Milliman Private Pensions in CEE 01-2010

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M ll ma Research Repor

Prepared by:

Adr a AlloCr s a A omPaul Er esBea a Golemb eckaMarc Krz ko skA a MazeraOlexa der O u

January 2010

Pr a e Pe s o S s ems Ce ral a d Eas er Europe



Milliman, whose corporate offices arein Seattle, serves the full spectrum ofbusiness, financial, government, andunion organizations. Founded in 1947 asMilliman & Robertson, the company has52 offices in principal cities in the UnitedStates and worldwide. Milliman employsmore than 2,400 people, including aprofessional staff of more than 1,100qualified consultants and actuaries. Thefirm has consulting practices in employeebenefits, healthcare, life insurance/financial services, and property andcasualty insurance. Milliman’s employeebenefits practice is a member of AbelicaGlobal, an international organization of

independent consulting firms servingclients around the globe. For furtherinformation visit www.milliman.com.




Table of ConTenTs

SCOPE 2

OvERviEw Of PRivAtE PEnSiOn SyStEMS 3Ma da or Pe s o s 3

Scheme Me r cs 3Charg g S ruc ures 4i es me Op o s 6Prude al Super s o 7Compe e La dscape 8Co r bu o Ra es 9

volu ar Pe s o s 9Scheme Me r cs 9O her fea ures 10

PRivAtE PEnSiOn SyStEMS in SPECifiC MARKEtS 11

Pola d 11Summar o he S s em 11Ma da or Pe s o s 11volu ar Pe s o s 15Pe s o Compa es 17

Roma a 24Summar o he S s em 24Ma da or Pe s o s 24

volu ar Pe s o s 28Pe s o Compa es 30

Russ a 41Summar o he S s em 41Ma da or Pe s o s 42volu ar Pe s o s 45

Hu gar 48Summar o he S s em 48Ma da or Pe s o s 48volu ar Pe s o s 52

Slo ak a 56Summar o he S s em 56Ma da or Pe s o s 57volu ar Pe s o s 60

OvERviEw Of PRivAtE PEnSiOn SyStEMS in OtHER MARKEtS 62Czech Republ c 62Slo e a 62Croa a 62Serb a 63Bulgar a 63Es o a 63La a 64L hua a 64



M ll maResearch Repor

Private Pension Systems in Central and Eastern EuropeAdrian Allott, Cristina Atomi, Paul Ernest, Beata Golembiecka, Marcin Krzykowski, Anna Mazerant, and Olexander Ofutin

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January 2010

sCope

For more than two decades, the World Bank has been active in promoting a move away from totalreliance on pay-as-you-go public pension provision.

The Bank’s preferred model is a three-pillar pension environment in which a state pension (typicallyuniversal, pay-as-you-go) is supplemented by two defined contribution pension arrangements, onefunded by mandatory contributions from workers, and the other voluntary but tax-advantaged.

The original template for the funded pillars was the pension systems of Chile and other Latin Americancountries; however, the bank considered that their introduction would also be appropriate in theCentral and Eastern European region, given that state pension provision in those countries was

particularly weak and that they faced similar demographic changes to developed countries.Tentative reforms commenced in the mid 1990s in Hungary and the Czech Republic.

In 1998, Poland became the first country in the region to implement the full World Bank model; it hassubsequently been followed by a number of others.

Private pensions have grown strongly in most countries in Central and Eastern Europe (CEE)in recent years. Although the pension systems in the region face important challenges from thecurrent economic downturn, they continue to represent a significant growth opportunity for financialservices providers.

The purpose of this report is to help Milliman’s clients and partners gain a better understanding of thevariety and current state of funded pension systems in the region, a decade on from the Polish launch,and the opportunities and challenges facing pension providers in these countries.

We have restricted our study to five markets. These have been chosen to provide a representation ofthe diversity in the region. An overview of the private pension systems in the other major markets isincluded for comparison.

the purpose o h s repors o help M ll ma ’s cl e s

a d par ers ga a be eru ders a d g o he ar ea d curre s a e o u dedpe s o s s ems he reg o ,a decade o rom he Pol shlau ch, a d he oppor u esa d challe ges ac g pe s opro ders hese cou r es.





January 2010

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overview of privaTe pension sysTems

Ma da or Pe s o s

Scheme MetricsMember numbers in mandatory ("Pillar II" or "PII") pension funds are determined by (a) the size ofthe workforce in a particular country and (b) the eligibility rules under which workers participate in thesystem. In the CEE region, the Polish system is by far the largest in terms of member numbers. This is,first and foremost, because Poland has a relatively large workforce.

: pii membersfigure 1

0m 5m 10m 15m

Poland

Hungary

Slovakia

Russia

Romania

Secondly, the Polish system is nearing maturity in the sense that it now covers most employees in theworkforce. The Romanian system, by comparison, is brand new, although it is expected to significantlyincrease its membership over the next two decades as younger people enter the workforce and areautomatically enrolled in the system. Pension systems are similarly underdeveloped in Russia relative

to the potential eligible membership, and this once again reflects the relative newness of the system.

: pii asseTs unDe r managemenT (aum)figure 2

€ 0bn € 10bn € 20bn € 30bn € 40bn

Poland

Hungary

Slovakia

Russia

Romania

Some countries in the region have struggled to extend the coverage of their pension systemto all economically active people. Because of tax structuring, these jurisdictions tend to havehigh proportions of self-employed or professional people, while pension systems are typicallydesigned for those earning salaries. More work needs to be done to ensure that the self-employed are not overlooked.

Member umbers ma da or pe s o u ds arede erm ed b (a) he s ze o

he ork orce a par cularcou r a d (b) he el g b lrules u der h ch orkerspar c pa e he s s em.





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January 2010

Assets under management (AUM) are a function of (a) member numbers, (b) contribution rates, (c)charge rates, (d) investment returns, and (e) the age of the system. Once again, Poland is by far thelargest market in the region, benefitting from 10 years of accumulated contributions, high participantnumbers, and a relatively high contribution rate.

