Title: The future of private pension systems in South East Europe
1The future of private pension systems in South
East Europe
- Violeta Ciurel
- General Manager European International Affairs
ING Group - South Eastern European Forum - 15 May 2007
2The main pension issues worldwide
- State pensions
- PAYG state pensions no longer affordable with
current and future demographics - In many countries pension provision relies solely
or mostly on the government - Employer/employee pension plans
- Defined benefit arrangements under financial
pressure - Many employer/employee pension plans are un- or
under-funded - Low retirement age in many countries exerts
financial pressure and hampers labour
participation - Often no portability of vested rights
- Personal pensions
- Lack of tax incentives
- Still not affordable to large segments of
population in many countries
3People enjoy pension over longer period of time
- Number of years in retirement has increased
substantially and will continue to increase - People play much more active role in retirement
- After retirement they expect to continue their
standard of living
Life expectancy at retirement (set at 62 years)
Life expectancy at birth
Source United Nations
4General starting points for a balanced pension
system
- Starting point ambition that total pension needs
to replace at least - 50 of earned income (percentage dependent on
local situation)
- Voluntary private pension accounts
- Life insurance
- Mutual funds
- Other savings instruments
Private arrangements
Employer/employee arrangements
- Mandatory pension accounts
- Voluntary pension accounts, NSPF
- DB, DC or combination of both
- Group Life insurance
Basic (state) pension
- Basis of pension provision
- Social safety net
- PAYGO, Notional accounts
5Pension reforms in New EU members 3 groups
- Poland, Hungary, Slovakia, Estonia, Latvia,
Lithuania, Bulgaria, Romania - In Lithuania a voluntary pillar is financed from
public 1st pillar contributions -
- Radical reform resulting in 3-pillar system and
reduction of public pensions in favour of funded
mandatory individual accounts
- Modernize current system by encouraging voluntary
private pensions and keeping the first pillar
intact as much as possible
Czech Republic, Slovenia
Cyprus, Malta
Quasi-mono pillar systems. In Malta, 3rd pillar
will be developed. Cyprus has provident funds as
supplementary pensions
6Main pension differences between Old and New EU
Members
- Old Member States
- Supplementary pensions
- Mainly organized by non-profit organizations
- Social partners play important role
- Mainly DB pension plans
- Closed funds
- Numerous large and small
- providers
- New Member States
- Supplementary pensions
- Mainly arranged by financial services providers
- No role for social partners
- Mainly DC pension plans
- Open funds
- Concentration towards limited
- number of providers
Main difference in approach Collective
risk-sharing in OMS vs individual responsibility
in NMS
7Romania is making major steps forward this year
- Voluntary pension funds as of 1 May 2007
- Mandatory pension funds from 1 August - 30
November 2007 - Mandatory for all workers younger than age 35
- Optional for workers between age 35 and 40
- Estimated total number of participants in market
3.7 million - Focus is on mandatory pension fund market
- Product is defined contribution pension account
with main features regulated by law - Part of employees' current contribution to state
pension will be redirected to private pension
fund - Initially set at 2 of wages, to increase by 0.5
per year to 6 in 2016 - Maximum administration and asset management fees
regulated by law - ING will participate in both voluntary and
mandatory pension fund market
8Global top 10 of countries with strongerst
pension system
Measured by pension assets as of GDP in 2005
Source OECD
9Employer-employee pensions are vital to the
strength of the Dutch pension system
Division of average benefit in
(Source Börsch-Supan, 2004)
10General lessons from the international pension
field
- Balanced multi-pillar system is best to generate
sustainable retirement income - Different systems work for different countries
- Natural ambition level for adequate pension
should be the starting point - Pillar I for the basis, Pillars II and III on top
of this basis to reach ambition level - Some countries have addressed demographic
challenges by making adjustments within existing
systems - Need to increase labour participation of older
workers - Importance of good education to obtain public
commitment - The pay-out phase becomes more important
- Good asset management to pay people adequate
pension as they live longer - US and Australia are forerunners in this field
- Choice for individual members is good, but too
much choice can be confusing - Sweden initially offered choice of 700 investment
funds, but the majority of the participants opted
for the default fund - Stimulate retirement savings through tax
incentives
11Tax incentives stimulate long-term savings
- Tax incentives will encourage people to make
long-term savings - This makes them less dependent on social security
- Private long-term savings contribute to balanced
and sustainable retirement solutions - Increased private long-term savings alleviate the
pressure on public finances - Governments receive additional tax revenues by
taxing the pensions paid to people at a time when
more people retire - Long-term savings are an engine for economic
growth - Life premiums and pension contributions are
invested back into the local economy - The investment of long-term savings boosts the
development of the capital market
12Harmonizing pensions in Europe a long and
laborious route
- The EU wants a Pan-European Pensions market
- The IORP is an excellent initiative
- But it benefits mainly employees of large
companies - Pan-European Pensions should be possible for all
EU citizens - Employer/employee pensions
- Individual supplementary pensions
- Harmonising national systems and rules of 25
countries takes too long - The European Financial Service Roundtable (EFR)
proposes an alternative route - 26th regime structure
- A new framework for Pan-European pensions
endorsed by all Member States - This framework complements existing national
pension structures - Not one single product, but a range of products
that fit the framework - Easy to understand and recognisable for all EU
citizens - Clear advantages
- Wider choice for consumers, economies of scale,
portability
13Conclusions
- Countries in South East Europe need to (continue
to) reform their pension systems - Romania is responding to the challenge with its
reforms - Employer-employee retirement savings plans need
to become the backbone of the pension system - Tax incentives are vital to stimulate retirement
savings - Public education is essential to increase
awareness of the need to make retirement savings - The pay-out phase of pensions needs more
attention to ensure sustainable retirement income
streams - Pan-European pension are a long, hard road, but
the EFR has proposed an interesting alternative
route
14Certain of the statements contained herein are
statements of future expectations and other
forward-looking statements. These expectations
are based on management's current views and
assumptions and involve known and unknown risks
and uncertainties. Actual results, performance or
events may differ materially from those in such
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general economic conditions, in particular
economic conditions in INGs core markets, (ii)
performance of financial markets, including
emerging markets, (iii) the frequency and
severity of insured loss events, (iv) mortality
and morbidity levels and trends, (v) persistency
levels, (vi) interest rate levels, (vii) currency
exchange rates (viii) general competitive
factors, (ix) changes in laws and regulations,
(x) changes in the policies of governments
and/or regulatory authorities. ING assumes no
obligation to update any forward-looking
information contained in this document. www.ing.co
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