International Seminar on Pension Reform in Slovakia, 2002
Will the Slovak Republic citizen become a serf paying regular tithe to the feudalist who is currently the pension system management company?
Ing. Dušan Lukášik,CSc 5. June 2002
As for solving the Pillar II pension system we can currently say that majority of solutions submitted by experts or politicians of individual political parties in the Slovak Republic have been harmonized on the basis of World Bank where the Pillar II is established by capitalization system, having to ensure risk diversification with the Pillar II representing labour revenues and the Pillar II is to depend on capital return.
The fundamental question is: Will the Slovak pension system be based on
feudal principle of making mandatory contributions of tithe to the feudalist and church in the modern system with management companies appointed by law?
At first glance an aggressive question can be without much effort documented and solutions to this question basically depend on whether we want such assets amounting to 20-40% of the pension benefit to be transferred to the future rich asset management companies or to give them to those who had actually contributed it into the system and which are the results of their work, that means to the future pensioners of the Slovak Republic?
As it is in Chile, where pension funds represent at least one GNP in balanced condition we can see that also in case of Slovak Republic the Pillar II shall experience balanced conditions with around one GNP during the period of 35 years and shall fluctuate depending on demography and slightly on unemployment development. The question thus is whether the management companies shall, in the 35-year long run, absorb around1/3 GNP for administration of those accounts or whether one, maximum two per cent will remain to pensioners for ensuring decent life at the time of retirement. Three graphs below clearly show that an
amount of one per cent of the managed assets paid every year for the period of 35 years means decreasing the value of the insurer's account by 20% after 35 years. From this point each tenth of a per cent of the assets value decreases the value of an account by around 2% in comparison to ideal state.
If we consider that all systems, evaluated and assessed, will passively invest in for example state bonds of just one state then, as for returns, such bonds will be with the same result. In other words, risks and bond returns will be the same. The only things that will differ are the expenditures.
As shown by analysis, only expenditures represent factor the most significant for assessing whether given solution is suitable or not in case of investments in capital markets by means of such funds. If we analyse individual systems from the point of expenditures we will find out the following: If we create a basic pension fund model according to picture 4, consisting of management companies and a fund with individual clients' accounts, we realize that the management company fulfils two main functions:
· manages individual client’s accounts
· manages assets in such accounts.
A commission is paid for such tasks, and it can be set by law and has exactly defined limits.
The analysis points out that no matter whether the management company is
public institution or private institution, there is always conflict of interests between these two functions. It leads to reducing the returns in clients' accounts and due to charges for accounts management it leads to absorbing returns for the benefit of the management company.
Only after separating these two functions and introducing the third entity is it possible to achieve situation in which the assets management, through competitive assets management companies of the private sector, creates competition in market by decreasing expenditures to 0.1% of assets per annum - Trift Plan USA, or to 0.2% of assets per annum as a maximum charge, being presented by the Canadian Investment Committee, and thus maximize returns and minimize expenditures.