: pii annualiseD Transfer raTesfigure 3

0% 2% 4% 6% 8%

Poland

HungarySlovakia

Russia

Romania

Transfer rates (the percentage of system participants electing to transfer from one provider toanother) vary significantly around the region for 2008. In Romania they are very low, which is due tothe newness of the market and some practical impediments to transfer contained in the regulations.In Poland and Hungary there is a stronger history and tradition of transfers, although even hererates are moderate.

Charging StructuresMost mandatory pension schemes impose a limit on the level of charges that can be applied byproviders, in order to protect consumers and maximise the (net) investment returns on pension

contributions. The charge caps imposed by regulations can take different forms and in the savingsaccumulation phase are typically defined as a maximum fund management charge and/or a maximumcharge on contributions. The fund-based charge limits are lowest in those countries (e.g., Slovakia)where political pressure on costs to participants has been strongest.

In Poland maximum charges on contributions have been reduced recently, although providers wereallowed to maintain relatively high charge levels for a number of years after the establishment of thesystem. In Slovakia charge levels were forced down by the government shortly after the introductionof the system, leading to severe disruption of provider business plans. In Romania charges wereestablished at relatively low levels from the outset and to date have not been subject to much pressure.

In some countries, performance-related fees or explicit charges to cover expenses (e.g., custodycosts) can be charged in addition. Fees of up to 25% of the investment return can be levied byproviders in Russia, for example, in addition to the maximum fixed charge of 1% p.a.

When calibrating a transfer environment, regulators need to balance the need to create acompetitive environment against the costs to the system (administration, sales commission)of excessive transfers. The best systems appear to be designed in such a way that member-originated transfers are relatively easy to process while distributor-originated transfers arediscouraged. Under this regulatory treatment transfer rates appear to be minimal.

Mos ma da or pe s oschemes mpose a l m

o he le el o chargesha ca be appl ed bpro ders, order o pro ecco sumers a d max m se

he es me re ur s ope s o co r bu o s.





January 2010

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Poland has the most sophisticated fund-based charging structure, with the maximum managementcharge (charged on the net asset value (NAV)) being dependent on the fund value. Under newregulations to be implemented from 1 January 2010, a sliding scale will apply for fund values rangingfrom PLN 8 billion (€ 1.9 billion) to over PLN 45 billion (€ 10.7 billion). Maximum charge rates reduce asassets under management grow.

: pii funD Charge limiTs (as a perCenTage of aum per annum)figure 4

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2%

Poland

Hungary

Slovakia

Russia

Romania

Slovakia also has the lowest contribution charge limit of just 1%. In Poland the current contributioncharge limit is 7% but is planned to decrease to 3.5% from 1 January 2010. In Russia no contributioncharge limits apply.

: pii ConTribuTion Charge limiTsfigure 5

0.0% 2.0% 4.0% 6.0% 8.0%

Poland

Hungary

Slovakia

Russia

Romania

Reductions in allowable administrator charges and other regulatory changes to Pillar II pensionsmay be making some pension systems unviable for administrators. In Romania administratorshave been prepared to accept projected returns below those normally required by theircorporate profitability standards. In Slovakia business plans have been undermined by legislativechange, and the initial investment in acquisition of business is unlikely to be fully recovered. Theanticipated legislative changes in Poland are also likely to significantly alter the current marketdynamics.

Pola d has he mossoph s ca ed u d-basedcharg g s ruc ure h hemax mum ma agemecharge, (charged o he easse alue (nAv)) be gdepe de o he u d alue.





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January 2010

Investment OptionsMost mandatory systems offer a choice of at least three investment fund options, shown in Figure6; generally, low risk (taken as a maximum of 10%–30% in risky assets), balanced (30%–50%maximum in risky assets), and aggressive (more than 50% in risky assets). None of the countriesanalysed offer a secure (cash) fund option. No fund choices are available in Poland, but here thetypical investment strategy of pension funds is to invest over 70% of assets in bonds with onlyaround 20% in equities. In Russia, fund options depend on the investment strategy and offering ofeach non-state pension fund (NPF), subject to limitations imposed by law. Across the region thereis usually only one investment strategy per fund, although in some countries providers can offermultiple funds, each with its own strategy.

: invesTmenT opTions availablefigure 6

seCure low balanCeD aggressive

polanD no yes no nohungary no yes yes yesslovakia no yes yes yesrussiaromania no yes yes yes

Most countries provide some form of minimum investment guarantees on pension contributions. InRomania the accumulated contributions less applicable charges are guaranteed at the date of exitfrom the fund. In Poland and Romania there is a minimum rate of return defined as the lesser of 50%of the weighted average rate of return of all open funds over the period or the average rate of returnless 4%. Absolute and market-relative guarantees also apply in Slovakia while there are no investmentguarantees in Russia or Hungary. The investment guarantees in various markets are summarised inFigure 7.

: invesTmenT guaranTeesfigure 7

absoluTe markeT-relaTive

polanD no yeshungary no noslovakia yes yesrussia no noromania yes yes

Mos cou r es pro desome orm o m mum

es me guara ees o

pe s o co r bu o s.

Average investment mixes may be suboptimal given the long-term investment horizon of apension fund. Political and marketing considerations, however, lead regulators and administratorsto promote low-risk or medium-risk funds, with relatively low exposure to risky assets such asshares and property. Over the long term, however, these strategies may suppress returns andreduce pensions payable.





January 2010

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Prudential SupervisionThe minimum capital requirements specified by the local pension fund regulators in Poland andRomania are broadly similar, at around € 4m, with Slovakia rather higher, at some € 7 million. In Russia,the effective minimum is RUR 100 million ( € 2.4 million). In Hungary, the minimum capital requirementof 100 HUF million (€ 0.38 million) applies only to pension funds that pay out benefits. This is waivedif benefit payments are outsourced by the pension fund.

