Transcript Funded systems in Central and Eastern Europe

FUNDED PENSIONS IN
CENTRAL AND EASTERN
EUROPE
Design and Experience
Agnieszka Chlon-Dominczak
Geneva, October 9th, 2003
Countries implementing mandatory
funded pension schemes
60
Kazakhstan
Macedonia
Poland
Hungary
Estonia
Latvia
Croatia
Bulgaria
number of persons older than 65
per 100 persons aged 15-64
Population ageing
Dependency rate
(65+/15-64)
2002
50
2050
40
30
20
10
0
Kazakhstan
Estonia
Latvia
Bulgaria
Hungary
Macedonia
Poland
Croatia
% of GDP
Pension expendiutre
14
12
10
8
6
4
2
0
Reasons for the multipillar reform
• to make the pension system sustainable in
long run


to reduce implicit pension debt
to diversify risk
• to achieve better balance between collective
and individual responsibility in the pension
system
• to encourage additional savings
• to develop and strengthen financial markets
Design
Minimum pensions
Country
Minimum pension Qualifying period
level
(women/men)
(% of average
wage in 2002)
Structure of the guarantee
Hungary
17%
20/20
Financed from the state budget
Kazakhstan
20%
20/25
Financed from the state budget, topping-up pensions
received from the funded pillar
Poland
30%
20/25
Financed from the state budget, topping-up pensions
received from the first and second pillars.
Latvia
17%
10/10
In the first tier, financed from social security
contributions.
Croatia
10,5%2
15/15
In the first tier, financed from social security
contributions.
Bulgaria3
19%
15/15
In the first tier, financed from social security
contributions.
Estonia
13%
5/5
In the first tier, financed from the state budget
Macedonia
41%
Over 30/35 years
38%
Over 20/25 years
35%
Over 15 years
Financed from social security contributions, toppingup pensions received from the first and second
pillars.
Changes in the PAYG
Strategy
Country
examples
Poland
Going towards defined contribution
Latvia
Croatia
Hungary
Reducing existing defined benefit
Bulgaria
Estonia
Macedonia
Flat rate minimum benefit
Kazakhstan
•
to balance public pension expenditures
•
to create room for financing the transition costs
Contributions
35%
30%
25%
20%
15%
10%
5%
0%
P o la nd
L a tvia
no n o ld-age
•
•
B ulg a ria
H u ng a r y
first pillar
M a c e d o nia
second pillar
C ro a tia
E s to nia
K a za k hs ta n
not a funded sc he m e m e m ber
Tax treatment: usually EET
Size of contributions to funded component depends on capacity
to finance transitions costs
Participation in the funded
pillar
Kazakhstan
Bulgaria
Croatia
Poland
Latvia
Estonia
Macedonia
Hungary
18
24
30
36
mandator
y
42
voluntary
48
54
not allowed
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
Bulgaria (until 2003)
Estonia
Macedonia
Bulgaria (from 2004)
Hungary
Supervision
Supervision
Separated
Partially consolidated
Fully consolidated
Croatia
Kazakhstan
Hungary
Macedonia
Poland
Bulgaria
Latvia
Estonia
Licensing
• financial requirements:

minimum shareholder capital,
• legal provisions and quality check:
presenting draft articles of association for
the approval of the supervision
 business plan
 information on the quality of the managers

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
35%
30%
25%
20%
15%
10%
•
Bulgaria
Poland
Kazakhstan
Croatia
Latvia
Hungary
0%
Macedonia
5%
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








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)
• 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
Experience
Members
Kazakhstan
Poland
Hungary
Bulgaria
Croatia
Estonia
Latvia
Funded system
participants (ths) % of all contributors
5 141
100%
10 990
76,4%
2 253
49,6%
1 115
48,40%
938
67,50%
210
35% (of choice group)
325
32%
Members
age distribution
100%
80%
above 55
60%
40-55
30-40
40%
up to 30
20%
0%
Hungary
•
•
Poland
Similar age pattern in Poland and Hungary, despite different switching
policies
Other countries:

in Estonia: 45% in the age group 20-25 and 32-34% in age group 26-60,
fairly equal distribution
Number of funds
Initial year
2002
10+1
13+1
Hungary
38
18
Poland
21
17
Bulgaria
8
Croatia
7
Estonia
6
15 funds
Latvia
6
11 plans
Kazakhstan
Concentration
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%)
0
Estonia
Latvia
Hungary
Croatia
Bulgaria
Kazakhstan
Poland
thousand persons
Average size
700
600
500
400
300
200
100
Market structure
TRANSFERS BETWEEN FUNDS
• Fewer transfers among funds than expected:
 in Hungary around 1% of members changed funds
 In Poland the number of changes is growing:




in Kazakhstan:




