Product categories
|
Reporting periods
|
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|---|---|---|---|
| Name | Pillar | Earliest data | Latest data |
| Pension funds | Occupational (II) | 2005 | 2024 |
| Supplementary pension funds | Voluntary (III) | 2009 | 2024 |
| Pan-European Personal Pension | Voluntary (III) | 2023 | 2024 |
Zhrnutie
Slovenský dôchodkový systém je typickým modelom Svetovej banky založenom na viac-pilierovom (troj-pilierovom) systéme s individuálnymi (osobnými) účtami sporiteľov. V roku 2024 sa aplikovali zásadné kroky reformy z roku 2022, najmä však povinný vstup do II. piliera, aplikácia predvolenej investičnej stratégie v II. pilieri, nové pravidlá predčasného dôchodku po 40 odpracovaných rokoch, zníženie poplatkov v II. aj III. Pilieri a negatívne opatrenie zníženia príspevkov do II. piliera na 4% natrvalo, čo bolo odrazom konsolidácie verejných financií.
Summary
The Slovak pension system is a typical World Bank model based on a multi-pillar (three-pillar) system with individual (personal) pension accounts. In 2024, the essential steps of the 2022 reform were applied, in particular the mandatory entry into the Pillar II, the application of the default investment strategy in Pillar II, new rules for early retirement after 40 years of service, reduction of fees in both Pillar II and Pillar III and negative measure of decreasing Pillar II contributions from 5,5% to 4% permanently as a consequence of public finance consolidation measures.
16.1 Introduction: The Slovakian pension system
- The year 2024 brought implementation of major pension reform from 2022 influencing all pension pillars;
- The reform removed retirement age ceiling and tied the retirement age back to the life expectancy;
- For Pillar II, starting May 2022, participation in Pillar II became mandatory for all new workers younger than 40 years with the opt-out options;
- Starting July 2023, application of predefined saving strategy took place with automatic portfolio rebalance for non-active savers in Pillar II with re-allocation of savings into the passively managed index pension funds (100% until the age of 50 years and then adopting the glide path of 4% annually from index funds into bond pension funds);
- after the government changes in October 2023, the contribution rate toward Pillar II was permanently decreased to 4% of insurable income starting January 2024;
- For Pillar III, the reform has decreased the fees to the level competitive to the Pan-European Personal Pension (PEPP) products (1% of assets under management (AuM));
- The year 2024 brought further increase in the number of savers in PEPP products.
- The pension reform adopted in 2022 as part of the Recovery and Resilience Plan (Component 18) has had some positive features on the overall performance of Pillar II as well as Pillar III pension products.
- Positive returns of most of the pension vehicles is tied to the overall positive market returns in 2024.
- Positive effects on overall performance of Pillar II products could be tied to the implementation of predefined saving strategy for non-active savers and re-allocation of pension savings towards passively managed index pension funds (equity-based).
Holding period
|
|||||||
|---|---|---|---|---|---|---|---|
| 1 year | Whole reporting period | 3 years | 5 years | 7 years | 10 years | to... | |
| Pension funds | 11.0% | -0.3% | -3.3% | -1.3% | -0.7% | -0.1% | end 2024 |
| Supplementary pension funds | 6.0% | -0.5% | -5.5% | -2.7% | -2.1% | -1.2% | end 2024 |
| Pan-European Personal Pension | 14.5% | 10.8% | NA | NA | NA | NA | end 2024 |
| Data: National Bank of Slovakia, Pension Asset Management Companies, Supplementary Pension Asset Management Companies, PEPP providers, Eurostat; Calculations: BETTER FINANCE | |||||||
Pension system in Slovakia: An overview
The Slovak old-age pension system is based on the multi-pillar approach, which consists of three main pillars:
- Pillar I — State pension organized as a mandatory pay-as-you-go (PAYG) scheme;
- Pillar II — Funded pension organized as voluntary funded Defined contributions (DC)-based scheme; and
- Pillar III — Supplementary pension organized as a voluntary individual pension DC-based scheme including PEPP products.
Pillar I - State pensions
The Slovakian pension reform started in 1996 with the introduction of Pillar III, which at that time (and until 2009) was organized as voluntary pension pillar offering life insurance contracts and as an occupational pillar as well. Since July 2009, the system was changed to funded saving schemes and voluntary Pillar III pension funds are offered to the savers (members). The organization of Pillar III started to become more personal with the financial support of employers.