: pii CapiTal requiremenTsfigure 8

€ 0 m € 2 m € 4 m € 6 m € 8 m

Poland

Hungary

Slovakia

Russia

Romania

Romania appears to have the most extensive range of risk management controls, covering all sixareas examined: actuarial reserves, depository unit price checking, guarantee fund, auditing, internalrisk management process, and external custody. Poland covers all areas except actuarial reserves,while Hungary covers all areas except external custody and depository unit price checking. Only theRussian and Slovakian systems do not include a guarantee fund.

: risk managemenT ConTrolsfigure 9

aCTuarial guaranTee uniT priCe eXTernal eXTernal inTernalreserves funD CheCking CusToDy auDiT risk mgmT

polanD no yes yes yes yes yeshungary yes yes no no yes yesslovakia no no yes no yes yesrussia no no yes yes yes yesromania yes yes yes yes yes yes

Roma a appears o ha ehe mos ex e s e ra ge o

r sk ma ageme co rols,co er g all s x areas

exam ed: ac uar al reser es,depos or u pr ce check g,guara ee u d, aud g,

er al r sk ma agemeprocess, a d ex er al cus od .

The capital framework in which pension funds operate is made up of a number of components,which do not necessarily fit together and are somewhat arbitrary. Nowhere in the region havewe observed a comprehensive risk-based capital framework similar to Basel II or Solvency II.Regulators and legislators appear to be focused on form rather than substance in this matter.





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January 2010

Competitive LandscapeCountries with more developed systems have seen consolidation among pension fund providers,with smaller players exiting the market in favour of larger providers, as companies look to achievecritical mass. In Poland, the largest and most developed market, the average number of membersper provider is around the 1 million mark, significantly higher than in all other countries. 1 Althoughthe number of members is only one of the factors affecting provider profitability, in some markets,(especially Russia and to a lesser extent Hungary,) providers may struggle to realise the necessaryeconomies of scale because of low membership levels.

: pii average me mbers per proviDerfigure 10

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000

Poland

Hungary

Slovakia

Russia

Romania

: pii average aum per proviDerfigure 11

€ 0 bn € .5 bn € 1.0 bn € 1.5 bn € 2.0 bn € 2.5 bn

Poland

Hungary

Slovakia

Russia

Romania

A similar picture can be seen for assets under management, with Poland recording an average of € 2.3billion per provider. Hungary and Slovakia are more developed than Romania, which has only nominallevels because of the newness of the system. Nevertheless, at some € 15 million per provider this isstill roughly double the levels in Russia.

1 The average in Romania is now up to almost 400,000 following mergers in 2009.

In jurisdictions where regulation allows cost-sharing between entities in a financial servicesgroup, scale may not be as important as it appears at first glance. The major fixed costs are theinitial advertising, system development, and the minimum personnel structure that has to bemaintained within the administration company.

Cou r es h morede eloped s s ems ha e seeco sol da o amo g pe s o

u d pro ders, h smallerpla ers ex g he marke

a our o larger pro ders, ascompa es look o ach e ecr cal mass.





January 2010

9

Contribution RatesContribution rates as a percentage of gross salary are as set out in the table in Figure 12. Romania isstill in the phase-in period, with contribution rates expected to rise eventually to 6%.

: ConTribuTion raTesfigure 12

CurrenT

polanD 7.3%hungary 8.0%slovakia 9.0%russia 6.0%romania 2.0%

volu ar Pe s o s

Scheme MetricsIn addition to mandatory pension systems, governments in all countries have introduced voluntarypension systems that aim to encourage individuals to make additional private pension contributions toreduce income shortfalls at retirement.

: piii membersfigure 13

0.0 m 0.5 m 1.0 m 1.5 m 2.0 m

Poland

Hungary

Slovakia

Russia

Romania

As would be expected, the take-up of voluntary systems is generally much lower than formandatory systems because of the lack of compulsion. Russia is an exception, however, becausethe voluntary system has operated for over 10 years, whereas the mandatory system is muchnewer. The volume of assets under management is therefore much higher in the voluntary system(despite the lower number of members).

Contribution rates at the levels set out above will only be capable of funding pensions that willreplace a minor part of pre-retirement income. Pillar I state pensions, Pillar III (PIII) voluntarypensions, and personal savings will need to fill the gap if retirees are to maintain their standard ofliving in retirement.

i add o o ma da orpe s o s s ems,go er me s all cou r esha e roduced olu arpe s o s s ems ha a m

o e courage d dualso make add o al pr a e

pe s o co r bu o s oreduce come shor allsa re reme .





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January 2010

: piii aumfigure 14

€ 0 bn € 5 bn € 10 bn € 15 bn

Poland

Hungary

Slovakia

Russia

Romania

In contrast to the well-developed mandatory system in Poland, the voluntary system, which consists ofindividual and employer-based schemes, is very small. The low level of take-up is partly linked to thelimited tax incentives offered. The system in Hungary is reasonably well developed with relatively highmembership but low asset volumes, while Romania is still in its infancy.

Other FeaturesAs with mandatory systems, tax incentives are offered, with contributions being deductible frompersonal income tax up to defined limits. The exception is Poland, where there is no deductibility forcontributions but benefits are exempt from capital gains tax. Voluntary pensions generally can onlybe provided by pension fund companies. In Romania and Poland a wider range of financial servicescompanies (e.g., life insurers, fund managers) are allowed to offer them.

As with mandatory systems, some countries impose restrictions on charges that can be levied byproviders. In Hungary, Romania, and Slovakia, the maximum annual fund-based charges are set at0.8%, 2.4%, and 3% respectively. In Poland there is effectively no limit on the management charge,

while in Russia this may not exceed 15% of the investment return and the maximum contributioncharge is 3%.

Similarly, most countries impose restrictions on charges that can be applied by providers on transfers.In Russia we understand these depend on the scheme rules.

