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Analyses

Comment to PENSION INSURANCE

A) MACROECONOMIC ENVIRONMENT

In the last two quarters Slovak economy increased its dynamics against the previous year. Both domestic and foreign demand participated in the growth of GDP. The first six months were characterized particularly by the increase of the formation of gross capital which from the mid-term perspective is an important determinant of the prosperity of economy. Slovenská ratingová agentúra, a.s. positively evaluates the conclusion of other sections in the process of negotiations with the European Union as well as the enhancement of stability in the financial sphere (by means of privatization as well as legislative changes). The sale of state share continues in the energy sector as well. The progress made in the area of some structural reforms was also recognized by the rating agencies Standard&Poor`s and Moody`s that increased long-term rating of Slovakia in foreign currency to the investment degree. The regular annual report of the European Commission has designated the Slovak Republic as functioning market economy.

However the last months brought also events that may mean a potential threat to Slovakia in the future period. The terrorist attacks in the United States have an important influence on U.S. economy as well, which got into recession because of them. The key question is: How long will the recession take? In absence of other events of military nature which could have a substantial influence on the function of the world largest economy, the massive monetary and fiscal stimuli should cause the growth of GDP as early as in the second half-year 2002. In this case the recession is only of short-term character and it should not have significant and long-term effect on the performance of EU economies and subsequently that of the Central and East European countries. Moreover, the growth of GDP in Slovakia is no more produced exclusively on the basis of the growth in foreign demand. A positive effect of the recession is the expected lower price of commodities on world markets (by reason of weaker demand), which may be reflected in costs of companies. However the companies exporting commodities will probably have lower sales.

Other risks result from the relatively high potential growth of final consumption of households in the following year. In 2002 the regulated prices will only increase moderately which, according to the estimates of the Slovak Rating Agency, can decrease the dynamics of the consumer price index in the first two months of the following year to the level at the vicinity of 5%. Some rigidity of nominal wages can then lead to faster growth of real wages. Moreover, net income of population will also increase as a result of the reduction of natural person income taxes. The higher growth in final consumption of households may subsequently increase the deficit of current account because historical time series show relatively high elasticity of imports to the growth of household expenditures. At the same time, the actual situation is already unfavorable - according to the estimates of the Slovak Rating Agency, in September the deficit of foreign trade reached 9.5% of GDP (on a twelve-months basis).
Problems also persists in fiscal area and on labour market. Public finance actually represents one of the most problematic areas of Slovak Economy. However we must distinguish between the short-term and the long-term perspectives. The results of state budget management for the first ten months indicated that there would be probably no problems in keeping the deficit of public finance under the planned value (3.9% of GDP). To be objective we must say that if we talk about the planned value we bear in mind the methodology using which the objective in the area of deficit was determined. But from the mid-term perspective, there are still doubts on the sustainability of debit balance. The absence of consensus over the role of Government in economy and slow solution of problems in health, education and social areas and in public administration are the primary risk factors.

From the view of supplementary pension insurance companies (DDP) the core area is particularly the amount of savings of population and the issue of suitable investment opportunities. Although the rate of savings in the first six months decreased on a year-on-year basis the Slovak Rating Agency expects in the following year an increase of absolute volume of savings of population (with regard to the anticipated growth in net real wages) which may create more space for DDP. Moreover, there is still no reason to expect a steep increase of interest rates which could enhance the attractiveness of saving deposits on accounts with fixed time-limit. From the view of investment opportunities we must bear in mind that the law very strictly stipulates the way of the utilization of premium by DDP. The low potential share of investments in foreign stock in some way protects DDP from high volatility of revenues. In case of reckoning interest on state bonds in the short end of the revenue curve we expect a slight decrease (not more than 0.5%) in the following period. The long end is assumed to remain stable, with potential increase before the parliamentary elections (risk premium).


B) DESCRIPTION OF THE PENSION INSURANCE SCHEME

Insurance industry in the Slovak Republic

The system of insurance companies in the Slovak Republic consists of commercial insurance companies, health insurance companies, a social insurance company and supplementary pension insurance companies.

Commercial insurance companies

The development of legislation in the area of insurance has affected by the development of insurance market inter alia by allowing the entry of several commercial insurance companies that started to create the first conditions for the establishment of competitive environment on the respective market. While in 1990 the only insurance company operating in Slovakia was the Slovak State Insurance Company , which in 1991 was transformed to a joint-stock company, in the following years the number of insurance companies increased until the end of the year 1999 where 28 commercial insurance companies operated on Slovak insurance market, of which 18 with foreign capital, and in it 16 with majority, res. 100% share of foreign shareholders.

In spite of the increasing number of commercial insurance companies, the relatively low share of the prescribed premium on gross domestic product persists. Total volume of the prescribed premium in Slovakia ranges within the interval from 2% to 3% of gross domestic product. In the developed countries this number is at least by 2% higher. In the EU countries it reaches in average 7.5%.

This situation is caused by undervaluation of the importance of insurance as an instrument for the elimination of potential risk on the part of both natural and legal persons. An important reason of weak dynamics of the share of the prescribed premium on gross domestic product is the underdevelopment of life insurance which proves that citizens are still not used to secure at productive age the increase of the level of income at the time when they become pensioners, but another important factor of weak life insurance is the low level of real wages of population in comparison with the developed countries. While in the EU countries citizens invest in life insurance 8 to 10% of their monthly income, in the Slovak Republic the policyholders pay monthly about 2% of their income for different types of life insurance.

The increase of the share of prescribed premium on gross domestic product could not be ensured even by the entry of new insurance companies on Slovak insurance market. However, by the arrival of new insurers, particularly after the year 1995, the client basis became differentiated, mostly as a result of product specialization of the insurance companies. While the first new-founded insurance companies started to profile themselves as universal companies, in the following years these entities started to specialize in individual insurance products such as life and accident insurance, legal protection insurance, travel insurance etc.

Due to the last amendment of the Insurance Act (effect from 1 April 2000), another profiling of commercial insurance companies is marked by the possibility for the insurance companies to conduct business exclusively in one insurance branch. Under the amendment of the quoted Act is impossible for a supervisory body to issue an authorization for the establishment and business in insurance industry in both life and non-life insurance (this change does not apply to the existing insurance companies which conduct business on the basis of an authorization issued before the amendment of this Act). Such strict profiling of insurance companies was necessary with the view of the approximation of Slovak insurance law with the EU law because in terms of the relevant European directive such separation of insurance branches is unavoidable from the view of insurance business, whereby it depends on each member country how it shall solve the area of universal insurance companies which have obtained the respective authorization before the entry into force of the relevant EU directive.

The ratio of life and non-life insurance in the EU countries is 50:50. In 1999 the share of life insurance on total insurance in the Slovak Republic was 36.11% (absolute volume of life insurance 8.6 billion SK, absolute volume of total insurance 23.7 billion SK), which represents an increase of nearly 7% against the year 1998. Although this increase is considered as the most dynamic one in the existing history of the Slovak Republic the life insurance in Slovakia is underdeveloped.

Health insurance companies

The health insurance companies are established under the Act No. 273/1994 Coll. on health insurance on the basis of the authorization issued by the Ministry of Health of the Slovak Republic. They execute mandatory health insurance. At present 4 health insurance companies operate in Slovakia. The largest health insurance company is the General Insurance Company that was established in 1995 as successor of the National Insurance Company of the Administration of the Health Insurance Fund. Although other health companies started to appear it remained the most important health insurance company in which more than 3.6 mil. policyholders are insured.

Social insurance company

The Social Insurance Company was established on 1 January 1995 by the Act No. 274/1994 Coll. as statutory institution authorized by the execution of health insurance and pension scheme that it has taken over from its predecessor, the National Insurance Company. To a limited extent it still executes state administration of social security - it decides on some state social benefits and pays them. The statutory character of the Social Insurance Company consists in full separation from state authorities, institutional arrangement of self-governing bodies as well as independent and autonomous financing and management, with no links to state budget.
The supreme administration body is the Board of Directors of the Social Insurance Company based on the tripartite principle. Its members are elected by the National Council of the Slovak Republic. The participation of representatives of the Government is actually justified by its obligation to pay contributions to health insurance and pension scheme for specified categories of persons, guarantee for the solvency of the Social Insurance Company and political responsibility of the state and its Government for the implementation of social policy and consequently for the transformation of the social sphere.

