The Eurasian Connection Organised by Kring Internationaal Johan de Witthuis, Utrecht, 14 April 2016
W elkom W elcom e Wilkommen Bienvenida Bienvenu Bem-vindo Velkommen Benvenuto Välkommen Tervetuloa Witaj Dobrodošli
Program 16.30 Doors open 16.45 Welcome and introduction of the guests by Caroline Tuin, Chairperson Kring I nternationaal 17.05 Rob van Leeuwen will take us to the world of pensions in the countries that were the former Soviet Union 17.45 I ain Batty, laywer at CMS Cameron McKenna. As one of the founders of the pension system in Poland, I ain will talk to us about the developments in the pension system in Eastern European countries that are now member of the EU. 18.25 Q&A 18.35 Closing drinks and networking opportunity 19.30 Doors close
Welcome and introduction of the speakers Caroline Tuin
Agenda • Welcome • I ntroduction of our guests
Welcome to the 4 th meeting of the Kring Internationaal
Introduction of our guests • Rob van Leeuwen (1964): – Graduated in 1989 from Groningen University with a Masters degree in mathematics; – Became a full member of the Royal Actuarial Association of the Netherlands in 1995; – Working since 2001 in successor states to the former Soviet-Union (predominantly in Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, the Russian Federation, Tajikistan and Ukraine); – Before 2001, Rob worked for several Consulting firms in the Netherlands as well as in Russia and as a technical director and member of the management board at a mid-sized insurance company in the Netherlands; – Since 2001, Rob has been working on a combination of international donor projects and assignments for private sector clients in the CIS.
Introduction of our guests (2) • I ain Batty: - Has been practising as an English solicitor for 25 years - Is a partner at the leading international law firm, CMS, and is responsible for the co-ordination of the Commercial Practice in Central and Eastern Europe; - Has a wealth of experience in the CEE region having worked there since 1991 and having lived there since 1997. He is based in Poland but travels extensively through the region; - Has been involved in drafting pension fund legislation for a large number of countries in the region including Poland, Bulgaria, Romania, Croatia, Slovakia and Macedonia. He has also worked in Russia, China and Kenya; - Iain has a particular focus on advising insurance companies and pension fund operators on a variety of commercial, regulatory and contractual issues across the region; - Iain regularly speaks at conferences and appears in the press.
Pension reform in the former Soviet Union - out in the desert Rob van Leeuwen
The Washington consensus • Or: roll-out of the Chilean model • I n the early 1980-ies Chile has reformed its pension system, to include a mandatory, funded, Defined Contribution, privately managed component • This was part of a wider reform effort, to set the Chilean economy on a market-oriented (or: “capitalist”) path • I t fitted well with the general “zeitgeist” (Reagan, Thatcher, Milton Friedman),promoting self-reliance instead of dependency of the State • These reforms were copied widely in Latin America (Argentina, Bolivia, Colombia, Mexico, Peru etc.) • Success factor: 35 years of continually declining interest rates • Problem: high marketing, administration, asset management costs • Reforms were picked up by the World Bank, I MF, USAI D, EU • When former socialist economies started to transfer to market economies in the 1990-ies, this opened a new field for the introduction of the “three pillar” model
The three pillars (of wisdom?) • Pillar I : mandatory, PAYG financed, can include a basic pension, often includes a Notional Defined Contribution (NDC) component • Pillar I I : mandatory, funded, Defined Contribution (DC) • Pillar I I I : voluntary, includes both occupational pensions and private arrangements This is the World Bank classification, which is most widely used in practice Problems: • The “double burden” or “transition burden” – no extra cost: implicit liabilities are made explicit; or should we say: – liabilities (to citizens) that can be reneged upon become “harder” (to bondholders) • Risk of high marketing, administration, asset management costs • Citizens fail to make informed choices Advantage: citizens have their nest eggs in two baskets: • The demographic, domestic, labor share of GDP-dependent basket • The potentially international, capital share of GDP-dependent basket