1.4% in 2000
1.7% in 2001
3.1% in 2002
mostly transfers from state to non-state pension funds
share of state pension fund decreased from 82% in 1998 to
46% in 2001
smaller movements between private funds
in Latvia:

in 2003 c. 12% participants changed from state to private
pension funds
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
Assets
• Role of pension funds as institutional
investors:
Hungary
Poland
stock market pension funds' % of stock market in
capitalisation
equity
pension funds:
6,28
0,16
2,6%
6,19
2,13
34,4%
Investments
100%
80%
60%
40%
c
GDS
Equity
Others
Croatia
Bulgaria
Hungary
Kazakhstan
0%
Poland
20%
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
Latvia
Croatia
Bulgaria
Estonia
Macedonia
Limits on charge
structure








Types of charges
admission fee
contributionbased fee
















asset
management fee








performance fee








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)
Impact of fees in
selected countries
Poland
2001
Up-front fee
(% contribution)
Management fee
(% assets)
Rate of return fee/
‘performance fee’ (%
return)
Reduction in assets
Reduction in yield
Poland
new law
2004
Kazakhstan
2001
Kazakhstan
new law
2002
Croatia
2002
Croatia –
draft law
8.5*
from 7.0 to
3.5
1
0
0.8
0.8
0.6
Up to 0.54
None
0.6
(0.28)
None
1.2
None
Up to 0.06
10
15
25
None
17.4
0.82
14.4
0.65
10.3
0.37
16.5
1.13
29.3
1.61
26.4
1.19
Source: World Bank (2003)
Charges - actual
performance:
• Charge levels are different across
countries
• They reflect the legal design,
supervision practices and competition
• Economies of scale are hardly observed
Charges vs. size of
pension funds
Kazakhstan and Poland:
y = 1 0 .5 0 2 L n ( x ) - 7 1 .5 2 1
y = - 0 .1 2 0 9 L n ( x ) + 2 .9 2 6
R 2 = 0 .0 3 8 9
5 .0
4 .0
3 .0
2 .0
1 .0
0 .0
Poland 2002
170
R 2 = 0 .1 7 6 3
150
130
(in PLN)
Kazakhstan 2001
6 .0
ave r age char ge pe r m e m be r
190
7 .0
(in ths te nge )
ave r age char ge pe r m e m be r
8 .0
110
90
70
50
30
0
150 000
300 000
450 000
600 000
num be r of m e m be rs
750 000
900 000
0
500 000
1 000 000
1 500 000
2 000 000
num be r of m e m be rs
• Charge level does not depend on the pension fund
size
• Some economies can be seen in Kazakhstan
• In Poland - bigger funds charges are higher
2 500 000
3 000 000
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
Charges vs. size of
pension funds
Kazakhstan and Poland:
Kazakhstan 2001
y = - 0 .8 0 7 5 L n ( x ) + 1 0 .6 3 8
(in ths te nge )
6 .0
Poland 2002
170
R 2 = 0 .6 9 9 7
5 .0
4 .0
3 .0
2 .0
1 .0
ave r age cos t pe r m e m be r
(in PLN)
7 .0
ave r age cos t pe r m e m be r
y = - 1 8 .7 8 3 L n ( x ) + 3 3 6 .7
190
8 .0
R 2 = 0 .1 8 5
150
130
110
90
70
50
30
0 .0
0
150 000
300 000
450 000
600 000
num be r of m e m be rs
750 000
900 000
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
3 000 000
num be r of m e m be rs
• More economies of scale than in the case of charges
• In Kazakhstan - stronger than in Poland
Rates of return
•
Kazakhstan:


•
Poland


•
relatively high real returns, little
disparity between funds
significantly better performance
of state fund - different asset
allocation
lower, but still above zero real
returns
large differences between funds
Hungary


lack of comparable data
in 2001 net fund returns at
6.1%
KAZAKHSTAN
Weighted average
Non-state Accumulation Funds:
standard deviation
Minimum
Maximum
State Accumulation Fund
Inflation rate
Real wage growth
Bank deposit rate (nominal)
POLAND
Weighted average
Standard deviation
Minimum
Maximum
Inflation rate
Real wage growth
Real bank deposit rate
June 2000
June 2001
6.81/%
October 2001
October 2002
6.50%
June 2002
June 2003
4.12%
1.01%
5.44%
8.70%
5.14%
2000
13.2%
5.7%
14.7%
0.51%
5.33%
7.07%
9.04%
2001
8.4%
9.5%
12.8%%
1.96%
-1.07%
5.41%
5.19%
2002
5.9%
10.0%
11.0%
December 1999 December 2000
December 2000 December 2001
4.5%
2.1%
3.5%
3.5%
-0.9%
-5.4%
12.5%
6.3%
2000
2001
8.5%
3.6%
4.2%
3.6%
6.5%
4.4%
December 2001
December 2002
14.5%
2.7%
6.3%
16.6%
2002
0.8%
2.7%
3.8%
Administrative costs
POLAND
1 800
sales and marketing
1 600
other costs
1 400
reserves and guarantees
PLN bn
1 200
1 000
800
600
400
200
0
2000
2001
2002
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
• Trend towards multi-pillar schemes:
 Implemented in 8 countries
 Considered in Slovakia
• 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