Primary source of income of the Social Insurance Company is premium for health insurance and pension scheme paid by the policyholders, employers and Government. Budget and annual financial statements of the Social Insurance Company are approved by the National Council of the Slovak Republic. The Act on the establishment of the Social Insurance Company entitles the Ministry of Labour, Social Affairs and Family and the Ministry of Finance of the Slovak Republic to supervise the execution of health insurance and pension scheme.

Supplementary pension insurance companies

The supplementary pension insurance constitutes one of basic pillars of the pension scheme. The establishment, foundation, activity, bodies, management, supervision and extinction of the supplementary pension insurance companies are stipulated by the Act on supplementary pension insurance.

Unlike the pension supplementary insurance executed by commercial insurance companies, the social dimension of the supplementary pension insurance scheme is reflected by the fact that the supplementary pension insurance companies are non-profit making entities and hence the whole scheme (is non-profit making), because revenues from investments made by a supplementary pension insurance company can be only used in favour of the participants in this insurance and not in favour of the shareholders, line in case of the commercial insurance companies.


Reform of social insurance in the Slovak Republic

The main reason for the need of social insurance reform is the crisis of social insurance system which is, in addition demographic and macroeconomic situation, partially caused by the irresolute approach of the required transformation measures in the decisive area of social policy which is social insurance. The provision of pensions only by means of current financing is unsustainable because it continuously increases the proportion of the number of pensioners to the number of premium payers and total population, which means that the share of those financing social insurance is decreasing.

It is necessary to decrease the deficit of public finance in the area of social insurance in the Slovak Republic by the combination of the following possibilities:

The purpose of the social insurance reform is to develop such system of participation in social insurance that will minimize the number of citizens being dependent on forms of social aid or some parts of state support. At the same time, a system of seniors from developed world will be founded, adequately to the approximation of living standard of active population. The means for the attainment of the said objective is particularly the transition to a diversified system of generation of resources which will cover the rights of citizens defined in the Constitution. Nowhere in the world the basic system of social insurance namely solves a dignified living standard in case of social event fully, but only partially.

The reform should ensure the preparation and the function of the new system of social insurance with a horizon of full operation in 20 to 25 years. Basic thesis, which is the leitmotif of the change in financing, is the effort to minimize required resources of state budget for the solution of internal debt of the existing social security scheme.

The social insurance reform will comprise multi-resource financing of short-term, long-term and accident benefits in cash on the basis of:
a) current financing - budget principle
b) capitalization financing - saving principle
c) spread of financing risk - insurance principle.

In the reformed pension insurance scheme, the basic mandatory scheme of long-term benefits in social insurance will consist of two pillars:

Pillar I - Basic statutory mandatory pillar financed from contributions in current way with target solution of gradual reduction of the coverage of benefits of the existing basic pension insurance fund to the level of necessary extent of social solidarity. It will be executed by the Social Insurance Company and financially guaranteed, stimulated and regulated by the Government.

Pillar II - Basic statutory mandatory capitalization pillar financed from contributions to specific personal accounts of policyholders with target solution of gradual extension of the coverage of benefits of the existing basic pension insurance fund. It will be executed by the Social Insurance Company and a special regime will apply to management of assets. The Government will coordinate, financially guarantee (up to the level of principal and inflation), stimulate and regulate it. This pillar will be based on the principle of personal interest. Through this instrument elements of resource capitalization and pension individualization will be brought in the mandatory basic system.

Besides the basic mandatory system of long-term benefits, in the framework of social insurance, a supplementary voluntary pillar of long-term benefits as Pillar III of pension insurance will be constituted. It will be founded by a special law, with a special way of establishment and special rules of management. This pillar will be financed from means of the employer and the employee or self-employed person, paid to specific accounts of the policyholders. It will be executed by the supplementary pension insurance companies, established on the non-profit making principle. The government will control, motivate and regulate it, applying the principle of personal participation, including reallocation of received capitalization. In the supplementary pension insurance companies the policyholder alone will participate in the result of valorization (unlike commercial insurance), whereby the amount of administration costs will be limited by law.

By the system of benefits provided under Pillar III the citizens will be provided the possibility to earn supplementary pension income at old age and in disablement. The construction of this pillar has already started and its foundation is laid by the Act on supplementary pension insurance of employees.

Beyond the framework of social insurance the citizen will have the possibility to improve his situation through individual commercial insurance within the voluntary commercial pillar, that will provide the citizen another possibility to solve his life situations related to his old age, disease or accident. It will be financed from means of the citizen, eventually those of the employer, paid to specific personal accounts of the policyholders, and executed by commercial insurance companies, banks, investment companies and other financial institutions. The Government will regulate and control it, applying the principles of personal participation.

The two ways of financing applied in social insurance, whether current or capitalized, are based on a gradual spread of risk. The change of financing is aimed to achieve the state where it will be finally possible to pay higher pensions for the same contribution. The reform will define the individual steps to systematically reach the relation between the number of premium payers and recipients of benefits 2.5 : 1. At the same time, one of important macroeconomic purposes of the reform is to generate long-term resources for effective development of economy, development of financial and capital market.

The social insurance reform should be seen as ongoing long-term process consisting in the following stages:
The Social Insurance Company will actively participate in the process of implementation of the conception of the social insurance reform in the Slovak Republic. Through representatives proposed by the Slovak Government to the Board of Directors of the Social Insurance Company, it will suggest the utilization of personnel and capacity potential and possibilities for financing works on the implementation of the social insurance reform in the Slovak Republic by resources of the administration fund of the Social Insurance Company. The utilization of the potential of supplementary pension insurance companies is considered particularly for the solutions related with Pillar III of pension insurance and the emerging links to overall reformed scheme of social insurance.


Supplementary pension insurance in the Slovak Republic

In compliance with the Concept on the Transformation of Social Sphere of the Slovak Republic approved by the Government, in 1996 the three-level social security system started to be constituted, which should ensure a successive transition to a functioning system based on the principle of personal responsibility of the citizen for the level of his security also after the termination of the active part of his life.

The social security system in the Slovak Republic consists of:
  1. System of basic pension insurance which is legally stipulated by the Act No. 100/1998 Coll. on social security;
  2. System of supplementary pension insurance based on and stipulated by the Act No. 123/1996 Coll., as amended by the Act No. 409/2000 Coll., on supplementary pension insurance of employees and on the change and amendment of certain acts;
  3. Individual pension insurance scheme, having legal support in the Act No. 24/1991 Coll. on insurance industry.
The supplementary pension insurance scheme in the Slovak Republic is based on the following principles:

Employer principle - the participation of employee in supplementary pension insurance is connected with the participation of his employer who pays regular contributions to personal account of the employee - policyholder.

State support principle - the state motivates not only the employer, but also his employee to participate in the voluntary pension insurance through tax allowances.

Voluntary principle - the employer and the employee decide voluntarily whether they become participants of supplementary pension insurance.

Minimum risk principle - the supplementary pension insurance company is obliged to manage entrusted funds and invest them so as not to menace the rights of the policyholders and claims of the recipients of benefits. This is stipulated by the Act on supplementary pension insurance which lays down the areas of investment but also limits the amount of funds intended for different investment activities.

Capitalization principle - capital deposited on personal accounts of the policyholders is valorized - invested by the insurance company under conditions stipulated by law, whereby such revenues from management are distributed every year in favour of the policyholders and the recipients of benefits. The investments of the supplementary pension insurance company should be executed in the form presenting minimum risk, therefore the law strictly stipulated the conditions of investment and spread of such investment over several areas so as to prevent that the failure of one investment project from the view of its revenues threats planned revenues from invested funds.

The amendment of the Act on supplementary pension insurance, which entered into force on 1 January 2001, brought several significant changes affecting especially the interests and rights and the policyholders. The amendment:
Financial assurance of reform
For the solution of financial assurance of the social insurance reform two basic categories of problems should be taken into account:
  1. Annual deficits of the Social Insurance Company arising under pension security. For the settlement of annual deficits of the Social Insurance Company arising under pension security in the period of years 2000 to 2006 it is realistic to consider the amount of 60 bill. SK.
    The framework for potential solution of deficits of the existing system:
  2. Financial assurance of system changes, by which the social insurance reform of the Slovak Republic will be implemented, as the only possible solution of solvency of the social sphere in the future.
The framework for potential resources of financing the system changes of the transition to the combined system of pension insurance financing:

Based on calculations executed in the framework of the approved Concept on the Social Insurance Reform in the SR, the scope of required financial resources of the transition to the combined system of pension insurance financing was determined at the amount of approximately 50 to 55 billion SK. At the observance of the current system of financing, which for the alternative conserving the existing social security scheme reaches a deficit at the amount of 1 289 billion SK until 2040. In case of the introduction of two-pillar pension insurance system in statutory insurance assets produced in Pillar II will reach the amount of 1 510 billion SK in 2040.