: resTriCTions on Transfer Chargesfigure 15 polanD only alloweD in firsT yearhungary 4.5% maXimumslovakia 5% maXimum firsT 3 years, ThereafTer 1% of aCCounT balanCerussia noromania 5% maXimum year 1, 2.5% in year 2, anD 0% ThereafTer

Voluntary pension saving should be an attractive solution to fiscal authorities, as the contributionsare not withdrawn from the tax base used to fund Pillar I pay-as-you-go pensions. Governmentsaround the region have, by and large, failed to recognise this potential. Regulatory environmentsare incomplete, tax incentives are moderate at best, and promotion is weak.

i co ras o he ell-de eloped ma da or s s em

Pola d, he olu ars s em, h ch co s s s o

d dual a d emplo er-based schemes, s er small.





January 2010

11

privaTe pension sysTems in speCifiC markeTs

Pola d

Summary of the SystemWith effect from 1 January 1999, a new pension system was introduced in Poland. The aim of thereform was to change the pension system in order to provide its participants with an adequate level ofincome after retirement. In the new system for people born after 1948 the pension depends only onthe capital accumulated throughout the life of a person. The pension system introduced is based on aso-called three-pillar framework.

The first pillar is represented by the individual account of the insured person at the Social Insurance

Institution (Zakład Ubezpieczeń

Społecznych, ZUS). The deposited capital is value-adjusted by thefactor announced by the Minister of Labour and Social Policy, based on the consumer price index (CPI).The pension from the first pillar is funded on a pay-as-you-go basis. This means that pensions paid outcurrently are financed by contributions from current employees. In return for mandatory contributionspaid to ZUS amounting to 19.52% of gross salary (12.22% if an insured is a member of a second-pillarfund), individuals acquire pension rights, which cannot be transferred away by inheritance.

The second pillar of the pension system is based on Open Pension Funds (pension funds, OFE),which are managed by dedicated pension fund management companies (PTE). The activity of pensionfunds and management companies is regulated by the 'Act on Organization and Functioning ofPension Funds from 28 August 1997', with the subsequent 'Amendment to the Act on Organizationand Functioning of Pension Funds and other Acts from 27 August 2003' (the Act).

The essential activity of mandatory pension funds is to collect and invest the contributions of pensionfund members with the purpose of paying out benefits to the members of the fund when they reachretirement age. Member contributions (7.3% of the gross salary) are transferred to pension fundsthrough ZUS as part of overall pension contributions. At the moment of contribution the second-pillarpremiums are exempt from income tax. While the first pillar is mandatory, the second one is mandatoryonly for those born after 31 December 1968.

The third pillar of the system is voluntary and includes employee pension schemes (PracowniczePlany Emerytalne, PPE) and individual pension accounts (Indywidualne Konta Emerytalne, IKE).Because the third pillar is less strictly regulated, other forms of pension savings (e.g., ordinary lifeinsurance or mutual funds) are often also referred to as third pillar .

Mandatory Pensions

Re e ues o Pe s o fu dsRevenues of PTEs consist of asset management charges and charges from contributions/premiumspaid by pension fund members.

Upper limits for both types of the charges are specified in the Act.

Upper limits on management charges as a percentage of Net Asset Value (NAV) are presented in thetable in Figure 16.

S ar g rom 1 Ja uar 1999,a e pe s o s s em as

roduced Pola d. the a mo he re orm as o cha ge

he pe s o s s em ordero pro de s par c pa s

a adequa e le el o come

a er re reme .





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January 2010

: upper limiTs on managemenT Chargesfigure 16

nav in plan (million) maXimum monThly manageme nT Charge

0 – 8,000 0.045% of nav8,000 – 20,000 3.6m pln + 0.040% of nav eXCeeDing 8,000m pln

20,000 – 35,000 8.4m pln + 0.032% of nav eXCeeDing 20,000m pln 35,000 – 65,000 13.2m pln + 0.023% of nav eXCeeDing 35,000m pln 65,000 + 20.1m pln + 0.015% of nav eXCeeDing 65,000m pln

The maximum charge from contributions paid by pension fund members is 7% and was envisaged

to be gradually reduced beginning in 2011 to reach 3.5% in 2014. However, this reduction will nowtake place starting 1 January 2010 (see below).

Another source of revenue for the PTEs is the profit received as a reward for good investmentperformance. OFEs transfer up to 0.005% of NAV each month to PTEs. This amount is then passedto a Bonus Account , which is managed by OFEs.

The Bonus Account transfer depends on the investment performance of PTE and is calculated inproportion to the average weighted rate of return of all pension funds announced by the SupervisoryAuthority (KNF) each month.

The PTE managing the pension fund with the highest rate of return transfers 100% of funds collectedin the Bonus Account to the Reserve Account . The PTE that manages the pension fund with thelowest rate of return is obliged to transfer all assets accumulated in the Bonus Account back tothe OFE. The remaining PTEs transfer part of the assets accumulated in the Bonus Account to theReserve Account in proportion to their investment returns and transfer the remaining part to the OFE.

PTEs have the right to withdraw money from the Reserve Account twice a year if the investmentreturn for the previous six years is higher than the CPI. This is considered to be a reward for goodinvestment performance.

The other source of revenue is the income from transfer charges paid by fund members in case ofswitching funds prior to completion of two years of membership. The transfer charge equals 160 PLN(approximately € 38) in the first year of membership and 80 PLN (approximately € 19) in the secondyear. Transfer charges are typically used to help finance acquisition costs, e.g., commissions incurredby PTEs on member transfers.

Expe ses o Pe s o fu dsThere are two types of expenses that are incurred by the pension fund: systemic and non-systemic.Systemic expenses are listed by the Act and are presented below.

Cos s o super s o ( or he accou o he u d) : PTEs transfer 0.1064% of monthly premiumsreceived by open funds.

Ombudsma cos s : PTEs transfer 0.0071% of monthly premiums received by the open fundmanaged by PTE.

Cos s o he Guara ee fu d : Created in order to protect OFE members against a financial deficit(see next page).

