Transcript Pension Reform in Central and Eastern Europe

Pension Reform in Central and
Eastern Europe
Elaine Fultz
Senior Specialist in Social Security
ILO Budapest
1
Regional trends:
1. More individualized
benefits
– reduce redistribution
– count more years of work
– Notional defined contribution
(NDC)
2
2. Retirement Ages – New EU States
Current law
Men
Women
Czech Rep.
1995,2003
increasing to 63 by 2013 by 2
months/year
Increasing to 59-63 (depending
on no. of children raised) by 4
months/year in 2013
Estonia
1998, in force
2000
63
Increasing to 63 in 2016 by 6
months/year
Hungary
1996
increasing to 62 in 2001 by 1
year every second year
Increasing to 62 in 2009 by 1
year every second year
Latvia
1998
increasing to 62 in 2003 by 6
months/year
Increasing to 62 in 2008 by 6
months/year
Lithuania
1994, 2000
increasing to 62.5 in 2003 by 6
months/year
Increasing to 60 in 2006 by 6
months/year
Poland
1998
(in force, 1999)
65, with early retirement
eliminated beginning in 2007
60, with early retirement
eliminated beginning in 2007
Slovak Rep.
2003
Gradual rise to age 62
Same as for men
Slovenia
1999
63
61
3
Retirement Ages – Stability Pact Countries of South Eastern Europe
Current law, year
of enactment
Men
Women
Albania
2003
61 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.
Bulgaria
1999
62.5 in 2004 increasing to age 63 in 2005.
57.5 in 2004 increasing by six months per
year to 60 in 2009.
Croatia
1998
63 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 Macedonia
2000
64 in 2004
60.5 in 2004 increasing by 6 months per year
to 62 in 2007
Moldova
1998
62 in 2004 with 30 years of contributions
57 in 2004 with 30 years of contributions
Romania
2000
62 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
4
months per year.
3. Unified collection systems:
•
•
•
•
•
•
•
•
Latvia
1996
Slovenia 1996
Estonia
1999
Hungary 1999
Croatia (Tax Authority + REGOS)
Bulgaria 2002
Albania
2003
Romania 2004
2001
5
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)
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Status of Pension Privatization
in SEE Countries
Countries with mandatory, Countries without such
commercially managed
scheme
individual savings account
Bulgaria (2000)
Albania
Croatia (2002)
Bosnia and Herzegovina
Macedonia (2002)
Romania (2004)
Serbia
Montenegro (2003)
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5. Laws Authorizing Voluntary Pension
Funds in new EU member states
Country
Start year
Czech Republic
1994
Estonia
1998
Hungary
1994
Latvia
1998
Lithuania
2000
Poland
1999
Slovenia
2000
Slovak Republic
1996
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Laws Authorizing Voluntary Pension
Funds in SEE Countries
Country
Year of enactment
Albania
1995
--
--
--
Bosnia and
Herzegovina
Year of
implementation
Bulgaria
2000
Croatia
2002
2003
FYR Macedonia
--
--
Moldova
--
--
Romania
2004
--
Serbia and
Montenegro
-9
6. Issues and Problems:
a. Transitional financing costs
b. Negative investment returns
c. Delay on private benefit package
10
Transitional financing costs in
Poland
2.5%
2.0%
%
1.5%
GDP
1.0%
0.5%
0.0%
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
year
privatisation revenues
credit
public pillar savings
Chlon, Agnieszka, "The Polish Pension Reform of 1999," in Fultz, E., Ed., Pension Reform in Central and Eastern Europe,
Vol. 1, ILO: Budapest, 2002.
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Replacement rates, Poland
80%
% of last salary
70%
60%
50%
40%
30%
20%
1949
1954
1959
1964
1969
1974
year of birth
Pillars I&II
Only pillar I
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
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
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New ILO reports (Dec. 2004)
• Hungary
• Poland
3.75% average annual internal
rate of efficiency over first 6
years of operations
6.6% inflation rate
20.3% increase in value of
second pillar savings over
December 1999 – June 2004
24% inflation rate
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Why the negative returns?
• Poor stock market performance?
• Industry charges and fees?
15
Admin. charges and their impact
Poland
2001
Poland
new
legislation
Kazakhstan
2001
Kazakhstan
new law
Croatia
2002
Croatia
draft
legislation
Upfront
fee (% of
contribution)
8.5
7.0
1
0
0.8
0.8
Mgmt. fee
(% assets)
0.6
Up to 0.54
none
0.6
None
1.2
Performance fee
(% of
return)
none
Up to
0.06% of
assets
10
15
25
None
Reductions 17.4
in assets
14.4
10.3
16.5
29.3
26.4
Reductions 0.82
in yield
0.65
0.37
1.13
1.61
1.19
Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.