Comparison of the pension schemes in Slovakia and the Czech Republic

The pension scheme reports deficits in billions not only in Slovakia, but also in the Czech Republic. Since 1989 the real value of pensions has decreased in the two countries. In addition, their population grows old and the number of pensioners increases. Therefore the pension scheme of the Czech Republic and Slovakia are undergoing a reform. The two countries have agreed upon the need to increase the retirement age.

However, while in the Czech Republic the retirement age started to increase as early as in 1996, in Slovakia it will happen only in two years. In 2003 current financing of pensions (the young people work for pensions to the old ones) in Slovakia should gradually change to capitalization financing (everybody will deposit to his personal account a part of contributions). But in the Czech Republic they don´t plan this type of reform. The current system of payment of pensions, to which people can take supplementary pension policy since 1994, will function there also in the future. Slovensko has an advantage over its neighbor because it has a functioning tripartite Social Insurance Company to which the employees, employers and the Government pay premium. In the Czech Republic the separation of these funds from state budgets is only planned (it should enter into force from January 2003 provided that the Act is adopted in the parliament). On the other hand, the Social Insurance Company in the Slovak Republic has financial problems and to pay pensions it often has to transfer means from other funds.

The differences between the pension schemes in the Czech Republic and Slovakia:

Czech Republic Slovak Republic
Pension insurance in global environment
Supplementary pension insurance in the Czech Republic

The objective of the supplementary pension schemes in the Czech Republic is to allow citizens to build up over their active life financial reserves for to be drawn upon in the form of life pay of private pension as an addition to old-age pension from the basic (public) supplementary pension insurance scheme. Supplementary pension schemes thus at the same time relief pressures and demands on the basic pension insurance scheme paid from public funds.

There are currently in the Czech Republic two forms of retirement supplementary insurance:
  1. Commercial retirement insurance provided by commercial insurers
  2. Supplementary pension insurance effected by pension funds

The current forms of pension supplementary insurance in the Czech Republic are based on the competitive environment of pension funds and commercial insurance companies. To win a participant (insured), considerable funds are spent within business activities on promotion and dealer fees, and eventually these increased costs are paid by the insured. The insured share the profit on investing funds earned from payments by the participants in the pension supplementary insurance with state contribution and the premium paid by the insured of commercial insurers with the stockholders of a pension fund or a commercial insurer. In practice the majority of the profit is intended to the benefit of the insured, namely either under law-mandated rules (pension supplementary insurance) or under a decision of the shareholders´ General Meeting (commercial insurers). Neither the participants in the pension supplementary insurance scheme featuring state contributions nor the insured of commercial insurers have the possibility of affecting active management with their money (costs, investment), nor have they the possibility of efficient control.

Commercial pension insurance in the Czech Republic

The focus of the commercial pension insurance is particularly on higher-income citizens. Commercial insurers keep on record about 800,000 policies, but a bulk of them are Česká poisťovna´s old policies taken out under the company's pre-1989 financial conditions, which provide very low benefits. On the other hand, the pension insurance has developed highly dynamically since 1995 as part of the life insurance in new financial conditions, where higher benefits are commensurate with a higher premium as well.

The pension insurance is provided by commercial insurers within the life insurance scheme, which embraces in addition to the pension insurance also the capital one (ordinary life insurance, endowment assurance, whole life and endowment assurance, investment insurance). In 1999, the pension insurance was provided by eight insurance companies, with the biggest market share (82.8% in 1999) held by Česká poisťovna, followed by Nationale-Nederlanden life insurer with a 12.07% market share.

Unlike the contribution-defined pension schemes of the pension funds, the pension insurance is benefit-defined. The insured may choose the amount of the premium such that upon meeting the terms and conditions contained in the policy they can receive a pension in the specified amount or at a given amount of respective premium instalments, which the insured can afford in view of their income, the insurer sets the amount of the pension.

In advanced countries the commercial life insurance is a major part of the social security. The life insurance still grows in importance in the Czech Republic, too. Expectations are that the upward tendency will continue and that not only the capital insurance but also the pension commercial insurance will be making considerable contributions thereto, thus becoming a significant part of the so-called third pillar of the pension system.

Pension supplementary insurance with state contribution in the Czech Republic

The issues of the pension supplementary insurance are governed by Act of 1994 on the pension supplementary insurance with state contribution (amended in 1999). An amendment thereto passed in 1999 should motivate toward an extended long-term of savings and the required increase in average contributions.

The Act provides the underlying framework to the pension supplementary insurance with state contribution, which can be characterised with the following principles:
The focus of the pension supplementary insurance with state contribution is on citizens of all income brackets (minimum contribution amount is 100 CZK a month). It is aimed at securing old-age income through life old-age pension. Established in 1994, the scheme currently serves over 2 million persons. It is based on long-term payments during active life that produce a financial resource for life payout of old-age pension. Over the first five years, the system saw development and stabilisation, but lacks as yet the necessary long-term nature of savings.

The pension funds operating in the Czech Republic's territory are brought together in the Pension Funds Association, which is a voluntary interest association of corporate bodies (pension funds) and had its inception in 1996. As of the end of August 2001, the Association bring together 17 members following accomplished mergers, which are at the same time all of the pension funds active in the Czech financial market.

The future of the supplementary pension insurance in the Czech Republic

The employers supplementary pension insurance scheme, the legislative process of which is expected to kick off in 2002 and the Act effectiveness as from 1 January 2003, should become part of the supplementary pension insurance scheme in the Czech Republic. The employers supplementary pension insurance is to allow some of earning citizens to extend their possibility of voluntary supplementary old-age pension insurance, namely with support from their employers and the state. This scheme is grounded on the basic mandatory pension insurance governed by the Pension Insurance Act of 1995 and the super structured by the supplementary pension insurance with state contribution governed by the Supplementary Pension Insurance Act.

Employers pension funds give the opportunity to produce old-age savings with lower costs, as the cost of advertising and dealer's fees is dropped, the cost of instalment collection are minimum, and all investment profit is only intended for the participants. The so-called non-profit principle does not imply that an employers pension fund is not allowed to make profit, quite the opposite, it is set up for the purposes of making profit through business (by investing participants funds) and it must make profit, but profit is only intended for participants to produce resources to fund their additional pensions rather than for other persons such as stockholders or the employer. Participants are represented on management and supervision bodies of the employers pension fund and can actively influence the management of their funds.

Pension scheme in other countries

All European countries face the question as to how to fund their pension security or insurance. There are a number of reasons and all are related to the population ageing, economy globalisation, growing competition on the world markets and also rising unemployment. The number of pensioners is permanently rises, pensions are revalorised as a result of inflation, the number of those who pay into the system declines, and thus their overall tax burden increases. These trends will continue to develop unfavourably and Slovakia is no exception in this regard. A demographic crisis will occur in Europe around the year 2007 and in Slovakia few years on.

In advanced countries there is public saving in non-state pension funds. Pension funds are extremely popular in the world and while these are voluntary, nearly 90% of earners are saving through them in advanced nations. Given society-wide benefits of amassing long-term funds, saving in pension funds is often underpinned with extensive tax reliefs. The conditions for obtaining an annuity from a public fund are substantially less demanding as compared to those for obtaining a state pension (or even not limited at all by law), owing to which citizens may retire earlier and enjoy higher income.

The employers pension funds scheme is a long-lived scheme in the world, and a host of employers pension funds with large-scale companies and small employers alike are successfully run in European Union countries and other OECD (the US, Canada, Australia). Employers pension funds are frequently interlinked also within a sector and their interlink age even between European Union states can be anticipated in the future in particular on initiative of large multinational corporations. The employers supplementary pension insurance is a permanent part of corporate social schemes and on the part of the employer this is an expression of paying regard for future social needs of its employees. The employers supplementary pension insurance is run in parallel with other forms of pension supplementary insurance and thus enriches the offer for the population to secure old-age funds on own initiative, e.g. about 700,000 employers pension funds are currently run in the US. States support employers and employees initiative with tax reliefs and they watch through state supervision that such cumulated funds reach the employee as an addition to their old-age pension.