Cos o de c s ope pe s o u ds: Detailed information is included under Guarantees on the next page.

the max mum charge rom

co r bu o s pa d b pe s ou d members s 7% a d ase saged o be graduallreduced beg g 2011 oreach 3.5% 2014. Ho e er,

h s reduc o ll o akeplace s ar g 1 Ja uar 2010.





January 2010

13

fees pa d o ZUS rom co r bu o s pa d b u ds members : According to the law, ZUS isentitled to receive not more than 0.8% of contributions for social insurance. The level of the ZUS fee(to cover its operating costs) is determined annually in the state budget.

tra s er ee pa d o bo h ZUS a d he na o al Depos or or Secur es (KDPw) : Accordingto the Act, the transfer charge paid to ZUS equals 1% of the minimum monthly wage for each newmembership agreement resulting from incoming transfer, whereas the charge paid to the KDPWequals 1% of the minimum monthly wage for transfers between OFEs.

Cos s o acqu s o /d sposal o asse s ( .e., deal g cos s) o ope pe s o u ds.

Cos o depos or ba k.

The Guarantee Fund consists of basic and additional parts. The basic part of the Guarantee Fund isadministered by the National Depository for Securities (KDPW S.A). PTEs make contributions to thebasic part of the Guarantee Fund and the total value of the basic part of the Guarantee Fund cannotbe higher than 0.1% of the net asset value (NAV) of all OFEs operating in the market.

PTEs also make payments to the additional part of the Guarantee Fund administered by their OFE.The total value of the additional part is between 0.3% and 0.4% of the NAV of the OFE managed bythe PTE (see below).

Expe ses o Pe s o fu d Adm s ra orsThe costs not regulated by the law are called non-systemic costs and involve all other expensesincurred in the operation of a PTE such as:

Acquisition costs, including costs of marketingGeneral management costs including salariesMinimum required rate of return and elimination of deficits

Guara eesThe law guarantees a minimum rate of return to the fund participants. In cases where the rate of returnon the fund drops below the minimum required rate of return, a deficit appears.

In cases where the current rate of return on the fund for the last 36 months is lower than minimumrequired rate of return, then the amount of the deficit is determined by multiplying the number of unitsof account in the pension fund on the last working day of the period of 36 months by the differencebetween the value of the unit of account that would ensure achievement of minimum rate of return andthe actual value of the unit of account on the last working day of the period of 36 months.

The minimum rate of return is defined as the lower of 50% of the weighted average rate of return of allopen funds during the period or the weighted average rate of return less 4%.

Open pension funds are obliged to redeem the fund units kept in the reserve account in order tocover any deficit. The income from the redeemed units increases the value of remaining units of thefund. In the case where the deficiency cannot be fully offset by the reserve account, the fund redeemsunits from the additional part of the Guarantee Fund. If the deficit is still not offset, the PTE has tocompensate the shortfall from its own assets. If the above sources are not sufficient to cover thedeficit, the remaining amount is compensated from the basic portion of the Guarantee Fund. In casethe basic portion of the Guaranteed Fund is insufficient to cover the deficit, the remaining amount isguaranteed by the state.

Ope pe s o u ds areobl ged o redeem he u du s kep he reser eaccou order o co er ade c . the come rom heredeemed u s creases

he alue o rema g u so he u d.





14

January 2010

i her a ceAssets managed by OFEs may be inherited, subject to some restrictions.

In case of the death of an OFE member, 50% of the account value is transferred to the spouse’s OFEaccount. The remaining 50% is inherited according to the rules given in the law. The OFE membermay, however, choose the beneficiaries and override the inheritance law.

D s r bu o S ra eg a d Age /Broker Remu era oAs the system has been in operation since 1999, the market is already saturated and has stabilised.Currently the new entrants to the fund are mostly new young employees entering the workforce forthe first time.

It is obligatory to choose a pension fund on taking the first job. If an employee fails to do so in aspecified period, a fund will be allocated to him or her by lottery. The allocation is made twice a yearwith the exclusion of funds that have excessive market share.

Membership of OFE funds is offered directly by the PTEs through call centres and the Internet andby insurance agents (including multi-level networks). The market is estimated at around 600,000–700,000 new members annually. Several times a year there are massive sales campaigns by PTEs(especially on TV).

Insurance agents typically receive commissions of between 200 PLN and 500 PLN. Commission ishigher for transfers with high assets under management (and may exceed 500 PLN). For the careerstarters the commissions tend to be at the lower end of the above range and are independent of theexpected contribution level.

There were 156,000 new members allocated by the lottery in 2008 (down one third from 2007),which is 20%-25% of all new OFE members. Only funds that have higher investment returns than themarket average and a share of AUM lower than 10% may take part in the lottery.

Because of widespread criticism of inappropriate selling in recent years, in particular in the transfermarket, the newest legal amendment is expected to introduce a ban on the acquisition of OFEmembers by insurance agents. Agents would be replaced entirely by direct channels (call centres,Internet, and direct mail).

i es me S ra eg esThe law stipulates investment limits for the PTEs. The most important limitation is that up to 40% ofassets may be invested in shares listed on the Warsaw Stock Exchange.

PTEs are not allowed to invest in derivatives of any kind.Foreign investment may total up to 5% of a fund’s assets. This regulation was recently questioned bythe European Commission, which considers the investment restrictions imposed by law on OFEs tobe contrary to the principle of free movement of capital. This dispute has not yet been resolved.

taxa o o Co r bu o s a d Be e sContributions paid to the OFE are deducted from gross salary and are not subject to income taxes orsocial security charges.

Regular benefit payments paid out by the OFE in the future are expected to be subject to the generalrules of personal income tax (e.g., growth in value may be subject to capital gains tax).

