Vol. 1, ILO: Budapest, 2002.

12. 12 Replacement rates, Poland Chlon, Agnieszka, "The Polish Pension Reform of 1999," in Fultz, E., Ed., Pension Reform in Central and Eastern Europe, Vol. 1, ILO: Budapest, 2002.

13. 13 Performance: “Internal rate of efficiency” calculated Hungary – 1998-2000 – industry return was – 4.1 percent (7.1 percent growth, 11.2 percent inflation) Poland – Jan 2000 – June 2001 -ranged from –3 percent to –14 percent

14. 14 New ILO reports (Dec. 2004) Hungary3.75% average annual internal rate of efficiency over first 6 years of operations 6.6% inflation rate Poland20.3% increase in value of second pillar savings over December 1999 – June 2004 24% inflation rate

15. 15 Why the negative returns? Poor stock market performance? Industry charges and fees?

16. 16 Admin. charges and their impact Poland 2001 Poland new legislation Kazakhstan 2001 Kazakhstan new law Croatia 2002 Croatia draft legislation Upfront fee (% of contribu- tion) 8.57.0100.8 Mgmt. fee (% assets) 0.6Up to 0.54none0.6None1.2 Perform- ance fee (% of return) noneUp to 0.06% of assets 101525None Reductions in assets 17.414.410.316.529.326.4 Reductions in yield 0.820.650.371.131.611.19 Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.

17. 17 Investment management performances in Hungary, 2000 Fund management Competetive (Group 1) Insider (Group 2) TOTAL Number of funds111324 Share in assets (percent)991100 Investment return (percent) gross net 7.7 7.1 7.4 5.9 7.5 6.0 Cost of fund management as percent of total value of assets total amount of gross return 0.6 8.5 1.5 23.8 1.5 22.3 Augustinovics et all, in Fultz (as cited above)

18. 18 Management Costs of Hungarian Mandatory Pension Funds Matits, A., "Practical Experience with the Second Pillar of the Hungarian Mandatory Pension System," delivered at an ILO pension conference, Budapest, Dec. 9 ‑ 10 2004.

19. 19 Structure of Assets of Mandatory Private Pension Funds in Hungary Matits, A., "Practical Experience with the Second Pillar of the Hungarian Mandatory Pension System," delivered at an ILO pension conference, Budapest, Dec. 9 ‑ 10 2004.

20. 20 Long Term Investment Performance of the Hungarian Mandatory Pension Funds by Size of Assets, 1999-2003 Matits, A., "Practical Experience with the Second Pillar of the Hungarian Mandatory Pension System," delivered at an ILO pension conference, Budapest, Dec. 9 ‑ 10 2004.

21. 21 7. Pension contribution rates in CEE, 2002 (as a percent of insured wages) EmployersEmployeesStateTotal Czech Republic19.56.526 Estonia20222 Hungary18826 Latvia-- 27.1030.86 Lithuania22.52.525 Poland16.26 32.52 Slovak Republic21.66.428 Slovenia8.8515.524.35

22. 22 Pension contribution rates in SEE Countries, 2004 (as a percent of insured wages) EmployersEmployeesTotal Albania21.38.629.9 Bosnia andHerzegovina FB&H RS 7 gross wage 24 net wage 17 gross wage -- 24 gross wage 24 net wage Bulgaria21.757.2529 Croatia--20 FYR Macedonia21.2 gross wage --21.2 Moldova29130 Romania23.3311.67Depends on employer rate Serbia and Montenegro Serbia Montenegro 10.3 12 10.3 12 20.6 24

23. 23 8. Pension contribution rates in CEE countries with mandatory private pension tiers, 2002 CountryTotalPAYGO (1 st tier) Funded (2 nd tier) SumEmployeremployeesumemployeremployee Estonia22.0020.002.0016.00 4.00 + 2.00 Hungary26.0018.008.0020.0018.002.006.00 Latvia30.86-- 2.00 Poland32.52 16.26 25.22 16.268.847.30

24. 24 Pension contribution rates in SEE countries with mandatory private pension tiers, 2004 CountryTotalPAYGO (1 st tier) Pre-funded (2 nd tier) SumemployeremployeeSumemployeremployee Bulgaria29.0021.757.2526.0019.506.503.00 Croatia 2015- 5.00

25. 25 9. Demographic Aging: Changing the pension financing method cannot „Avert an Old Age Crisis” Need to increase employment

26. 26 10. Employment rates in 2002 Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.