ERISA (Employee Retirement Income Security Act) is a Federal Act of 1974 laying down the conditions for running private pension plans. Thus it covers employer pension funds particularly popular in the United States. ERISA specifies under what conditions the employee can become a participant in his employer's pension fund, what right the survivors have to share after the participant's death, etc. However it mainly requests disclosure of information on pension funds, economic results and financial plans thereof; it requires a responsible approach by pension fund managers who are in charge of investing fiduciary moneys and gives the participants the right to bring an action against a fund in failure to comply with the agreed conditions.

ERISA thus does not the employer to set up a pension fund, it only cares of its transparent management such that the participants themselves have the opportunity to track developments of the fund they put their moneys in.

In the US, there are in general two types of pension funds, namely defined benefit plans and defined contribution plans. Defined benefit plans promise a pre-established sum of pension benefit. In these funds the amount of benefit depends on the conditions laid down in the plan. The conditions may calculate the benefit as a percentage of the annual pay, these can be provided as a monthly payment, or other measure may be used. In these funds pension benefits depend neither on the sum of the contribution, nor the investment realised. The employer is obliged to contribute a sufficient amount of moneys promised.

Unlike defined benefit plans, defined contribution plans do not promise in advance the pre-established sum of pension benefits, but in these funds the employee, the employer or both contribute to an individual account of the employee under the plan. These contributions are invested on behalf of the employee. Investment has a direct effect on the sum of the employee's pension. In these funds wrong financial management may mean a loss to some. To minimise the risk of making a loss and management of a pension fund, room is created for ERISA that takes care of transparent management of pension funds and allow the participants to track developments of the pension funds they put their moneys in.

The federal pension insurance grants protection to those participants in defined benefit plans if their pension plans ceased to exist without paying out promised benefits. Not all pension plans are protected by the federal insurance scheme. Even those plans that are insured in this scheme do not have a 100% coverage of benefits promised.


The basic legislative framework regulating the supplementary pension insurance scheme

The activity of supplementary pension insurers in the Slovak Republic is affected by the following legal rules:
Act No. 123/1996 Coll. on supplementary pension insurance of employees and on alteration and amendment to certain laws (amended by Act No. 409/2000 Coll.)
Income Tax Act No. 366/1999 Coll., as altered and amended
Collective Bargaining Act No. 2/1991 Coll., as altered and amended
Bankruptcy and Composition Act No. 328/1991 Coll., as altered and amended
Collective Investment Act No. 385/1999 Coll.
Accounting Act No. 563/1991 Coll., as altered and amended

Act on Supplementary Pension Insurance of Employees

The objective of supplementary pension insurance of employees is to allow the insured to receive a supplementary old-age or disability pension benefits or the survivors of the insured to receive a supplementary pension benefits in case of the insured death.

The supplementary pension insurance for purposes of law is the collection of contributions from employers and those from the insured, management of these funds and payout of supplementary pension insurance benefits.

The supplementary pension insurance under law is carried out by a supplementary pension insurer that is a corporate body. The establishment, activity and cessation of a supplementary pension insurer are covered by the Commercial Code, unless otherwise provided for by the Supplementary Pension Insurance Act.

Income Tax Act

The activity of a supplementary pension insurer is legislatively supported by the Income Tax Act as contributions paid by the employer for employees who are the insured are part of the employer´s cost of making, ensuring and maintaining revenues and contributions paid by the insured toward supplementary pension insurance are an item reducing the tax base. A 10% withholding tax is deducted by the insurer from the benefits provided from the supplementary pension insurance. A 15% withholding tax on proceeds on time deposit accounts, treasuries, deposit certificates and commercial company debentures applies in accordance with the Income Tax Act.

Collective Bargaining Act

The employer's and employee's participation in the supplementary pension insurance and the amount of the employer's contribution thereto can be agreed upon in a collective agreement.
The Collective Bargaining Act regulates bargaining between appropriate trade union bodies and employers, which is aimed to conclude a collective agreement.
Collective agreements regulate individual and collective relations between employers and employees and the rights and obligations of the parties thereto. Collective agreements are:
a) corporate made between the appropriate trade union body and the employer,
b) of higher-level made for a larger number of employers between the appropriate higher-level trade union body and
an organisation or organisations of employers.

Bankruptcy and Composition Act

The employer may terminate an employer's agreement if a petition for bankruptcy or a petition for composition has been presented under the Bankruptcy and Composition Act.
The purpose of the Bankruptcy and Composition Act is to settle property conditions of the debtor facing bankruptcy. The debtor faces bankruptcy if it has a number of creditors and is unable to perform its obligations 30 days following the due date. If the debtor faces bankruptcy, bankruptcy or composition proceedings can be instigated in the bankruptcy court with the aim of proportionally satisfying creditors from the debtor's assets.

Collective Investment Act

The depository of a supplementary pension insurer can be a bank or a foreign bank branch based in the Slovak Republic holding a licence to perform the function of the depository. Relevant provisions of the Collective Investment Act apply to the performance of the function of the depository for a supplementary pension insurer

Accounting Act

A supplementary pension insurer keeps accounts pursuant to the Accounting Act. It uses double entry bookkeeping, prepares a chart of accounts for the year and it may add new accounts thereto over the year. It must have its financial statements audited.


Basic conditions and rules for the establishment, functioning and cessation of supplementary pension insurers in the Slovak Republic

Establishment of a supplementary pension insurer

A supplementary pension insurer can be established by:
a) an employer, a number of employers or an organisation of employers,
b) a trade union organisation or a number of trade union organisations,
c) an employer, a number of employers or an organisation of employers with a trade union organisation or a number
of trade union organisations if based in the Slovak Republic's territory.
A licence is required to establish a supplementary pension insurer. The granting of a licence is decided by the Slovak Government following a written application by the founder at the proposal from the Slovak Ministry of Labour, Social Affairs and Family to be submitted on agreement with the Slovak Finance Ministry. A licence is granted for an indefinite period and cannot be assigned to another corporate body or natural person. Upon establishment of a supplementary pension insurer the founder will ask the Ministry of Labour, Social Affairs and Family to make an entry in the register of supplementary pension insurers run by it.

The founder is obliged to attach to the licence application
a) a draft charter,
b) a document saying that it employs at least 100,000 employees or a letter of intent demonstrating that the number
of employees of the founder and the employer with whom such letter has been made is at least 100,000 if the
founder employs less than 100,000 employees, or the founder is a trade union organisation or a number of trade
union organisations or an organisation of employers,
c) a letter of intent with a bank on the performance of the function for a supplementary pension insurer,
d) a draft benefit plan,
e) a draft statute,
f) a draft financial plan and a draft long-term financial plan,
g) an abstract of the criminal record, documents on education and experience received by Supervisory Board and Board of Directors nominees,
h) a document saying that it has a deposit of no less than 30 M SKK consigned in a bank in the Slovak Republic´s
territory to cover the cost associated with setting up the supplementary pension insurer and launching the
supplementary pension insurer (final deposit),
i) a statement on the origin of money making up the deposit.

Establishment of a supplementary pension insurer

A supplementary pension insurer is established on the day on which it is entered in the registered. Until the establishment of the supplementary pension insurer, the founder acts in matters related to its establishment. The founder is liable for obligations assumed by it until the establishment of the supplementary; if there are more founders, they are jointly and severally liable for them.

Participants in legal relations of the supplementary pension insurance

The participant in legal relations of the supplementary pension insurance is the employer, the insured, the beneficiary, and the supplementary pension insurer.

Each employee has the right to be the insured if he or she has satisfied the waiting period condition. The waiting period is a duration of employment or a similar work relation of the employee to the employer; this period cannot exceed three months.

The beneficiary is the insured or the survivor of the insured who has been designated by the insured in the employee's or insurance contract to be the survivor and who is provided by the supplementary pension insurer benefits thereunder.

An employer's contract is made by the employer with a supplementary pension insurer, an insurance contract is made by the insured with a supplementary pension insurer. The employer that has set up a supplementary pension insurer is obliged to enter into an employer's contract with this insurer.

Suspension of the participation in the supplementary pension insurance

Following agreement with the supplementary pension insurer, the insured may suspend his or her participation in the insurance under conditions to be specified by the benefit plan. The employer and the insured do not pay the supplementary pension insurer contributions during the suspension of the insured participation in the supplementary pension insurance.

