CENTRAL EUROPEAN PENSION REFORM
I
n
of
Over the same period, Poland,
pension reform sent shock waves
2011,
Hungary’s
policy
Slovakia and Romania have all
across Europe. In order to reduce
tapped into the private elements of
its budget deficit, it collapsed the
their – largely compulsory – second
second pillar of its pensions into the
pillar structures to increase revenues
state scheme and appropriated all
to their respective treasuries.
private funds.
“Fears have grown that cashstrapped governments might plunder their pensions systems”
The decision by the Hungarian
Since then, fears have grown that
government was highly controversial
that
cash-strapped governments might
and justified by the need to cut the
permanent and the second pillar
the
suspension
would
be
plunder their pensions systems
budget deficit. However, the contro-
would be removed altogether, says
in order to shore up their creaking
versy was fuelled by the government’s
Daniel Gera, an associate in the
fiscal positions.
announcement at the eleventh hour
employment team at French legal firm Gide Loyrette Norel’s Budapest
Attacking the second pillar
office. Consumers were given the option to transfer their account into the existing private sector third pillar, he says, but this was made difficult and the deadline was very short. And there was worse to come. “If you wanted to keep a private
Pádraig Floyd reports on central European governments’ raiding of the second pillar and the subsequent effects this has for overall pension provision
account, there was a risk you would not receive your state pensions entitlements accrued to that date. Although this was ultimately declared unconstitutional, by then only 3 per cent remained outside the first pillar,” says Gera. The impact of this measure was
www.europeanpensions.net 17
CENTRAL EUROPEAN PENSION REFORM
far reaching. It effectively ended the private provision of pensions in Hungary and greatly knocked public confidence. Private provision is important to investors in these countries, because it is one of the few tax-efficient means of accumulating wealth that may be passed on through inheritance. So now in Hungary, not only is there no second pillar pension system, there is little trust among the average consumer in saving at all. There is certainly no interest from providers to create a financial services market. “The government uses incentives for employers to use the third pillar but there have been no new market players in since the change,” says Gera. “Pension funds operating in the second pillar wanted to keep as many clients as possible, but simply couldn’t survive. Even the largest bank, OPT, had to dissolve its fund recently.” The financial markets in central and eastern Europe are “heterogeneous and fragmented” and the crisis in 2008 affected the asset management business in a negative way, says Schroders deputy head of sales, central Europe, Lydia Malakis. “In
Hungary,
the
institutional
“The commitment of the Polish, Slovakian and Romanian governments to return second pillar contributions towards former levels shows there is no long-term desire to disrupt independent financial markets”
business is dead and it is impossible
The soft compulsion of autoenrolment introduced into the UK’s second pillar in October 2012 has set savings considerably higher levels, and yet are dismissed as inadequate by many commentators. So it would seem reasonable that investors in these countries may be better off not saving. But nothing could be further from the truth, says Generali Slovakia CEO and chairman, Vladimir Bezdek. Bezdek,
an
economist
and
co-author of the Czech retirement
to raise assets. While in other
reform programme, says in countries
markets, the business is very locally
cent for the next five years, though
such
concentrated,” she says.
has made plans to increase it to 3.5
Romania, even if the average second
per cent by around 2017.
pillar contribution is only 3 per cent
This makes it difficult for a financial
as
Poland,
Slovakia
and
services market to develop and
Slovakia similarly cut the maxi-
to 4 per cent, two or three decades
the same is true in other countries in
mum contribution from 9 per cent
with compound interest will have
the region. A number have already
to 4 per cent, with a gradual uplift
a profound effect on the lives of
greatly restricted the amount that
to 6 per cent by 2017/18.
their citizens.
can be paid into the private sector,
Romania, one of the smaller
“The Czech Republic has three
markets with around €2 billon of
million retired people in a population
dismantling the three pillar system,
assets,
maximum
of 10 million. By studying their
largely based upon the World Bank’s
contribution to second pillar pensions
spending, we see that 94 per cent of
model.
to 2.5 per cent from 6 per cent in
income for those people comes
Poland, which has around €50
2010. It too put in place an annual
from the state budget either in
billion of assets, reduced the amount
0.5 per cent increase which has
pensions or benefits,” says Bezdek.
that could be paid into second pillar
raised the limit to 3.5 per cent
“Almost all the income of these
pensions from 7.3 per cent to 2.3 per
in 2012.