The World Bank’s approach has been fully implemented by introducing Pillar II at the beginning of 2005, and, from a terminological point of view, it should be called the “Pillar I-bis”, as individual retirement accounts are funded via partial redirection of social security contributions on individual pension savings accounts. For a person who works a full career (42 years) and retires in 2024, the main income stream derives from the PAYG (Pillar I) pension scheme. On average, the individual replacement ratio of such a person could reach 49% of their gross salary. If the person would have participated since 1996 in Pillar III and contributed on average 3% of their salary into a Pillar III pension scheme, having also entered Pillar II (1bis pillar) in 2005, their income stream during retirement would have been slightly different and their replacement ratio would have been a little higher than 60%. However, still more than 90% of the retirement income stream is provided via the PAYG scheme (Pillar I), around 5% from Pillar II (1bis pillar) and 5% from Pillar III.
Pillar I is a state organized PAYG pension scheme, managed by the State Social Insurance Company. Pensions are funded on an ongoing basis and benefits are calculated based on the number of insured years and paid contributions. The PAYG principle of financing is supplemented by the redistribution principle, where the lowest income groups receive higher replacement ratios and higher income groups (due to the solidarity mechanisms) receive lower replacement ratios.
Pillar I is closely connected to the economic activity and income of the citizens. This pillar is financed by contributions of economically active individuals, amounting to 18% of their base income (gross salary) under the condition, that an individual is not participating in Pillar II). These contributions are directed to the Social Insurance Company, which distributes the allowance to the beneficiaries (current pensioners).
An individual is entitled to an old-age pension after the statutory retirement age is reached. There are two options for early retirement: 40 years of insurance period or 2 year before retirement age. In both cases, the minimum level of pension (1.6 \(\times\) living minimum) should be reached.
Pension insurance is mandatory; statutory insurance and participation in this scheme is a legal obligation for all eligible persons. However, the Act on Social Insurance also enables voluntary pension insurance participation.
Pillar I is a typical PAYG point scheme (defined benefit – DB) with a certain income solidarity element. The old-age pension of the insured person depends on three parameters:
- The insurance period, that is, the number of insured years with active contribution;
- The average personal wage point (APWP), determined as the ratio of the sum of personal wage points calculated for each calendar year of the reference period and the period of pension insurance in the relevant period; and
- The value of the pension point, that is, the monetary value of one personal wage point. The pension value is adjusted on 1 of January each year through indexation, which is determined as the ratio of the average wage calculated in the third quarter of the previous calendar year and the average wage calculated in the third quarter of the calendar year two years preceding the calendar year on which the pension value is calculated. The value is automatically revalued on an annual basis with the objective to mimic the increase in the average salary in Slovakia.
Statutory retirement age is 63 years and 4 months in 2024, valid for both men and women. For women, the retirement age might be lowered depending on the number of raised children. For each raised child the retirement age is lowered by 6 months up to three children. For the birth years 1968 and younger, a new pension reform in 2022 re-introduced the retirement age tied to the life expectancy.
To illustrate the calculation of an old-age pension, let us assume an individual who reached the statutory retirement age of 63 years and 4 months in 2024 and has following characteristics:
- Number of insured years (N) = 42 (full working career);
- APWP = 1 (for the entire working career, an individual has been earning on average 100% of average salary in Slovakia);
- value of pension unit (VPU) = EUR 17.7688 (for persons retiring in the year 2024).
The old-age pension is then calculated using the following formula: N \(\times\) APWP \(\times\) VPU. Therefore, considering the above-mentioned individual parameters of a person claiming old-age pension, he/she will be entitled to a monthly pension equal to: 42 \(\times\) 1 \(\times\) EUR 17,7688 \(=\) EUR 746. If an individual has earned on average 100% of an average salary during their entire working career and the average salary in 2024 was EUR 1524, then the gross individual replacement ratio of such an individual would be: EUR 692 \(/\) EUR 1524 \(=\) 48.95%.
Pillar II - Funded pensions
The Slovak Pillar II was established as a DC pension saving scheme in 2005. The principle of funded pension is based on the accumulation of savings during employment and investing savings in financial markets via special purpose vehicles—pension funds, which are managed and administrated by pension assets management companys (PAMCs), licensed by the National Bank of Slovakia.
During the period from September 2012 until May 2022, the enrolment was voluntary and eligible for persons up to 35 years of age. Since May 2022, the automatic enrolment with opt-out option is applied for all workers under the 40 years entering the labour market for the first time. In general, pension fund members (Pillar II savers) are free to choose pension funds provided by the same PAMC. Each saver has an individual retirement account (IRA). Their contributions (savings) are redirected from the Social Insurance Company to the chosen supplementary pension assets management company (supplementary pension assets management company (SPAMC)) on their IRA at a rate of 5.5% of gross salary in 2023. In December 2023, the contribution rate has been permanently cut down to 4% of gross salary starting 2024.
With the possibility to save in one or two pension funds at the same time, it is completely up to a saver how much of their own savings would be invested in one pension fund or another. They can invest, for example, 70% in a bond guaranteed pension fund and another part (30%) in an index non-guaranteed pension fund. There is no fee or charge to change their allocation ratio or switch pension funds managed by the same PAMC—even on a daily basis. Switching providers (PAMCs) for free is possible for savers if the change is made after one year, otherwise a fee of EUR 16 is applied.