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Investment management
performances in Hungary, 2000
Fund management
Competetive
(Group 1)
Insider
(Group 2)
TOTAL
Number of funds
11
13
24
Share in assets (percent)
9
91
100
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)
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Management Costs of Hungarian
Mandatory Pension Funds
Average value of assets managed (Bn HUF)
2000
133
Management costs ( bn HUF )
5.4
Costs of operation
1.6
Asset management costs
7.0
Total management costs
Annual Management Costs as a percentage of average value of assets
4.06%
Costs of operation
1.17%
Asset management costs
5.23%
Total management costs
Total management costs as a percentage of annual contributions
7.10%
2001
229.5
2002
348
2003
487
6.7
2.6
9.3
7.1
3.5
10.6
9.3
5.0
14.3
2.92%
1.13%
4.05%
2.04%
1.01%
3.05%
1.91%
1.02%
2.93%
8.93%
9.08%
8.70%
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.
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Structure of Assets of Mandatory
Private Pension Funds in Hungary
Cash and deposits
Domestic state bonds
Equities
Investment funds
Othes
1998
14%
77%
7%
0%
2%
1999
3%
83%
10%
2%
2%
2000
1%
78%
15%
3%
4%
2001
1%
80%
12%
2%
5%
2002
4%
68%
9%
7%
12%
2003
1%
70%
9%
7%
13%
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.
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Long Term Investment Performance of the
Hungarian Mandatory Pension Funds by Size of
Assets, 1999-2003
2,5%
2,0%
1,5%
1,0%
0,5%
0,0%
Questor
Életút
Vasutas
VIT
Erste
Postás
Dimenzió
Honvéd
MKB
BB
UNIQA
Aranykor
Évgyűrűk
CS Life&Pensions
Allianz
-1,5%
AB-AEGON
-1,0%
ING
OTP
-0,5%
Average of the last 5 years
Average of the last 3 years
-2,0%
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.
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7. Pension contribution rates in CEE, 2002
(as a percent of insured wages)
Employers
Employees
State
Total
Czech Republic
19.5
6.5
26
Estonia
20
2
22
Hungary
18
8
26
Latvia
--
--
Lithuania
22.5
2.5
25
Poland
16.26
16.26
32.52
Slovak Republic
21.6
6.4
28
Slovenia
8.85
15.5
24.35
27.10
30.86
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Pension contribution rates in SEE
Countries, 2004
(as a percent of insured wages)
Employers
Employees
Total
Albania
21.3
8.6
29.9
Bosnia andHerzegovina
FB&H
RS
7 gross wage
24 net wage
17 gross wage
--
24 gross wage
24 net wage
Bulgaria
21.75
7.25
29
Croatia
--
20
20
FYR Macedonia
21.2 gross wage
--
21.2
Moldova
29
1
30
Romania
23.33
11.67
Depends on
employer rate
Serbia and Montenegro
Serbia
Montenegro
10.3
12
10.3
12
20.6
24
22
8. Pension contribution rates in CEE
countries with mandatory private pension
tiers, 2002
Country
Total
PAYGO
(1st tier)
Funded
(2nd tier)
Sum
Employer
employee
sum
employer
22.00
20.00
2.00
16.00
16.00
Hungary 26.00
18.00
8.00
20.00
18.00
2.00
6.00
Latvia
30.86
--
--
--
--
--
2.00
Poland
32.52
16.26
25.22
16.26
8.84
7.30
Estonia
16.26
employee
4.00
2.00
+
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Pension contribution rates in SEE
countries with mandatory private pension
tiers, 2004
Country
Bulgaria
Croatia
Total
PAYGO
(1st tier)
Pre-funded
(2nd tier)
Sum
employer
employee
Sum
employer
employee
29.00
21.75
7.25
26.00
19.50
6.50
3.00
20
15
-
15
5.00
24
9. Demographic Aging:
• Changing the pension financing method
cannot „Avert an Old Age Crisis”
• Need to increase employment
25
10. Employment rates in 2002
70
E U a ve ra g e (1 5 -6 4 )
60
50
E U a ve ra g e (5 5 -6 4 )
40
30
20
10
E m p lo ym e n t ra te (1 5 -6 4 )
M ace d o nia
Cro atia
Kazakhstan
Bulg aria
Po land
Hung ary
Latvia
Esto nia
0
E m p lo ym e n t ra te (5 5 -6 4 )
Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.
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