Expec ed Cha ges Leg sla o

Since the beginning of 2009 a number of changes in the legislation regarding pension funds wereproposed by the Ministry of Labour and Social Policy. They mainly concern decreasing the level ofcontribution charges, management fees, the detailed rules of operation of the Bonus Account , and

the la s pula es es mel m s or he PtEs. the mos

mpor a l m a o s haup o 40% o asse s ma be

es ed shares l s ed ohe warsa S ock Excha ge.

S ce he beg g o 2009a umber o cha ges heleg sla o regard g pe s o

u ds ere proposed bhe M s r o Labour a d

Soc al Pol c . the ma lco cer decreas g he le elo co r bu o charges,ma ageme ees, he

de a led rules o opera o ohe Bonus Account , a d he

Guara ee fu d.





January 2010

15

the Guarantee Fund. The other proposed change was the introduction of a multi-fund structure thatwould allow for lower investment risk for older members of the system (Type A and Type B sub-funds).

Two of the changes proposed above are being introduced through new legislation. On June 26,the Polish Parliament adopted an amendment to the Act on Organization and Functioning ofPension Funds that set the maximum level of acquisition charges from the premiums paid to 3.5%.The amendment also decreases the maximum management charges paid by open funds to themanagement funds. The proposed table of maximum management charges (as a proportion of NAV)is shown in Figure 17. :

: proposeD maXimum managemenT Chargesfigure 17

nav in plan (million) maXimum monThly managemenT Charge

0 – 8,000 0.045% of nav8,000 – 20,000 3.6m pln + 0.040% of nav eXCeeDi ng 8,000m pln

20,000 – 35,000 8.4m pln + 0.032% of nav eXCeeDing 20,000m pln 35,000 – 45,000 13.2m pln + 0.023% of nav eXCeeDing 35,000m pln 45,000 + 15.5m pln

This amendment was accepted by the Polish Senate in mid-July and has been approved by thepresident. The law is expected to be in force starting from 1 January 2010.

The temporary law regarding the payout phase of first pensions from OFE was passed in 2008.Several thousand women born before 1949 are entitled to pensions from OFEs starting from thebeginning of 2009. Because the retirement age for men is higher it is expected that they will start toreceive their first pension benefits in 2014.

In accordance with the (transitory) law, the new pensions will be paid in two forms: fixed-termannuities and life annuities. Lump-sum payments are not allowed. Current OFE members (practicallyonly women) will be entitled to a guaranteed five-year annuity upon attaining the age of 60 years. After65, the member of OFE will be entitled to a life annuity under a new, permanent law.

The total pension paid will be the sum of the Pillar I and Pillar I I pensions. In the case of life annuities,an OFE member will be able to choose among offers of the life annuities available in the market.Funds accumulated in an OFE account will be transferred via ZUS to the chosen life annuity funds(Fundusz Do żywotnich Emerytur Kapitałowych, DEK fund), which will be managed by a pensioncompany (Zakład Emerytalny).

Annuities cannot be inherited. However, if the retiree dies within three years of the first annuitypayment, a guaranteed lump sum will be paid to the beneficiaries.

The payout phase system for the fixed five-year term annuity was adopted as a temporary law at theend of 2008. However, the law that stipulates the creation, organization, and operation of DEK fundshas been vetoed by the president and is expected to be rewritten before 2014.

Voluntary Pensions

i d dual e Ko o Emer al e (i d dual Pe s o Accou )The law provides tax incentives for additional savings through individual pension accounts. AnIndywidualne Konto Emerytalne (IKE) account holder may choose a combination of different forms ofsaving, including bank deposits, unit-linked insurance products, mutual investment funds, and directstock exchange investments. IKE accounts are offered by almost all mutual fund companies, mostbanks, some insurance companies, and stock exchange brokers. In case of survival up to the age of60 (or premature retirement), investment returns from the IKE are exempt from capital gains tax.

the la pro des axce es or add o al

sa gs hrough d dualpe s o accou s. Ai d dual e Ko oEmer al e (iKE) accouholder ma choose acomb a o o d ere

orms o sa g, clud gba k depos s, u -l ked

sura ce produc s, mu uales me u ds, a d d rec

s ock excha ge es me s.





16

January 2010

There is effectively no limit imposed on providers with respect to the level of fund managementcharges. Additional costs such as dealing charges have to be charged by insurers at the actual costlevied by third parties.

A limit is imposed on charges applied on transfers. A charge can only be applied in the first year andthereafter no charge is permitted.

In case of surrender, the account holder will be taxed with a capital gains tax of 19% and is notallowed to participate in the IKE program in the future.

Take-up of IKEs has been weak because of low levels of sales commission and the low interest ratesbeing paid on traditional pension savings.

Until 2008, the annual IKE contribution was limited to 1.5 times the average monthly gross salary peryear (4,055.12 PLN). Starting from 1 January 2009, the annual contribution limit has been increasedto three times the average monthly gross salary per year (9,579 PLN). The top limit is adjustedannually by a factor of expected average salary increase.

Data on the number of accounts at the end of period, new entrants, and assets under managementare presented in the table in Figure 18.

: aCCounTs, enTranTs, anD asseTs unDer managemenTfigure 18

no. of aCCounTs new enTranTs asseTs unDeraT enD of perioD During The year managemenT

2006 840,263 447,115 3112007 915,492 120,955 4472008 853,832 55,360 387

Source: KNF

The fall in the volume of assets in 2008 is due to the decreasing number of accounts andcontributions, e.g., from individuals closing their accounts or not making any contributions, as well asfrom the significant decrease in global asset values that year.

Praco cz Program Emer al (Emplo ee Pe s o Programs)

Employee pension schemes are defined as organized collective and regular-payment forms ofretirement saving. The contributions of program participants are paid in by the employers to thefinancial institutions that handle the management of such funds. The Pracowniczy Program Emerytalny(PPE) scheme itself is a contract that sets out the mutual duties of employers and employees inrespect of the program offered by the employer to the employees.