people depends on one source –
though
have
held
18 www.europeanpensions.net
back
from
reduced
the
CENTRAL EUROPEAN PENSION REFORM
there is no diversification.”
fiscally neutral rather than to punish
Bezdek points out that unlike
investors, says Bezdek, and believes
western Europe, there is no history
private savings will remain very
of occupational pension provision
popular.
and therefore something is a lot
“The third pillar has been very
better than nothing. He adds: “Even
popular since it was introduced in
5 per cent to 6 per cent pots make
1994,” says Bezdek. “After 20 years
political sense in 20 years time.”
history of voluntary contribution
“In Hungary, the institutional
business is dead and it is impossible to raise assets” similar to ISAs – from net income.
As for political risk, Bezdek is
almost five million individuals parti-
The commitment of the Polish,
generally optimistic, dismissing fears
cipate in it. In a country with a
Slovakian and Romanian govern-
that more countries might seek to
population of only 10 million, that
ments
emulate Hungary and raid private
participation rate is extremely high.”
contributions towards former levels
pension structures.
to
return
second
pillar
The only question that remains
shows there is no long-term desire
There is opposition in every
unanswered for Bezdek is where
to disrupt independent – if under-
country making changes to pension
they find the money. But find it they
developed – financial markets.
structures says Bezdek, and Slovakia
will, he asserts.
Though the Czechs have also
offers an interesting political case
“Will they be able to reduce their
imposed limits, they are further
study. In spring 2012, elections
consumption and save? I certainly
from Hungary’s position than any of
delivered the first strong government
do not believe they will cancel old
their neighbours. Their compromise
in Slovakia’s short history, with the
policies to find the money.”
shows foresight in nurturing – even
social democrats securing a majority
The Czech Republic is a devel-
stimulating – a growing private
of more than 80 members in the
oping and attractive market, accor-
pension sector by rewarding those
150 seat chamber.
ding to Schroder’s
who make provision from their
Malakis. “It is
“In Slovakia, there is no second
the most mature and advanced and
chamber,” says Bezdek, “so this
offers opportunities for institutional
As the long term goal for most
leftish-orientated government has
assets,” she says and agrees that
of these countries is to enter the
the power to do what they wish.
net pay.
private sector (third pillar) invest-
eurozone, it may be tempting to
“Even then, they did not close
ments offer opportunities in terms
follow Hungary’s lead in order to
down private pensions completely
of unit-linked business written by
keep their deficits below the 3
and made provision for them to
insurance companies.
per cent of GDP required to make
come back in five or six years time.”
“This is quite a popular area and
the grade. But this would ultimately
The Czech Republic is also about
one part of the asset management
be futile, says Gera, as Hungary’s
to undergo considerable reform.
industry that has seen the highest
raid of private pensions has done
The opposition party has promised
growth of between 17 per cent and
nothing to stabilise the first pillar
to reverse the policy when it comes
20 per cent,” says Malakis.
pension system.
into power, but few believe it will be
Malakis sees Poland’s situation
“The problem with the elimination
able to even if it remains a political
as merely a “temporary slowdown”,
of the second pillar is it does
priority. But importantly, says Bezdek,
but what holds back all the markets
nothing to make the system, more
the model being implemented dem-
from developing is that they are
sustainable. Demographic changes
onstrates an understanding of the
relatively closed and domestically
means the population above 65 –the
importance of private provision.
orientated.
retirement age recently increased
In the Czech Republic, employer
Despite
having
their
options
from 62 – has increased significantly
and employee contribute 28 per
reduced in order to maximise contri-
and is forecast to grow from more
cent of gross wages into pensions.
butions into state coffers,
than 16 per cent in 2006 to above 20
Those wishing to go into the second
of central and eastern European
pillar must now contribute 25 per
countries remains well-placed to
This is the effect of baby boomers,
cent to the state and 3 per cent to
continue saving into pensions funds.
as much a demographic problem in
citizens
the second pillar. In order to be
Many second pillar structures are
allowed to contribute 3 per cent, an
already compulsory, so there are
individual will have to invest a further
few options for investors to seek
2 per cent from net income. But this
alternative arrangements beyond
condition is to make the process
unit-linked savings products – some
per cent by 2020.”
the east as it is in the west.
WRITTEN BY Pádraig Floyd, a freelance journalist www.europeanpensions.net 19