Cessation of the participation in the supplementary pension insurance
The employer's participation in the supplementary pension insurance ceases by termination of the employer's contract, denouncement of the employer's contract, cessation of the supplementary pension insurer. The employer may terminate the employer's contract if
a) a petition for bankruptcy or composition under a special regulation (Bankruptcy and Composition Act) has been presented against it,
b) it is unable due to its insolvency to pay the supplementary pension insurer over six months contributions for its employees and the supplementary pension insurer has not approved it a delay in paying contributions.

The employer may terminate the employer's contract following discussion with the appropriate trade union body or authorised representatives of employees. The period of notice is 12 months starting the first day of the calendar month subsequent to delivery of notice to the supplementary pension insurer.

The insured may terminate the employee's contract and the insurance contract. The period of notice is three months starting the first day of the calendar month subsequent to delivery of notice to the supplementary pension insurer, unless otherwise agreed in these contracts.

The beneficiary's participation in the supplementary pension insurance ceases by paying out redundancy payment, lump-sum settlement or completion of payout of supplementary pension; cessation of the supplementary pension insurer; death.

Benefit plan

The benefit plan regulates in particular the waiting period, types of benefits, the conditions for entitlement to benefits, the method of calculation and payout of benefits, the method of setting the amount of the insured contribution, the method of payment and transfer of contributions, etc.

The supplementary pension insurer develops a benefit plan with defined contributions where the amount of supplementary pension depends on the sum of contributions paid to the insured account, the insured share of proceeds on management of the supplementary pension insurer, and the age since which the supplementary pension is provided. The benefit plan, alterations or amendments thereto must be approved by the Ministry of Labour, Social Affairs and Family.

Statute

The statute contains in particular the name, registered office, line of business, organisational arrangement, the principles for supplementary pension insurer management, including the way of election and recall of Board of Directors and Supervisory Board members, their term of office, delineation of their domain and the rules for voting, the way of participation by the employer, the insured and the beneficiaries on supplementary pension insurer bodies, trade name and registered office of the bank performing the function of the depository, and the like.

The statute, alterations and amendments thereto must be approved by the Ministry of Labour, Social Affairs and Family that will decide on approval following agreement with the Finance Ministry. Modifications induced by a change in the registered office of the supplementary pension insurer, a change in the name, surname or permanent residence of Board of Directors and Supervisory Board members, and a change in the registered office of the bank performing the function of the depository do not subject to approval.

Financial plan and long-term financial plan

The financial plan and the long-term financial plan contain
a) revenues of the supplementary pension insurer commensurate with the expected number of the insured; the expected amount of contributions by the employer and contributions by the insured; the expected proceeds on supplementary pension insurer management,
b) expenses (costs) of the supplementary pension insurer,
c) the focus, way and extent of use of moneys as investments,
d) the amount of the reserve fund.

The supplementary pension insurer develops a financial plan for one calendar year and long-term financial plan for five calendar years that are submitted by the state supervision body following approval by the Board of Directors.

Claims from the supplementary pension insurance

The following benefits are provided from the supplementary pension insurance: supplementary old-age pension; retirement pension for the insured carrying out work included under a decision by the relevant health protection authority issued pursuant to a special regulation (Human Health Protection Act, as altered and amended) in Category 3 or 4; lump-sum settlement; redundancy payment.

Supplementary pension insurer bodies

The supplementary pension insurer sets up itself the following bodies:
a) the Board of Directors,
b) the Supervisory Board,
c) other bodies if so specified by the statute.

The Board of Directors is the supreme body of the supplementary pension insurer and statutory body of the supplementary pension insurer. The Board of Directors manages the supplementary pension insurer activity. The Supervisory Board is a supervisory and audit body of the supplementary pension insurer.

Management of the supplementary pension insurer

The supplementary pension insurer manages property consisting of its revenues and property used by it under a special regulation (§ 659 and 663 of the Civil Code). Contributions by employers and contributions by the insured are not the supplementary pension insurer property.

The supplementary pension insurer is obliged to distribute income for reserve fund formation and in favour of the insured and beneficiaries.

The depository keeps for the supplementary pension insurer one current account in the established currency through which must pass all payments and transfers of moneys that the supplementary pension insurer manages.

Depository

The depository of the supplementary pension insurer may only a bank or a foreign bank branch based in the Slovak Republic that holds a licence to perform the function of the depository under a special regulation and is not under receivership.

The supplementary pension insurer is obliged to deposit and keep moneys in a single current account and deposit all documentary securities with its depository.

If the supplementary pension issuer is set up by the employer that is a bank, it cannot perform the function of the depository for the supplementary pension insurer.

A change in the depository must be approved by the Ministry of Labour, Social Affairs and Family following agreement with the Finance Ministry.

Revenues of the supplementary pension insurer

Revenues (proceeds) of the supplementary pension insurer are in particular
a) contributions by employers,
b) contributions by the insured,
c) proceeds on management of the supplementary pension insurer,
d) revenues received from sanctions for default on obligations set out in §37 therein,
e) contributions including on management of the supplementary pension insurer that have been transferred from another supplementary pension insurer,
f) donations and succession.

Expenses of the supplementary pension insurer

Expenses (costs) of the supplementary pension insurer are:
a) payout of benefits,
b) cost of administration,
c) expenses to secure rights of the insured and claims of beneficiaries,
d) expenses of investment procurement,
e) contributions including proceeds on management of the supplementary pension insurer that have been transferred to another supplementary pension insurer.

The amount of the cost of administration of the appropriate calendar year over the period of two years from the establishment of the supplementary pension insurer is decided by the Board of Directors. The amount of the cost of administration in the appropriate year upon expiry of two years cannot exceed 6% and upon expiry of five years 3% of revenues of the supplementary pension insurer set out under subparagraphs a) through e).

The monthly balance of moneys of the supplementary pension insurer to satisfy the rights of the insured resulting from their participation in the insurance cannot fall below the sum needed to ensure three-month payout of already alloted benefits and benefits to be allotted for the expected number of the insured over the next three months of the current year.

The supplementary pension insurer forms a reserve fund to cover unexpected fluctuations in drawing on benefits and satisfaction of the rights of the insured resulting from their participation in the supplementary pension insurance. The reserve fund is formed from the supplementary pension insurer income in the amount of 2.5% annually. Furthermore, the reserve fund is also formed from contributions paid to the supplementary pension insurer by the employer for the insured to whom a redundancy payment was made. The use of the reserve fund is decided by the Board of Directors.

Focus, way and extent of use of moneys as investments

The supplementary pension insurer may place moneys in a bank other than the depository such that the value of the deposit in one bank increased by the par value of purchased deposit certificates or debentures issued by this bank does not exceed 40% of the bank's share capital and does not exceed 25% of the value of assets which the supplementary pension insurer has the right to manage.

The supplementary pension insurer may invest moneys in:

a) securities
1. treasuries, bills of credit and Slovak National Property Fund bonds,
2. debentures admitted to the primary market of the stock exchange up to 20% of the value of assets which the supplementary pension insurer has the right to manage,
3. shares and participating certificates of closed-end unit trusts admitted to public trading on the primary market of the stock exchange as well as participating certificates of open-end unit trusts irrespective whether they are publicly trade able, up to 20% of the value of assets which the supplementary pension insurer has the right to manage,
b) foreign securities traded on the primary market of the domestic stock exchange or a foreign stock exchange up to 15% of the value of assets which the supplementary pension insurer has the right to manage,
c) real estate for which there is a prerequisite for constant proceeds up to 10% of the value of assets which the supplementary pension insurer has the right to manage.

Assets managed by the supplementary pension insurer can be no more than 10% of the total par value of securities issued by the same issuer save the securities referred to under subparagraphs a)(1).

The supplementary pension insurer cannot invest moneys in the shares of its depository and the shares of a securities trader, if the latter performs securities administration for the supplementary pension insurer.

The supplementary pension insurer is obliged in selling securities or foreign securities from or to assets which it has the right to manage or in buying securities or foreign securities to sell or buy such securities for as advantageous price as can be achieved in favour of the insured and beneficiaries, no less than the exchange rate of the security for which it was traded on the day of sale or purchase on the stock exchange or a similar securities market.

If the supplementary pension insurer has exceeded the amount of unit trusts in respective types of investment because of the exercise of its options and pre-emption, changes in securities exchange rates and changes in real appraisal, it is obliged to remedy this within six months from the day of excess of the unit trusts.