The PPE itself is not a financial institution, but contributions to the program are managed by existingproviders such as insurance companies and mutual investment funds. There are three forms in whichan employer may offer the PPE to its employees:

Group unit-linked life insuranceAgreement for employees to pass contributions to an investment fund through the employerEmployee Pension Fund (PFE)

Emplo ee pe s o schemesare de ed as orga zedcollec e a d regular-pa me

orms o re reme sa g.the co r bu o s o programpar c pa s are pa d b heemplo ers o he a c al

s u o s ha ha dle hema ageme o such u ds.





January 2010

17

The table in Figure 19 presents basic figures with respect to the PPE market.

: ppe markeTfigure 19

numbe r of number of employers number of premiums perprograms offering programs member s perioD [ € m]

2006 974 1,024 281,495 1662007 1,019 1,061 312,121 1792008 1,078 1,112 325,000 199

Source: KNF

Employees have a right to join the PPE if they are employed longer than three months and fulfil theconditions stipulated in the agreement between employee and employer. The contributions paid bythe employer are divided into two parts:

Basic, paid by the employer, up to 7% of the gross salary of an employee

Additional, paid by the employee, deducted from the employee’s salary and transferred to theprogram by the employer

There is a small tax advantage for PPE contributions compared to those made to IKEs in that thebasic contribution paid by the employer is not subject to social security insurance (ZUS).

Assets saved on the individual account are free from capital gains tax. In the payout phase thebenefits are also tax-free. The payout phase begins upon attaining the age of 60.

One of the special forms of mutual investment fund is the Employee Pension Fund (PFE), which is anentity created especially for the collection and management of contributions from several PPEs. A PFEis managed by an Employee Management Fund under the same legislation applying to OFEs and PTEs.Currently there are five PFEs in the market. The number of participants and assets under managementare presented in the table in Figure 20.

: pfesfigure 20

no. of membe rs aT The enD of perioD asseTs unDer managemenT [ € m]

2006 - 2052007 60,058 2512008 59,215 248

Source: KNF (2008 figures are estimated)

Pension CompaniesThe pension market in Poland is more than 10 years old with 14 pension companies present (reducedfrom 21 originally). The market already seems saturated and, as has been the case for several years,no new PTEs are expected to enter the market. The three major players in the market in terms ofassets managed are Aviva, ING, and PZU, accounting for 64% of the market with the top five playerscovering 77%

O e o he spec al orms omu ual es me u d s heEmplo ee Pe s o fu d (PfE),

h ch s a e crea edespec all or he collec o a dma ageme o co r bu o s

rom se eral PPEs.

the pe s o marke Pola ds more ha 10 ears old

h 14 pe s o compa esprese (reduced rom 21or g all ). the marke alreadseems sa ura ed a d, as has

bee he case or se eralears, o e PtEs are

expec ed o e er he marke .





18

January 2010

. : markeT share (members) as aT 31/12/08figure 21

5.57%8.05%

4.92%

20.67%

4.38%20.16%

5.62%

3.24%

14.61%

AEGONAIGAllianz PolskaAXABankowyAVIVAGenerali

INGNordeaPekao PioneerPocztylion-ArkaPolsatPZUWARTA

: markeT share (ConTribuTions) as aT 31/12/08figure 22

AEGONAIGAllianz Polska

AXABankowyAVIVAGenerali

INGNordeaPekao Pioneer

Pocztylion-ArkaPolsatPZUWARTA

4.26%8.00%

4.65%

24.40%

3.95%

24.81%

4.00%

2.28%

13.23%

: markeT share (asseTs) as aT 31/12/08figure 23

AEGONAIGAllianz PolskaAXABankowyAVIVAGenerali

INGNordeaPekao PioneerPocztylion-ArkaPolsatPZUWARTA





January 2010

19

: managemenT (figure 24 € m) as aT 31/12/08

0 € 2,000 € 4,000 € 6,000 € 8,000 € 10,000 €

AEGONAIG

Allianz PolskaAXA

BankowyAVIVA

GeneraliING

NordeaPekao Pioneer

Pocztylion-ArkaPolsat

PZUWARTA

There are only two possible ways of acquiring new clients in the market: transfers between OFEs andcareer starters. Despite being excluded from the lottery allocation of career starters, which is due totheir large agency networks and strong reputation, ING and Aviva are the clear leaders in the activeacquisition of career starters. Mid-sized funds such as AIG, Generali, Nordea, Pekao Pioneer, andPZU also have a significant share of new entrants to the system.

: new enTranTs in 2008figure 25

20,37859,412

17,88729,031

5,163126,577

51,268157,427

50,34547,210

31,21837,634

65,8322,246

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000

AEGONAIG

Allianz PolskaAXA

BankowyAVIVA

GeneraliING

NordeaPekao Pioneer


PZUWARTA

There are two clear leaders in terms of transfers—ING and AXA (in absolute values). In addition totheir good reputations and investment results, both companies have large networks of life insuranceagents who are allowed to sell pension funds (and acquire pension fund transfers). AEGON has lostthe highest number of members; this one-time effect is likely to be due to its recent M&A activity.

there are o clear leaders erms o ra s ers—inG

a d AXA ( absolu e alues).i add o o he r goodrepu a o s a d es meresul s, bo h compa es ha elarge e orks o l e sura ce

age s ho are allo ed o sellpe s o u ds (a d acqu repe s o u d ra s ers).





20

January 2010

: neT Transfers in 2008figure 26

-47,069-16,156

10,06343,559

-14,5648,232

16,03940,895

-4,780-4,917

-14,181-10,597

-3,863-2,661

-60,000 -40,000 -20,000 0 20,000 40,000 60,000

AEGONAIG

Allianz PolskaAXA

BankowyAVIVA

GeneraliING

NordeaPekao Pioneer


PZUWARTA

After 10 years of the system, all but one pension fund management company broke even. Theexception is AXA, who as a latecomer still incurs significant acquisition expenses. After consolidationof the seven companies exiting the market, all PTEs reached the threshold of 300,000 members,which is informally considered to be the break-even level for this business activity in Poland. However,because of the expected legislation changes (significant decrease of management charges andacquisition fees), this threshold might increase in order to maintain profitability. This might be a driverfor further M&A activity in the market in the future.