Kazakhstan • I ntroduced in 1998 • Pillar I mostly concerns legacy pensions, a basic pension and a minimum guarantee • Pillar I I is dominant – Funded by an employee contribution of 10% of wages – From 2018 the employer will contribute an additional 5% of wages • Pillar I I I is virtually non-existent • The State took the transition burden upon itself • I mpeccable technical implementation: – A legal and supervisory infrastructure creating a wide array of potential investment vehicles – After initial hick-ups the contribution collection mechanism was sophisticated and automated • Problem: lack of investment opportunities, resulting in low nominal returns and negative real returns • The State guaranteed a 0% real return • 2013 reform: – all pillar II pension funds were brought under State Control – The strict DC system is to attain DB elements – details remain hazy
Russian Federation
Russian Federation • I ntroduced in 2002 • All contributions paid by the employer • Pillar I : a basic pension + an NDC component (contribution 22% for those born before 1967, 16% for those born thereafter) • Pillar I I : based on a contribution of 6% for those born in or after 1967 – since 2014 also these are diverted to Pillar I; this moratorium will extend at least into 2017 – since 2015 participation in Pillar II is voluntary • Pillar I I I is mostly limited to industry-wide DC plans and DC plans of some foreign employers • The system is hugely in deficit: about 50% of pension payments comes from general taxes • Recently the NDC system moved to a “points” system, which allows the government to better control costs in times of high inflation • Pension age 55 (female) respectively 60 (male) – still a “sacred cow”
Other countries Ukraine: • Has been contemplating the introduction of a second pillar for 15 years – it was supposed to happen when several macro-economic parameters (e.g. inflation) would meet certain criteria • What actually happened was that only the minimum pension was somewhat indexed and as a result over time all pensioners are squeezed to the minimum Azerbaijan: • Did a good job implementing Pillar I : a basic pension + an NDC component • I s implementing a funded pillar in a very cautious way (and rightly so!) Tajikistan: • I mplemented a funded pillar in 1999, but it remains underdeveloped • Only in 2013 crossed over from the Soviet DB system to an NDC system, but also this reform is far from complete, mainly due to lack of human resources
Conclusions former SU • As Leo Tolstoy said: “All happy families are alike; each unhappy family is unhappy in its own way.” • I n Russia and Kazakhstan pension reform has been partly reversed • I n Azerbaijan, Tajikistan and Ukraine it hasn’t really taken off yet Problems: • The transitional “double burden” was underestimated – “Petrostates” coped with this more easily – until recently • Real investment returns were overestimated • Lack of knowledge and indifference on the part of the population – Great scope for “nudging” people into one or the other choice by making it the default option • Lack of investment opportunities – Notwithstanding rhetoric about pension systems providing a “stable base of long-term investors” • Wider economic instability not conducive to stable retirement saving – Inflation, currency depreciation, corruption, civil war, political risk • The State can be a good arbiter between private parties – However, as a contributor, having the State as your counterpart is something different…
Pensions in Eastern Europe - a hasty retreat? Iain Batty
Wave of reform to create three pillar pension systems • Reform spread across the region with new laws implemented between 1998 and 2005 • Wide-ranging reforms in Poland, Hungary, Romania, Bulgaria, Croatia, Macedonia and Slovakia • The Czech Republic was a straggler, introducing its reforms in 2013
Pensions Terminology in CEE • Differs from existing EU terminology • First Pillar – state social security • Second Pillar – mandatory, funded, privately managed • Third Pillar – voluntary, funded, privately managed, whether employer sponsored or individual
Overview of Pension Reform in the Region • Until mid 1990s virtually no funded provision • State was monopoly provider • After that many countries in the region underwent radical reform • Reform justified by need to avert a demographic crisis and also the need to create domestic institutional investors • Reform heavily influenced by World Bank
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