The supplementary pension insurer cannot issue bonds.

The property, which the supplementary pension insurer has the right to manage, cannot be provided as donations, monetary loans or credits, nor secure the obligations of other natural persons or corporate bodies.

Payment of contributions

Contributions are paid to the supplementary pension insurer toward the supplementary pension insurance. Contributions are paid by:
a) the employer for its employees who are the insured if the former has entered into an employer's contract,
b) the employer who has not entered into an employer's contract and a special obligation applies to it (if the insured carries out work included under a decision by the appropriate health authority in Category 3 or 4), the employer is obliged to pay a supplementary pension insurance contribution in the amount agreed to in a collective agreement, no less than 2% of the insured accounted pay)
c) the insured.

The amount of the employer's contribution will be established by the employer's contract and the employee's and insurance contract will establish the amount of the insured contribution.

Contributions paid by the employer for employees who are the insured are up to 3% of an aggregate of accounted pays of the insured part of the employer's cost of making, ensuring and maintaining revenues under a special regulation (§ 24 of Income Tax Act No. 366/1999 Coll. within the meaning of Act No. 358/2000 Coll.).

Contributions paid by the employer for employees who are the insured and carry out work included under a decision by the appropriate health protection authority in Category 3 or 4 are up to 6% of an aggregate of accounted pays of the insured part of the employer's cost of making, ensuring and maintaining revenues under a special regulation (§ 24 of Income Tax Act No. 366/1999 Coll. within the meaning of Act No. 358/2000 Coll.).

Contributions paid by the insured toward the supplementary pension insurance are an item to be deducted from the base of his or her tax.

An employer who has failed to enter with the supplementary pension insurer into an employer's contract is obliged to enter with an employee, who has made with the supplementary pension insurer an employee's contract, into an agreement for payroll deductions and the method of payment and transfer of the supplementary pension insurer contribution under conditions to be agreed to with the supplementary pension insurer in the employee's contract.

Record-keeping and accounting

The supplementary pension insurer is obliged to permanently keep track separately of the state of contribution paid by the insured, separately of the state of contributions paid by the employer, separately of the state of the insured shares of proceeds on management of the supplementary pension insurer, and separately of the state of the employer's shares of proceeds on management of the supplementary pension insurer.

The supplementary pension insurer must have financial statements audited and is obliged to keep accounts under a special regulation (Accounting Act No. 563/1999 Coll., as altered and amended).

Supervision of the supplementary pension insurer activity

The state carries out the supervision of the activity of the supplementary pension insurer through state supervisory authorities, which are the Ministry of Labour, Social Affairs and Family and the Finance Ministry.

Cessation of a supplementary pension insurer

A supplementary pension insurer ceases on the day of erasure from the register. The cessation of the supplementary pension insurer is preceded by its dissolution.

A supplementary pension insurer is dissolved by

a) a Board of Directors decision on
1. amalgamation of the insurer with another supplementary pension insurer,
2. merger of two or more supplementary pension insurers,
3. division of the supplementary pension insurer into two or more supplementary pension insurers
b) a Board of Directors on the supplementary pension insurer dissolution on grounds other than those set out in subparagraph a)
c) a Ministry decision on the withdrawal of a licence on grounds set out in § 45(6) therein

The dissolution of a supplementary pension insurer under the previous subparagraphs a) and b) takes approval by the Slovak Ministry of Labour, Social Affairs and Family to be decided thereupon following agreement with the Slovak Finance Ministry, and in the case set out in the previous subparagraph (a)(1) and (2) also following agreement with the Slovak Anti-Monopoly Office.


Competitive environment

Competition of supplementary pension insurers in the Slovak Republic from administrators

Collective investment and unit trusts

For the general public the most common form of appreciation of funds is their interest bearing on current accounts, passbooks and a variety of types of time deposits in banks providing, on the one hand, a high degree of safety of funds deposited and low proceeds, on the other. As compared to it, while investment in securities offers high proceeds, this involves certain risks of loss, the higher proceeds, the higher risk. It is somewhere halfway through between these two ways of appreciating funds, combining the requirement for investment safety and high proceeds, that the idea of collective investment was developed, spurring the establishment of administrators and unit trusts.

Unit trusts, which are not brand-new in Slovakia, constitute a special form of collective investment based on accumulation of moneys with the aim of investing them in property on the basis of risk restriction and distribution in a law-mandated manner. A unit trust is an entity with no legal subjectivity operating at an administrator as its accounting-organisational unit. This represents partakers´ property of that depends on the value of issued and returned participating certificates. A participating certificate is a security that represents parts, which the property is divided into. It is linked with the partaker's right to an appropriate property part.

The so-called minimum entry investment ranging from 5,000 SKK up to 100,000 SKK is required to invest in unit trusts, with administrators with lower entry investment dominating the market. It is through low entry investment that the investment in unit trusts becomes more available to the general public. By opening the Savings Programme the placement of the minimum entry investment can be circumvented, and this Programme also provides a discount on entry fees in long-term saving. The essence of the Savings Programme is instalments at regular intervals (monthly) whereby the required sum will be saved. As the minimum volume of the standard investment might pose too high an amount to somebody, the Savings Programme is an ideal way of obtaining initial experience with investment products.

Advantages of unit trusts

Investment - saving through unit trusts implies a multitude of advantages, namely in particular:
A state supervisory authority performs the state supervision, which is the Slovak Finance Ministry. The activity carried out by administrators; foreign administrators; administrator founders; Board of Directors, Supervisory Board members and confidential clerks of an administrator; shareholders of administrators having an interest in share capital over 10%; persons procuring issue and payout of participating certificates; the depository, the receiver, the trustee is subject to the state supervision.

Legislation

As of January 1, 2000, a new Collective Investment Act took effect, bringing about several principal changes in business by administrators.

The most important primary provision of the new Act was the company duty of applying with the competent state authority for a licence to establish and run an administrator and for a change in statutes of administered unit trusts until June 30, 2000, from which resulted a lot stringent conditions in administering unit trusts.

Another change concerns the way of the depository reward for the performance of his/her activity while administering property in unit trusts, adjustment to the limits of risk restriction and distribution, modification in appraisal of property in unit trusts. Considerable changes occurred in the activity of the depository who has been given thereunder more extensive competencies.

The method of calculation of the fee for administration has not escaped an amendment either, where the original two options have been reduced such that the fee for administration is calculated from the average net value of the unit trust property. A special rate is applicable for both open-end and closed-end unit trusts.

The implementation of the EU Collective Investment Directive brought about a reduction in the duration of closure of closed-end unit trusts by cutting it to 10 years and in existing trusts by the year 2009.

Collective investment market in the Slovak Republic

A marked fall in interest rates over the last two years has resulted in increased attractiveness of other forms of investing savings. Time deposits are currently no longer as dominant in the structure of public savings as they were at times of two-digit interest rates. This has also manifested itself in the volume of invested funds in open-end unit trusts, which markedly rose in 2000 and topped 6 billion SKK.

Also administrators are aware of the market high potential and thus the number of available participating certificates in the Slovak Republic is on the rise. In addition to domestic companies, also high-profile foreign unit trusts such as KBC, WIOF or Veritas have established their presence in the market. Slovakia's largest administrator in terms of the volume of property administered is Prvá Penzijná správcovská spoločnosť, a.s. In its open-end and closed-end funds it administers over 2.915 billion SKK worth property. This results particularly from the company's early entry in the market.

In the medium term high dynamism in the volume of funds administered can be expected (in advanced countries investments in unit trusts make up several tens of percent of total savings). As the horizon for investment in unit trusts is medium to long term, their market presence is competition to supplementary pension insurers in terms of gaining savings.

Competition to supplementary pension insurers in the Slovak Republic from non-licensed entities

Non-licensed (non-bank) entities can be divided by the way of their business into several groups:
  1. Non-bank entities that need to fund their own business represented by: 1. garantovaná, a.s., Drukos - výnos, Družstvo BDV, Združenie Vaša vlna privatizácie, BMG Invest, MCS - Marketing and Consulting Services, Dexteruty Financial

    1. garantovaná, a.s., receives resources by selling its shares and at the same time 1. dôchodková, a.s., enters with shareholders into an agreement for futures for these shares. The money is used for different businesses, e.g. purchase of majority stakes. 1. garantovaná´s shares are not publicly trade able. In advanced economies firms acquiring capital through public offering for share subscription must comply with stringent information obligations and are under the Securities Commission's supervision. Despite the misleading name (in certain cases) non-licensed entities has nothing to do with providing pensions for the population.
  2. Non-bank entities offering services on the financial market mainly grant credits (usually at a very high interest - 4% monthly) or leasing and at the same time purchase resources with the population, seeking profit on interest margin.