Pillar III - Supplementary pensions
The Supplementary pension is a voluntary funded DC-based pension saving scheme in which the funds of the participants are administered by SPAMCs. The SPAMCs are private joint stock companies established under the Slovak law and able to only provide services tied to the management of supplementary pension funds. SPAMCs and their supplementary pension funds are supervised and regulated by the National Bank of Slovakia.
The purpose of supplementary pension saving is to allow participants to obtain supplementary pension income in old-age and the whole Pillar is mostly oriented towards employers and their employees. However, the coverage ratio is rather low (32% in 2024).
Both employers and employees can contribute to the individual retirement account with no limits. The following benefits are paid from the supplementary pension saving upon the completion of the saving period:
- supplementary old-age pension in the form of lifelong or temporary supplementary annuity;
- supplementary pension in the form of programmed withdrawal;
- lump-sum settlement;
- redundancy pay.
| Social Insurance Company | Pillar I | Pillar II | Pillar III / PEPP |
|---|---|---|---|
| Social Insurance Company | State pension | Funded pension | Voluntary pension / PEPP |
| Management | State management | Pension Asset Management Companies (PAMCs) | Pension & PEPP providers |
| Nature | Mandatory | Mandatory | Voluntary |
| Scheme | PAYG | Funded (DC) | |
| Benefit type | DB | DC | |
| Account type | Point scheme | Individual personal pension accounts | Individual PEPP account |
| Details (contributions / withdrawal / retirement) | Retirement Age: 63 years; tied to life expectancy increase; Early retirement possible after 40 years of service or 2 years before retirement age. Contributions: 18% (if only Pillar I) or 14% (if Pillar I & II). | Withdrawal allowed if Pillar I pension is granted; withdrawal options: phased withdrawal for the first half of life expectancy + single annuity for the second half (since 2025); lump-sum if Pillar I pension is higher than average pension. Contributions: 5.5% (2022-2024); 4% afterwards (derived from paid social insurance contributions). | Individual and employer can contribute with no limits (indirect fiscal support for both); withdrawal options: lifetime annuity; phased withdrawal (min. 10 years); lump-sum if savings < 4× average wage; combination of phased withdrawal and annuity. For PEPP: individual and employer can contribute; indirect fiscal support provided only for the individual; withdrawal options: phased withdrawal min. 5 years; lump-sum at statutory retirement age + 5 years. |
| Quick facts | |||
| Number of old-age pensioners: 1.135 mln. | Administrators: 5 | Administrators: 4 | Administrators: 1 |
| Coverage (active population): 2.74 mln. | |||
| Average old-age pension: EUR 683 | Funds: 16 | Funds: 21 | PEPP products: 2 |
| Average salary (gross): EUR 1 524 | AuM: EUR 17.045 bln. | AuM: EUR 4.139 bln. | AuM: EUR 0.3 bln. |
| Average replacement ratio: 44.82% | Participants: 1.921 mln. | Participants: 1.32 mln. | Participants: 0.028 mln. |
| Source: Social Insurance Company, 2025; Data for Pillars II and III: employment.gov.sk. | |||
The year 2024 was a year of major 2022 pension reform impacts. The reform adopted in 2022 has brought major changes in Pillar I with support of the funded pension schemes — Pillar II and Pillar III. The summary of key reform changes in the Slovak pension system from 2022 included:
- Pillar I. (state pensions)
- Flexible statutory retirement age tied to life expectancy (longer working career) for people born after 1967;
- Early retirement (2 years before statutory retirement age or after 40 working years regardless the age) = risk of losing employees (lowered fine for early retirement 3,6% annually) effective since January 2023;
- Reduced pension point increase (0.95 \(\times\) average wage increase) \(=\) lower replacement rates in future, effective since January 2023;
- Introduction of parental bonus (1,5% of child’s wage, maximum 1.2 \(\times\) average wage) effective since January 2023 – the parental bonus have been removed in 2024 and replaced with 13th pension for all pensioners in the amount of average monthly pension from the last year;
- Pillar II. (funded DC scheme)
- Decreased fees (removing the performance fee 10% of new highs and 0,4% p.a. of accumulated savings + 1,25% of new contributions), effective since January 2023;
- Predefined saving strategy (life-cycle strategy with glide path starting at 50 years, 4% annually equity share decrease), effective since May 2023;
- Automatic enrolment for the new workers entering labour market, effective since May 2023;
- Major changes in payout phase (programmed withdrawal for the first half of life expectancy and annuity for the remaining life expectancy)—one-off withdrawal possible for above average earners, effective since January 2025;
- Pillar III. and PEPP (voluntary occupational and personal pensions)
- Introduction of PEPP legislature in 2022 (tax benefits for employee contributions similar to the third pillar, no tax benefits for employer’s contributions, more relaxed payout phase compared to the III. pillar, 5 years of programmed withdrawal or up to statutory age + 5 years) with first PEPP products starting from 2023;
- Decreased fees for III. pillar (max 1% p.a. of accumulated savings), effective since January 2023.
