Slovaks hope to save for a better future

05-11-2004

The First of November was a state holiday in Slovakia. People went to cemeteries to light a candle and say a prayer for their loved ones who past away. In that solemn atmosphere many Slovaks didn't think that the day could have any other significance. But on that very same day began the most important stage of pension system reform. From November 1 until June 2006 all citizens younger than 52 will be allowed to choose to deposit up to nine percent of their monthly income in a private pension fund.

Eight companies have already been licensed to manage such funds. Jiri Rusnok, the Director of Pension Division at ING Group explains how the system will work:

"People will save through their employers and their mandatory contributions and this money will be channeled to chosen specific pension company. They can choose one of the three funds or if you like investment profiles. If they are young they can choose more risky investments, the so called growth funds, or they can choose balanced funds or the so called conservative funds."

The law stipulates very strict criteria for the companies managing these pension funds. They must be credible financial institutions with at least 3 years of experience and a minimum basic capital of 7.1 million euros. The money paid into these funds will be a private hereditary ownership and the interest earned will not be taxed. Martin Danko, the spokesperson of the Ministry of Labour says that the financial supervision authorities have set up strict rules for pension sales people:

"They cannot give their potential clients any information about how much money has been already invested in that particular fund or how many people have joined it. They cannot make any projections on the future value of pension that the client will receive. And they cannot get involved in any other commercial activities while acting as pension salespersons."

With a local equity market too volatile to provide stable income in retirement years, analysts are trying to figure out which would be the best investment for the clients of private pension funds. Peter Golias from the Institute for Economic and Social Reforms explains:

"The limit for investing abroad is not very strict in Slovakia so the companies are supposed to invest just 30% in Slovakia and the rest can be invested abroad. In domestic market it is true that government bonds are one of the major possible targets for investing for companies but there is also money that can be invested abroad."

But how can ordinary citizens unfamiliar with the strange language of financial markets differentiate between the eight companies licensed to manage pension funds in Slovakia? Peter Golias:

"They can either offer different fees or they can also offer different backgrounds of the companies. So, you have financial strength or you have companies with longer history which are also present in some foreign markets. On the other side you have companies which are well known only in Slovakia or in some small parts of Europe."

Billboards advertising one pension fund promise Slovaks a worriless life akin to that of two Swiss pensioners riding a Harley Davidson motorbike. They have targeted plenty of ironic comments from ordinary retired Slovaks who struggle to meet ends from their current pension. But if the pension reform proves successful their children may one day own a Harley Davidson, who knows.

05-11-2004