    Representatives: SaS, Delta Management Košice, Družstvo vzájomnej pomoci, General Invest Company, Investa Leasing Slovakia, Goldfin Invest, AGW, Horizont Slovakia
  3. Firms offering gaining funds, e.g. through silent partnership, bank loan and accepting for this an upfront commission from businessmen Representatives: Boston Credit, JP-Seven, PK Euromarket
  4. Others on which data is not available

So far, the non-licensed have collected from the public 12 billion SKK or so, with citizens having lost irrevocably nearly 4 billion SKK. This activity has been carried out to date by more than 50 entities, of which no less than 13 are currently operating with the average period of activity of about 3.5 years. The average life of non-bank entities is about 4 years (source: web site of the Trust Companies Association).

There is currently no control over the activity of non-licensed entities. Even if there is suspicion, the state supervision cannot be applied with these non-licensed persons. However as from January 1, 2001 a change is anticipated in this area, and even persons who have been pursuing without licence the activity, which only a trust company is entitled to, should be made subject to the state supervision.

Advantages of the supplementary pension insurance in comparison with the life insurance at a commercial insurer or passbook savings
The supplementary pension insurance thus in terms of control mechanisms fixed by law, tax allowances, its construction, where a part of a benefit is paid by the employer, and particularly by the nature of the supplementary insurance as a non-profit activity enjoys a strong advantage over other competitors that are also engaged with appreciation of depositors´ funds.

Summary:

The current demographic developments - falling birth rate in parallel with the extending life span - general ageing of the population. This phenomenon already today gives rise to an alarming decline in the pension scheme contributors to pension beneficiaries ratio, which inevitably leads to a deepening deficit of the basic pension insurance fund. Slovakians social security scheme finds itself in a crisis. The current scheme is expensive, non-motivating and unjust. First of all the pension insurance scheme will become insolvent over the next years and will be unable to provide legally stipulated citizens´ entitlements.

The rule is widely recognised in the world that the pension scheme approaches a crisis where the contributors to beneficiaries ratio will fall below 2:1. In Slovakia, the ratio tumbled below the aforesaid limit as early as the mid-1990´s, and based on Slovak Statistical Office data it can be estimated to stand today below the 1.5:1 level. The present average pension fails to be up to 40% of the average pay and even the government's upbeat outlook expects the average pension to fall over the next decade below a third of the average pay.

The unfavourable situation concerning citizens´ pension insurance calls for pension scheme reform. Upon analysis of similar reform action in neighbouring countries, a considerable shift in the retirement age limit (already passed by Parliament), limitation on the concurrence of a number of pension types, and making available the conditions for entitlement to certain pension insurance benefits are expected to be part of Slovakia's reform as well. Even after a successful reform, however, the state-run pension insurance scheme will be able to provide citizens with average pension at the level of no more than 50% or so of the average pay.

Average pensions of citizens in advanced countries commonly reach up to about 70% of the income they had in their active life. This is the case because in advanced nations the population save under non-state pension plans whose principle is based on regular saving of smaller financial amounts that are long-term accrued and up valued on the issued account. When the insured elects to retire, a pension plan calculates the current state of the insured account from which he or she will be paid over a certain period or for life a pension annuity. The Slovak equivalent to pension plans is the supplementary pension insurance.


C) DESCRIPTION OF THE SUPPLEMENTARY PENSION INSURER MATKET ENVIRONMENT

Four supplementary pension insurers are currently active on the Slovak market:

N.B.:
Pokoj DDP had operated until February 7, 2001 under the name DDP Horizont, at which time under approval by the Slovak Ministry of Labour, Social Affairs and Family of February 7, 2001 the insurer name was changed from DDP Horizont to Pokoj DDP.

In September 2001, Danubia Holding applied for a licence, with Slovenská sporiteľňa poised to be the depository of the new supplementary pension insurer. Though several more companies, which are acting also abroad in pension schemes, are interested in the market.

Trends in the number of employee and employer contracts

The largest supplementary pension insurance market share continues to be held by Prvá doplnková dôchodková poisťovňa Tatry-Sympatia whose market share as of the end of 2000 was 60 %. This is the first insurer of this type in Slovakia and this is reflected in financial and non-financial results of the insurer. Prvá DDP Tatry-Sympatia rounded out the year 2000 with over 105,000 insured, nearly 21,000 insured up from 1999.

DDP Stabilita posted a somewhat higher increase in the insured as of the end of 2000 over 1999, with the number of the insured rising 21,320 year-on-year. DDP Lipa saw the number of its insured rise less than 10,000 despite that the insurer took up its activity 1999 as the last from among the four supplementary pension insurers. The least increase in new insured year-on-year (less than 2,500) was recorded by Pokoj DDP.

Also as regards the total number of employer's contracts entered into, Prvá DDP Tatry-Sympatia ranks first, with the number of potential insured reaching 300,000. During 2000, the insurer at the same time made also the most employer´s contracts from among the four supplementary pension insurers.

DDP Lipa comes second in terms of the number of employer contracts made for 2000 that saw the number up soar a massive 327% during 2000. The final number of employer contracts came to 331, leaving the insurer in third position as goes the total number of employer's contracts.

DDP Stabilita entered into 217 employer contracts in 2000, which is more than over the previous two years on aggregate. Thus the total number of employer's contracts grew to nearly 400 and employer potential hit the mark of 150,000. The insurer ranks third among the aforementioned four supplementary pension insurers.

The total number of employers having a signed employer's contract with Pokoj DDP came to 158 as of the end of 2000, which represented 49,118 potential insured. Over 2000, Pokoj DDP entered into 62 employer's contracts, which is the least among the four supplementary pension insurers.

The numbers of employee and employer's contracts made in 2000 and in total since the time of the insurer foundation are given in the table below:

The oldest Prvá DDP Tatry-Sympatia had the most insured at the end of September of 2001, up approximately 38,000 from the start of that year, which is more than last year's round-year increase. DDP Stabilita grew over the nine months of 2001 over 15,000 new accounts. The number of the insured with DDP Lipa rose roughly 8,000, and in case DDP this almost doubled.

Comparison of the number of the insured as of the end of 2001 and as of the end of 3Q 2001 is shown in the charts below:

Age pattern of the insurance portfolio

The age pattern of the insured documents as to which age bracket shows the most interest in the supplementary pension insurance. All age brackets of earners are represented among the insured of respective supplementary pension insurers. Those aged 41 up to 50 are aware most urgently of the need to deal with their financial position at the pension age, therefore this age bracket is also most strongly represented on the pattern of the insured with supplementary pension insurers. This fact also affects the average age of the insurance portfolio, which is the lowest at DDP Stabilita from among three insurers (this data for DDP Lipa is not available) and the highest at Prvá DDP Tatry-Sympatia.

Age pattern of the insured as of the end of 2000 is shown in the table below:


State of property and liabilities of supplementary pension insurers

Assets of insurers, accounted in property, are generated from resources coming from contributions by employers and employees and revenues on management of this property. The highest book value of administered property as of the end of 2000 was posted by Prvá DDP Tatry-Sympatia whose book value topped 2 billion SKK. Almost 63% of its assets are made up of financial investments, which we judge positively, as received funds from the insured and employers are long-term invested, the most in treasuries. We deem also the share of financial investments (52% of the book value) of DDP Stabilita to be favourable, and the insurer as of the end of 2000 held in its portfolio SKK and EUR denominated treasury securities, BACA securities, and Slovenská sporiteľňa securities. The least financial investment to book value ratio (less than 21%) was posted by Pokoj DDP, which keeps on record treasury securities in its financial investments, and by DDP Lipa (less than 22%). The two insurers however show a relatively high financial assets to book value ratio, which was with DDP Lipa almost 55%, and with Pokoj DDP it was nearly 72%.