16.2 Long-term and pension savings vehicles in Slovakia
There are five providers—PAMCs—operating on the Pillar II (funded pension) market. According to the AuM measure, the two biggest providers, Allianz and UNIQA, represent nearly 51.16% of the market in 2024, but continually decreasing over the last 5 years.
There are four providers—SPAMCs—operating on the Pillar III market. According to Assets under management, the two biggest, NN and DDS Tatra banky, represent nearly 71.79% of the whole market (slight increase over the last year).
It should be noted that the majority of pension savings are accumulated in Pillar II pension funds that is financed via redirected mandatory pension insurance contributions. Additional voluntary contributions towards Pillar III pension funds are driven mainly by employers’ contributions and not individual contributions of savers.
Second pillar: Pension funds
The Pillar II market is fairly concentrated. Each saver can choose one out of six currently existing providers (PAMCs) on the Slovak market. The PAMCs are private joint-stock companies with a minimum capital requirement of EUR 10 million and established in the territory of the Slovak Republic. Their exclusive business is the creation and administration of pension funds. As a further condition, they must attain at least 50 000 members within a period of 18 months from the establishment of the pension fund.
According to the applicable law (the Act on Old-Age Saving), each PAMC is obligated to operate at least two pension funds (bond and index funds). However, provider on top of 2 mandatory pension fund types that are used for pre-defined savings strategy also provide other types of funds::
- Bond guaranteed pension fund (Guaranteed scheme);
- Index non-guaranteed pension fund (Non-guaranteed scheme) applying passive investment management style
- actively managed equity or mixed non-guaranteed pension funds.
Each PAMC is free to choose (mostly based on their business model) whether it operates additional pension funds, which are optional. These legislative changes entered into force on April 30th, 2013. Before that date, each PAMC had to operate three (respectively four) obligatory pension funds:
- Bond (Conservative) pension fund (since March 2005);
- Mixed (Balanced) pension fund (since March 2005);
- Equity (Growth) pension fund (since March 2005);
- Index pension fund (since April 2012).
After the legislative changes became effective since major pension reform in 2022, index pension funds with passive investment strategy became the key pension vehicle for all savers younger than 50 years. Changes in the fee policy (strictly regulated) forced providers to change the investment strategy of pension funds towards being passively managed using mostly exchange-traded funds (ETFs) as main financial instruments.
PAMCs are subject to a variety of regulations. The Old-age Pension Savings Act defines the range of allowed investment instruments and sets maximum limits for portfolio allocations (quantitative limits). Investment procedures and valuation of investments (daily at market prices) are also regulated. Thus, each category of pension funds has their own investment strategy, as well as general or special quantitative limits and operating conditions. PAMCs and managed pension funds are supervised by the National Bank of Slovakia.
The year 2019 brought an introduction of Pension Benefit Statement with pension benefits projections also into the II. pillar. The providers are obliged to send the pension benefit statements to all savers since January 2021.
The reform of the pay-out phase, introduced in 2022 and effective from 2029, stipulates the following pay-out phase rules:
- Half of the savings have to be used to buy programmed withdrawals lasting half of the life expectancy of the retiring person;
- The second half of the savings is invested using the predefined investment strategy and used to buy the single nominal annuity once the retired person survives to the age expected in the first point.
- Programmed withdrawal (phased withdrawal) with no limitations if the retired persons benefits are higher than the average pension benefits;
- Perpetuity (withdrawal of only annual returns).
Products 1, 2 and 3 are provided by insurance companies, products 4 and 5 by PAMCs.
Market structure of providers and pension funds shows the almost equal market share of 3 players.
Table 16.5 presents the market share of Pillar II pension funds according to their dominant investment strategy and asset allocation. The dominant part of savings is allocated into bond pension funds that invest conservatively. However, the allocation has started to change from bond pension funds towards index pension funds due to the implementation of 2022 pension reform applying predefined saving strategy.
The reform in 2022 introduced the predefined investment strategy for all non-active savers who made no active choice during May 2013 and January 2023. Starting July 2023, the portfolio of these savers should be gradually re-allocated to the index pension funds (100% until the age of 50 years and then adopting the glide path of 4% annually from index funds into bond pension funds). The 2022 reform stipulates that the pension provider has to align the saver’s portfolio with the predefined saving strategy within 2 years (until the end of 2025). The increase in AuM was caused mainly by the stabilization of the market and higher returns of Index pension funds. We see increased number of savers, who mix two funds on their individual retirement savings accounts, one of which is the index pension fund.
