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Pension Reform in Central and Eastern Europe

Elaine Fultz

Senior Specialist in Social Security

ILO Budapest

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Regional trends:

1. More individualized benefits– reduce redistribution

– count more years of work

– Notional defined contribution (NDC)

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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

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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 months per year.

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3. Unified collection systems:

• Latvia 1996• Slovenia 1996• Estonia 1999• Hungary 1999• Croatia (Tax Authority + REGOS) 2001• Bulgaria 2002• Albania 2003• Romania 2004

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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, commercially managed individual savings account

Countries without such scheme

Bulgaria (2000) Albania

Croatia (2002) Bosnia and Herzegovina

Macedonia (2002)

Romania (2004)

Serbia

Montenegro (2003)

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5. Laws Authorizing Voluntary PensionFunds 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 PensionFunds in SEE Countries

Country Year of enactment Year of implementation

Albania 1995 --

Bosnia and Herzegovina

-- --

Bulgaria 2000  

Croatia 2002 2003

FYR Macedonia -- --

Moldova -- --

Romania 2004 --

Serbia and Montenegro

--  

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6. Issues and Problems:

a. Transitional financing costs

b. Negative investment returns

c. Delay on private benefit package

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Transitional financing costs in Poland

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

year

% GDP

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

20%

30%

40%

50%

60%

70%

80%

1949 1954 1959 1964 1969 1974

year of birth

% o

f la

st

sala

ry

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.

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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 3.75% average annual internal rate of efficiency over first 6 years of operations 6.6% inflation rate

• Poland 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?

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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)

8.5 7.0 1 0 0.8 0.8

Mgmt. fee (% assets)

0.6 Up to 0.54 none 0.6 None 1.2

Perform-

ance fee (% of return)

none Up to 0.06% of assets

10 15 25 None

Reductions in assets

17.4 14.4 10.3 16.5 29.3 26.4

Reductions in yield

0.82 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 return0.6

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

2000 2001 2002 2003 Average value of assets managed (Bn HUF) 133 229.5 348 487Management costs ( bn HUF ) Costs of operation 5.4 6.7 7.1 9.3Asset management costs 1.6 2.6 3.5 5.0Total management costs 7.0 9.3 10.6 14.3Annual Management Costs as a percentage of average value of assetsCosts of operation 4.06% 2.92% 2.04% 1.91%Asset management costs 1.17% 1.13% 1.01% 1.02%Total management costs 5.23% 4.05% 3.05% 2.93%Total management costs as a percentage of annual contributions

7.10% 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

1998 1999 2000 2001 2002 2003Cash and deposits 14% 3% 1% 1% 4% 1%Domestic state bonds 77% 83% 78% 80% 68% 70%Equities 7% 10% 15% 12% 9% 9%Investment funds 0% 2% 3% 2% 7% 7%Othes 2% 2% 4% 5% 12% 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

-2,0%

-1,5%

-1,0%

-0,5%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

OTP

ING

AB

-AE

GO

N

Allia

nz

CS

Life

&P

en

sio

ns

Évg

yű

rűk

Ara

nyko

r

UN

IQA

BB

MK

B

Ho

nvé

d

Dim

en

zió

Po

stá

s

Ers

te

VIT

Va

su

tas

Éle

tút

Qu

esto

r

Average of the last 5 years

Average of the last 3 years

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 -- -- 27.10 30.86

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

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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 andHerzegovinaFB&HRS

 7 gross wage24 net wage

 17 gross wage--

 24 gross wage24 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 MontenegroSerbiaMontenegro

 10.312

 10.312

 20.624

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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 employee

Estonia 22.00 20.00 2.00 16.00 16.00 4.00 + 2.00

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 16.26 25.22 16.26 8.84 7.30

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Pension contribution rates in SEE countries with mandatory private pension

tiers, 2004

Country Total PAYGO (1st tier)

Pre-funded (2nd tier)

  Sum employer employee Sum employer employee

Bulgaria 29.00 21.75 7.25 26.00 19.50 6.50 3.00

Croatia     20 15 - 15 5.00

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9. Demographic Aging:

• Changing the pension financing method cannot „Avert an Old Age Crisis”

• Need to increase employment

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10. Employment rates in 2002

0

1020

3040

5060

70

Esto

nia

Latvi

a

Hung

ary

Polan

d

Bulg

aria

Kaza

khsta

n

Croa

tia

Mac

edon

ia

Employment rate(15-64) Employment rate (55-64)

EU average (15-64)

EU average (55-64)

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