Structure of assets for 2000 is shown in the table below (in ´000s SKK):

In appreciation of assets of the insured and other temporarily free funds, the insurers make use of various financial instruments. The method and extent of investment of funds depend on restrictions set out by the Act on Supplementary Pension Insurance of Employees. The insurers place the emphasis on assets appreciation so as not to jeopardise the rights of the insured and the entitlements of the beneficiaries. Until 2000, there had been no restrictions on the investment in the employer's businesses and the granting of loans. Pursuant to an amendment to the Act effective as from 2001 the supplementary pension insurer cannot invest in a business with which it has concluded an employer's contract, cannot invest in the shares of its depository, and in the shares of a securities trader, if the latter carries out for the insurer the administration of securities. The amendment has at the same time extended the possibilities of investing in foreign securities. The property cannot be provided as donations, monetary loans or credits, nor secure the obligations of other natural persons or corporate bodies.

The structure of the investment portfolio for Prvá DDP Tatry-Sympatia suggests that the most funds was placed in more conservative, in our opinion less risky financial instruments, such as treasuries, time deposits and deposit certificates of banks and Slovak National Property Fund bonds. A structure of the investment portfolio indicates that the insurer diversifies the risk in allocating the property it manages. Nevertheless, Prvá DDP Tatry-Sympatia formed in 2000 an adjusting entry on financial investments totalling 10 M SKK intended to mitigate a possible impact by failure to pay the liabilities arising out of the placement of moneys.

The structure of DDP Lipa yield assets also indicates that this insurer places funds so as to minimise risks of their return. On the other hand, the placement of such high a share in deposit accounts may entail a low risk diversification.

DDP Stabilita has also its investment portfolio diversified and nearly all funds have been invested in less risky investments such as treasuries, deposit certificates and time deposit. The insurer keeps on record none loans granted to third parties.

Structure of DDP Stability investment portfolio as of December 31, 2000

Pokoj DDP only keeps on record securities in its financial investments. The insurer keeps on record largely time deposits with the depository in the short-term financial property.

Structure of assets for 2000 is shown in the table below (in ´000s SKK):

Unlike other entities, supplementary pension insurers have no share capital. Shareholder's equity consists of retained earnings accounts, income (loss) from previous years, and income (loss) from current period. While assessing the amount of shareholder's equity with the four supplementary pension insurers, it can be stated that the unfavourable, thus negative, value of shareholder's equity is shown by DDP Lipa and Pokoj DDP due to the posted loss from previous years. The two insurers made a loss on management also as of the end of 2000 and will not even form the statutory reserve fund, as this is formed from income in the amount 2.5% annually. Prvá DDP Tatry-Sympatia shows as of the end of 2000 a 4.16% contribution of shareholder's equity to the book value, and DDP Stabilita shows a somewhat higher percentage contribution of shareholder's equity to the book value (6.14%), but its absolute value is lower.

The structure of total liabilities, debt and obligations of each of the supplementary pension insurers is dominated by long-term obligations that comprise particularly obligations toward DDP insurers and will be due and payable at the time of meeting the conditions for payout of benefits set out in the benefit plan of each insurer. The volume of long-term obligations of respective supplementary pension insurers suggests that the most obligations is kept on record by Prvá DDP Tatry-Sympatia, which also has the most insured. The least long-term obligations (obligations toward the insured as of the end of 2000 totalled nearly 121 M SKK) is recorded by DDP Lipa, even of it ranks third among the four insurers as to the number of the insured. From the nature of long-term obligations they cannot be viewed as classical obligations increasing the insurer indebtedness.

Revenues, expenses and income (loss)

Insurer revenues are produced particularly from yield interest on time deposit accounts, capital yield (difference between par value and lower purchase price of securities), from interest on investment, aliquot interest yield on treasuries and cleared doubtful items on interest revenues of respective types of investment.

Structure of revenues of the supplementary pension insurers in 2000 is shown in the table below (in ´000s SKK):

The supplementary pension insurers manage assets in line with the approved investment strategy. On the one hand, each insurer looks to make maximum revenues from assets appreciation and, on the other, the rate of assets appreciation depends on interest rate developments on the Slovak money market. The supplementary pension insurers achieved as of the end of 2000 the following average rate of assets appreciation:


Source: TREND TOP 2001

Average rate of assets appreciation

The insurers account cost and expense items in accordance with effective accounting procedures and in line with Guidance from the Slovak Ministry of Labour, Social Affairs and Family of October 31, 2000 laying down as to what expense and cost are part of the cost of administration and what do not affect the limit established therefor. The amount of the cost of administration in the relevant year is limited by the Act on the Supplementary Pension Insurance of Employees, upon expiry of two years it cannot exceed 6% and upon expiry of five years 3% of the supplementary pension insurer revenues specified by the Act. This cost is reported in the operational area.

Most costs are incurred by the insurer in financial operations, namely in connection with the cost of procured securities and deposits, the cost of the performance of activities under contracts entered into, the cost relating to the keeping the insurer assets account, etc.

Costs for 2000:

Prvá DDP Tatry-Sympatia incurred for 2000 the cost of administration totalling 56.7 M SKK, while DDP Stabilita saw its administration expenses come to 18 M SKK over 2000. Pokoj DDP had administration expenses running at 18.5 M SKK, however upon inclusion of the insurer's total cost of administration went up to nearly 49 M SKK, which was caused to a crucial extent by the full depreciation of expenses of almost 28 M SKK in order for them not to burden the insurer's management in the years to come.

Income (loss) for 2000:

The above table suggests that the supplementary pension insurers unlike non-financial businesses entities make profit in the financial rather than operational area, which results from the character of their activity that is to collect funds of the employers and the insured and appreciation of their property. In the operational area they only report cost items, in particular the cost of administration. Just two supplementary pension insurers of the four are profit-making.

The current information on the supplementary pension insurance in the Slovak Republic

Over 252,000 insured were involved in the supplementary pension insurance scheme at the end of 3Q 2001, which is approximately 12% of earners. This represents a 4% or nearly 70,000 new accounts increase on the end of last year. At the end of September 2000, the supplementary pension insurers administered 4.7 billion SKK, up 1.5 billion SKK from the end of last year. The investment in the supplementary pension insurers is affected by strict rules and the lack of high-quality investment opportunities. A supplementary pension insurer cannot invest in a business with which it has an employer's contract.

Even despite that this year's increase in new insured is higher than that last year, these developments are merely to a low extent the result of market easement. Growth dynamism in this segment (customers who still could not take out an insurance last year) is not thus marked. In particular the industry sphere has mobilised. The reason for such developments is that where a firm has none contract with a supplementary pension insurer, an employer's contribution is missing too, which is one of the principal advantages of the supplementary pension insurance. A tax allowance is not sufficiently motivating.

From the beginning of this year the amendment to the Supplementary Pension Insurance Act is in force, making it possible to enter the scheme even for those citizens whose employer does not have a contract with some of the insurers. It was expected of this measure that employees of budgetary and subsidised organisations and tradesmen would show increased interest in this type of pension insurance. The original supplementary pension scheme looked to make firms take care of their employees. The makers of the Act did not anticipate such dramatic a decline in Slovakia's businesses management and that this insurance for tax reliefs would only meet low interest by the employers, which finally led to its easement. In addition, the state has imposed as from this year the lower limit for the possibility of lowering the tax base for participants in the supplementary pension insurance to 10% of the annual income, no more than 24,000 SKK a year. Even though there has been no such restraint thus far, it should not have a grave influence, since the average contributions by employees is not even half of this sum. The average monthly contribution is currently less than 900 SKK, with the employee's and employer's contribution being almost identical. A positive change brought about by the amendment is lowering the tax burden on benefits from 15% to 10%.

Supplementary pension insurers after the first half of 2001:

Conclusion:

The supplementary pension insurers are non-profit entities appreciating funds of the insured and all income is redistributed to the benefits of their accounts. The pension insurance scheme is to motivate not only the insured but also the employers, therefore even the employer may contribute to the pension insurance of the insured. This means that an insurer also appreciates the contributions by the employers, but it distributes the appropriate share of revenues to the benefit of the insured. In order to make this form of investment more attractive, the state grants the insured and employers tax reliefs and preferences.

The ongoing reform of Slovakia's social security can be regarded as an uncertainty of the external environment. The hitherto steps do not clearly suggest as yet whether the supplementary pension insurers will be performing the second, mandatory capitalisation pillar or the third, supplementary pillar of the pension insurance, which is bound to affect the potential market of the insured of Slovakia's supplementary pension insurers.

The supplementary pension insurers have certain reserves on area-wide, insufficiently making use of these law-fixed features. However it should be noted that these campaigns represent high financial expense which the insurer does not have legal ways of funding, and therefore the founder's or administrator's company would have to bear some of the expense.