Asset allocation of Pillar II pension funds is regulated by law (Act on Old-Age Saving), laying down the general quantitative investment limits on all pension funds — for example:
- max. 3% of AuM into one financial instrument (does not apply on bond investments or in case of passively managed pension funds);
- max. 10% of AuM into one Undertaking for Collective Investment in Transferable Securities (UCITS) fund;
- max. 15% of the whole pension fund portfolio into one issuer (does not apply on bond investments or in case of passive managed pension funds);
- bond investments must have investment grade rating (does not apply in case of passively managed pension funds).
Pillar II savers can choose from two main types of obligatory and two types of optional voluntary pension funds.
Obligatory — Bond guaranteed pension funds are actively managed pension funds and are obliged to invest 100% of the assets into bonds, money market instruments, deposits, investment funds in which assets must be invested in the above securities and deposits and other similar assets. Bond guaranteed pension funds are not allowed to invest in equities and real estate, nor respective investment funds. This conservative strategy focuses on bonds, and its objective is the preservation of capital and moderate growth primarily on shorter horizons. Bond guaranteed pension funds are obliged to hedge at least 95% of the whole portfolio against currency exposure. That means that if the pension fund allocates the assets into the financial instruments that are denominated in a currency other than Euro, fund managers must open the position (usually swaps or other hedging instrument) that fixes the value of such investment in Euro.
Obligatory — Index non-guaranteed pension funds, introduced in April 2012, are the only passively managed pension funds in Slovak pillar II. There are no general nor specific quantitative limits, because of the nature of investing. Slovak Index non-guaranteed pension funds track respective stock market benchmarks (such as MSCI World, EuroSTOXX 50, MSCI ACWI, MSCI Euro).
Third pillar: Supplementary pension funds
Currently, there are four providers (SPAMCs) operating on the market, which could be considered concentrated. Each SPAMC is obliged by law to operate at least one contributory and one “pay-out” supplementary pension fund. The legislation does not determine specific types of contributory pension funds; however, we can divide all existing contributory pension funds according to the portfolio structure into three main groups:
- Conservative supplementary pension funds (no equity investments);
- Balanced supplementary pension funds (small portions of equity investments);
- Growth supplementary pension funds (highest portions of equity investments).
Company “NN” and later on “AXA” (“UNIQA” since January 2021) have launched the first passively managed equity fund within the Pillar III. Most of the competitors followed this move and introduced passively managed index (equity) pension funds as well. There are no specific investment restrictions regarding asset classes in supplementary pension funds, but there are some general quantitative limits to restrict the concentration risk of the fund.
DDS Tatra banky has introduced target-date funds (TDFs) in 2015, with the aim to provide age specific investment strategy for its members saving for retirement.
For supplementary pension funds, there are no special investment restrictions regarding asset classes, but there are some general quantitative limits, i.e. no more than:
- max. 5% of AuM in one financial instrument;
- max. 30% of AuM in securities and money market financial instruments from one issuer (does not apply to instruments issued by the European Union (EU) Member States);
- max. 35% of AuM in securities and money market financial instruments issued by the EU Member State, the EU, European Central Bank (ECB), International Monetary Fund (IMF) or World bank;
- max. 20% of AuM in one standard mutual fund (-compliant);
- max. 10% of AuM in one Alternative Investment Fund (AIF);
- max. 40% of AuM in mutual funds.
In general, the Pillar III scheme covers less than 32% of economically active population, while only 70% of them actively contribute to the scheme. At the same, most of the retirement savings are directed into balanced supplementary pension funds, which apply rather conservative investment strategy with limited long-term investments.
16.3 Charges
Pension products for both pillars have seen continual decrease in costs and charges over the period of their existence. However, it is obvious that both pillars do have different fee structures that reflects the features of the pillars and duties of the asset managers and administrators.
The year 2024 has brought no significant changes in fee structure for Pillar II products. Main changes were applied in 2022 when two fees has been abandoned (entry fee as well as performance fee) and the administration fee has been slightly increased. The only remaining entry fee is charged by the Social Insurance Company, who transfers part of the social insurance contributions toward Pillar II and charges 0,25% of contributions sent. Pillar III products have also seen some changes in fee policy as the law required the providers to continually decrease the asset management fee towards the 1% cap within 4 years.
Charges of pension funds (Pillar II)
Charges are highly regulated and capped in the Pillar II scheme by the Old-Age Pension Saving Act. In 2024, PAMCs can apply only one type of fee, i.e., management fees (as percentage of in respective pension fund).
However, the law allows to charge additional charges that cover the costs incurred, namely:
- Depository fee (as percentage of in the respective pension fund); and
- Other charges (mostly trading charges).
It must be mentioned that on top of these charges, each saver in Slovak Pillar II also has to pay an Administration fee to the Social Insurance Company that administers the central collection system, central information, and offering system for annuities. The Social Insurance Company collects the social security contributions and transfers part of savers’ contributions to their personal pension account managed by the PAMC.
Table 16.8 compares applied charges for Pillar II pension funds and the evolution of fee policy over the analysed period.
| Year | Total ongoing charges | Entry fees1 | Admin. and mgt. fees | Other ongoing fees | Performance fees2 |
|---|---|---|---|---|---|
| 2005 | 1.03% | 1.50% | 0.80% | 0.04% | 5.60% |
| 2006 | 1.09% | 1.50% | 0.80% | 0.04% | 5.60% |
| 2007 | 1.05% | 1.50% | 0.80% | 0.04% | 5.60% |
| 2008 | 0.84% | 1.50% | 0.80% | 0.04% | 5.60% |
| 2009 | 0.89% | 1.50% | 0.80% | 0.04% | 5.60% |
| 2010 | 0.91% | 1.50% | 0.80% | 0.04% | 5.60% |
| 2011 | 0.92% | 1.50% | 0.80% | 0.04% | 5.60% |
| 2012 | 1.01% | 1.50% | 0.80% | 0.04% | 5.60% |
| 2013 | 0.47% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2014 | 0.74% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2015 | 0.44% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2016 | 0.62% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2017 | 0.56% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2018 | 0.34% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2019 | 1.19% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2020 | 0.57% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2021 | 1.19% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2022 | 0.34% | 1.25% | 0.30% | 0.04% | 10.00% |
| 2023 | 0.49% | 0.25% | 0.45% | 0.04% | 0.00% |
| 2024 | 0.46% | 0.25% | 0.42% | 0.04% | 0.00% |
| 1 % of contributions | |||||
| 2 % of overperformance | |||||
| Data: Pension Asset Management Companies Calculations: BETTER FINANCE. | |||||
Charges of supplementary pension funds (Pillar III)
Charges in Pillar III are capped by law. Supplementary Pension Fund Management Companies are (since January 1st, 2014) allowed to apply the following types of charges:
- Management fee, as percentage of AuM in a respective supplementary pension fund;
- Performance fee, as percentage of new highs reached in performance of a respective supplementary pension fund — high-water mark (HWM);
- Depository fee (as percentage of AuM in a respective pension fund);
- Other charges (Switching fee).
Table 16.9 compares charges applied in the Pillar III.
| Year | Total ongoing charges | Admin. and mgt. fees | Other ongoing fees | Performance fees1 |
|---|---|---|---|---|
| 2009 | 2.76% | 2.50% | 0.04% | 10.00% |
| 2010 | 2.73% | 2.50% | 0.04% | 10.00% |
| 2011 | 2.54% | 2.50% | 0.04% | 10.00% |
| 2012 | 3.35% | 2.50% | 0.04% | 11.00% |
| 2013 | 2.63% | 2.40% | 0.04% | 12.00% |
| 2014 | 2.82% | 2.30% | 0.04% | 13.00% |
| 2015 | 1.84% | 1.80% | 0.04% | 10.00% |
| 2016 | 2.01% | 1.70% | 0.04% | 10.00% |
| 2017 | 2.04% | 1.60% | 0.04% | 10.00% |
| 2018 | 1.54% | 1.50% | 0.04% | 10.00% |
| 2019 | 2.32% | 1.40% | 0.04% | 10.00% |
| 2020 | 1.65% | 1.30% | 0.04% | 10.00% |
| 2021 | 1.94% | 1.20% | 0.04% | 10.00% |
| 2022 | 1.24% | 1.20% | 0.04% | 10.00% |
| 2023 | 2.38% | 1.15% | 0.04% | 10.00% |
| 2024 | 2.04% | 1.05% | 0.05% | 10.00% |
| 1 % of overperformance | ||||
| Data: Supplementary Pension Asset Management Companies Calculations: BETTER FINANCE. | ||||
It should be noted that the pension reform in 2022 has changed the fee structure and reduced the overall cost ratio starting the year 2023.
16.4 Taxation
The Act on Income Tax recognizes two different of income tax rates in Slovakia that apply to pension saving schemes.
Personal income tax rate has been set at 19% since 2005. Since 2013, there is higher tax rate of 25% for higher earners, whose monthly income in 2024 was higher than EUR 3961.50.
Corporate income tax rate for 2024 was 21%.
| Product categories |
Phase
|
Fiscal Regime | ||
|---|---|---|---|---|
| Contributions | Investment returns | Payouts | ||
| Pension funds | Exempted | Exempted | Exempted | EEE |
| Supplementary pension funds | Exempted | Exempted | Taxed | EET |
| Pan-European Personal Pension | Taxed | Exempted | Taxed | TET |
| Source: BETTER FINANCE own elaboration, based on Own elaboration. | ||||
Pillar II
Pillar II should be viewed as a 1bis pension pillar that is basically a derivative of the basic old-age security scheme, as a part (4% in 2024) of the overall (18%) old-age social insurance contributions are diverted from a PAYG pillar into funded DC scheme. Understanding this principle, Pillar II taxation is similar to the PAYG pillar, meaning that an Exempt Exempt Exempt (EEE) taxation regime is applied.
Taxation of contributions
Contributions paid to Pillar II are tax deductible. However, a saver can add voluntary contributions on top of the 4% contributions redirected from PAYG pillar. Since 2017, voluntary contributions on top of redirected social insurance contributions are subject to the personal income tax (19%) as well as social and health insurance. Thus, the “T” regime applies for voluntary contributions.
Taxation of the Fund
Fund returns are not subject to Slovak income taxes at the fund level.
Taxation of pay-out phase income
Income generated via purchased pillar II pay-out phase products (annuity, perpetuity, programmed withdrawal) are not subject to personal income tax. In case of heritage, the amount the successor receives as inherited (accumulated) savings is not subject to personal income tax.
Thus, we can say that for Pillar II the EEE taxation regime applies in general. However, for voluntary contributions, the Taxed Exempt Exempt (TEE) regime applies.
Pillar III
Taxation of Pillar III differs from the Pillar II taxation approach significantly. There are different taxation treatments of contributions as well as different treatments of the pay-out phase. It is rather difficult to generalize the regime. However, the Exempt Exempt Taxed (EET) regime can be used with several exceptions and specifications.
Taxation of contributions
When considering the taxation treatment of contributions, a slightly different regime is used for savers’ (employees’) contributions and a different regime for employer’s contributions.
Generally, both contributions are income-tax deductible; however, for employees (savers) there is a ceiling of EUR 180 per year. This means that the monthly contributions to the Pillar III supplementary pension fund up to EUR 15 are income tax base deductible. Above this amount, the contributions made to the individual saving account are subject to personal income tax. Considering that the average salary (EUR 1524 in 2024), employee contributions up to 0.99% of the gross average salary can be deducted from the personal income tax base.
Employer contributions are treated in a slightly different way. Contributions are tied to the monthly salary of employees. Employer’s contributions up to 6% of monthly salary are treated as tax expenses. Therefore, employers are motivated to contribute on behalf of employees up to this tax favourable ceiling. Taking into account the average salary in Slovakia, contributions up to EUR 91.44 per employee per month are considered as tax expenses for contributing employers in 2024. Taking into account the poor supplementary pension funds’ performance and the relatively high level of charges, favourable tax treatment of employer’s contributions are the key drivers for the participants. At the same time, this favourable treatment of employer’s contributions paid on behalf of its employees exclusively in the Pillar III scheme creates an administrative monopoly in form of preferred supplementary retirement product in Slovakia.
Taxation of the Fund returns
Fund returns are exempt from income taxes at the fund level.
Taxation of pay-out phase
There are three different types of products used for the Pillar III pay-out phase (according to the Act on Supplementary Pension Saving):
- Lump-sum — paid out through SPAMC at maximum of 50% of accumulated savings;
- Annuities — paid out through insurance company in form of a single annuity;
- Phased (Programmed) withdrawal — paid out through SPAMC for at least 5 years.
There are 3 general conditions, where at least one should be met when entering the pay-out phase in order to achieve more favourable tax treatment of income stream from Pillar III savings. They concern the member’s age, the entitlement for state retirement pension benefits or the entitlement for early state retirement pension benefits.
When considering the tax treatment of the pay-out phase income stream from the saver’s point of view, there is a possible way to adjust the personal income tax base. The Act on Income Tax stipulates that the deduction from income tax base will be applied to the income stream from Pillar III benefits and life insurance contracts. Personal income tax base shall be lowered by the paid contributions (Pillar III) or paid premiums (life insurance contract). The Act on Income Tax also defines the income tax base adjustments in case of paid monthly benefits according to the following formulas:
- In the case of temporary annuity, the income tax base is calculated as positive balance between sum of already received benefits and sum of paid contributions;
- In the case of single annuity, the income tax base is calculated as paid monthly benefits and total paid contributions (or premium) divided by the number of remaining years calculated as life expectancy and the age of the taxpayer (beneficiary) at the moment of the first paid benefit.
Therefore, we can conclude that the income tax treatment of pay-out phase is, in fact, a deferred taxation of investment returns applied not to the supplementary pension fund, but directly to the saver during the pay-out phase. In general, we can say, that the tax regime for Pillar III is EET.
16.5 Performance of Slovakian long-term and pension savings
Real net returns of Slovakian long-term and pension savings
The year 2024 brought overall exceptional positive returns for equity based pension vehicles and rather poorer, but still positive returns for bond based pension vehicles. Higher positive returns were recorded for equity based funds. On the other hand, higher inflation negatively influenced the performance of all pension funds.
The performance (returns and respective volatility) differs in all types of pension funds. This is caused by the portfolio structure and different investment strategies. Bond guaranteed pension funds do not invest in equity investments. Mixed non-guaranteed pension funds invest a small portion in equity investments (currently less than 40% of AuM on average) and equity non-guaranteed pension funds invest higher portion in equity investments (currently more than 50% of AuM on average). Optional Index non-guaranteed pension funds possess the highest level of equity investments (nearly 100% of AuM), because their fully passive investment strategy focusing on the replication of benchmark (various equity market index) performance. The following figure presents the performance of Pillar II Pension Funds over various holding periods.
Do Slovakian savings products beat capital markets?
Before comparing the performance of savings products against relevant market benchmarks, portfolio structure of pension products should be understood.
For pillar II pension funds, most of the savings have been invested into money market instruments and later in bond investments due to the legislative ruling and started to invest more into equities starting 2015 (see Figure 16.7). Portfolio structure changes has started in 2023 by applying predefined saving strategy allocating all savings into passively managed index pension funds until the age of 50.
Pillar III products have allocated savings into the equities and bonds, so the performance of the vehicles has been more volatile compared to the Pillar II pension funds. The portfolio structure of Pillar III Supplementary Pension funds is presented below.
In order to compare the performance, we set the weight for two key classes (equities and bonds) based on the respective portfolio structures of pension vehicles in both pillars (see Table 16.11).
| Equity index | Bonds index | Start year | Allocation | |
|---|---|---|---|---|
| Pension funds | STOXX All Europe Total Market | Barclays Pan-European Aggregate Index | 2005 | 50%–50% |
| Supplementary pension funds | STOXX All Europe Total Market | Barclays Pan-European Aggregate Index | 2009 | 50%–50% |
| Pan-European Personal Pension | STOXX All Europe Total Market | Barclays Pan-European Aggregate Index | 2023 | 50%–50% |
| Data: STOXX, Bloomberg; Note: Benchmark porfolios are rebalanced annually. | ||||
The new PEPP products introduced in 2023 came on the market with clear, transparent and efficient passive management style delivering high performance combined with low fees well below 1% of AuM. However, unfair tax regime and inability to switch from Pillar III products towards PEPP products limit the increased value-for-money for savers.
16.6 Conclusions
The Slovak multi-pillar pension system is not quite favourable for savers. Pillar II still suffers from constant changes and significant political risk therefore not only arises from diverging political opinions on the pension system. The new phenomena in Slovak pension system is the pension populism, where political parties reverted stabilization features and decreased the financial stability and trustworthiness of the PAYG scheme. The year 2022 brought major reform changes in Slovak pension pillar. However, it combines recommended positive changes (retirement age tied to the life expectancy, lowering fees for pension funds, introduction of predefined investment strategy) with the populistic features (new parental bonus, new early retirement rules, low state support for private savings). The new government in late 2023 decreased permanently the contributions towards the Pillar II scheme to 4% of contribution base, which will have significant detrimental impact on young savers due the fiscal imbalance of Pillar I on long-term.
The unprofessional move of transferring savers’ assets from equity-based pension funds into bond ones in 2013 had detrimental effect on savings, which could lead to low pension pots and further political pressures on decreasing importance of private pension savings in Slovakia. The reform in 2022 with the introduction of predefined investment strategy for all inactive savers could improve the situation and expected pension benefits in future.
Pillar III pension vehicles are generally poorly performing, costly and without significant tax benefits for employees’ contributions; Pillar III would never survive competition from Pillar II pension funds and typical investment funds. The debate on finding an appropriate regime for the Pillar III scheme is still ongoing, while there are several different views on how to make Pillar III more favourable for savers.
PEPP products introduced in 2023 suffers from uneven conditions compared to Pillar III products, however they have brought significantly lower level of fees.
Acronyms
- AIF
- Alternative Investment Fund
- APWP
- average personal wage point
- AuM
- assets under management
- DC
- Defined contributions
- ECB
- European Central Bank
- EEE
- Exempt Exempt Exempt
- EET
- Exempt Exempt Taxed
- ETF
- exchange-traded fund
- EU
- European Union
- HWM
- high-water mark
- IMF
- International Monetary Fund
- IRA
- individual retirement account
- PAMC
- pension assets management company
- PAYG
- pay-as-you-go
- PEPP
- Pan-European Personal Pension
- SPAMC
- supplementary pension assets management company
- TDF
- target-date fund
- TEE
- Taxed Exempt Exempt
- UCITS
- Undertaking for Collective Investment in Transferable Securities
- VPU
- value of pension unit