: pTe sTaTuTory p&l in 2008 (figure 27 € m)

-10 € 0 € 10 € 20 € 30 € 40 € 50 € 60 €

AEGONAIG

Allianz PolskaAXA

BankowyAVIVA

GeneraliING

NordeaPekao Pioneer


PZUWARTA

In most cases the equity capital of PTEs is proportional to the size of the fund (with some economiesof scale). The only exception to this general rule is AEGON, which has relatively high equity capitalbecause of two previous M&A transactions.

A er co sol da o o hese e compa es ex g hemarke , all PtEs reached

he hreshold o 300,000

members, h ch s ormallco s dered o be he break-e e le el or h s bus essac Pola d.





January 2010

21

: pTe's own CapiTal, 31/12/2008 (figure 28 € m)

0 € 20 € 40 € 60 € 80 € 100 € 120 € 140 € 160 €

AEGONAIG

Allianz PolskaAXA

BankowyAVIVA

GeneraliING

NordeaPekao Pioneer


PZUWARTA

Acquisition costs vary significantly between companies, with the main players ranging between € 45and € 85 per new member (including career starters and new entrants). AXA is a notable exceptionwith an estimated acquisition cost of over € 150 (in 2008). As well as the decrease of maximumacquisition and management charges, the draft bill of the Ministry of Labour and Social Policyprohibits OFE acquisition by agents. Only direct sales channels would be allowed: internet, callcentre, direct mail, etc. The same bill stipulates introduction of age-dependent portfolio strategies anda low-risk bond fund, which would be allowed for older members.

: aCquisiTion CosT per new me mberfigure 29 2

0 € 25 € 50 € 75 € 100 € 125 € 150 €

AEGONAIG

Allianz PolskaAXA

BankowyAVIVA

GeneraliING

NordeaPekao Pioneer


PZUWARTA

2 2008 acquisition, marketing, and promotion costs divided by numbers of new entrants and transfers in





22

January 2010

Current maintenance expenses per member show a considerable variation and range from below€ 8 (Polsat) up to € 15.5 (AXA). In the majority of cases the amount is linked to the number of fundmembers (economy of scale). However, because of the unclear accounting treatment of elementssuch as advertising costs, companies have some discretion in allocating expenses betweenmaintenance and acquisition.

: mainTenanCe eXpense per aCTive membe rfigure 30

0 € 2 € 4 € 6 € 8 € 10 € 12 € 14 € 16 €

AEGONAIG

Allianz Polska

AXABankowy

AVIVAGenerali

INGNordea

Pekao PioneerPocztylion-Arka

PolsatPZU

WARTA

In 2008, almost 65% of the revenues of the PTEs was derived from acquisition charges from thecontributions. Because of the natural increase of NAVs and the expected decrease of the chargesfrom contributions (which are due to legal changes), the main revenues in the future will be assetmanagement charges.

: pTe revenue sTruCTurefigure 31

64.8%

30.8%

4.4%

Contribution Charges

Management Fees

Other

The investment mix as of the end of 2008 is a result of the pension fund legislation and thedecrease of prices of equities in the Polish Stock Exchange. Funds are allowed to invest up to 40%of the NAV in equities. Because of the decrease of the asset prices during 2008, the investmentmix of 40% in stocks, which had been kept by many PTEs previously, dropped to around 20% bythe end of 2008.

Curre ma e a ceexpe ses per member shoa co s derable ar a o a dra ge rom belo € 8 (Polsa )up o € 15.5 (AXA).





January 2010

23

: invesTmenT porTfolio sTruCTurefigure 32

0.83%

75.10%

2.21%

0.43%

21.44%

Equities

Treasury bills

Securities and deposits

Bonds

Other

After the presidential veto at the beginning of 2009, PTEs are waiting for new legislation regarding thebenefit payout phase. The main issues to be decided include 'fairness', the choice of the entitiesresponsible for the payments, and the factors contributing to the expected profitability of the business.Any changes are likely to impact on designated pension providers rather than PTEs, however.

A er he pres de al e o he beg g o 2009,

PtEs are a g or eleg sla o regard g hebe e pa ou phase.





24

January 2010

Roma a

Summary of the SystemRomania has a classic three-pillar pensions system, the mechanics of which are functioning wellfollowing the commencement of contributions in May 2007 (facultative) and May 2008 (mandatory).

The private system functions alongside the pay-as-you-go universal state pension system as well asother forms of retirement saving such as life insurance. Outcomes for the participants are limited bythe relatively low levels of contributions going into the two private pillars.

The profitability of pension administrators in the mandatory system is marginal because of the lowlevels of fees that can be charged.

The system is subject to a range of guarantees and protection mechanisms, but capitalrequirements are somewhat incoherent.

There is little sales activity underway for mandatory pensions. Voluntary pensions are typically soldby tied agents and multi-level marketing (MLM) brokers as part of a life insurance offer.

Investment strategies are quite conservative because of guarantee requirements.

Mandatory Pensions

Par c pa oParticipation in a mandatory pension fund is obligatory for all employees born after 31 December1972; 65% of members come from this category. Employees born between 1 January 1963 and 31December 1972 have the option to and account for the remaining 35% of fund members.

Participants choose which fund they want to belong to, and are free to transfer their moneybetween funds.

Currently there are nine funds, four smaller funds having merged with larger rivals. Eachadministrator may manage only one fund.

Co r bu o sContributions are mandatory and are collected through the income tax system alongsidecontributions to the state pension system. The contributions are collected by the National Pensionsand Social Insurance authority, and then distributed to the privately administered funds.

The contribution rate is currently 2% of gross salary, but it will gradually rise to 6% by 2016.In December 2008, 24% of fund participants failed to pay the scheduled contribution. By 31December 2008, however, only 11% of participants had failed to make any contribution whatsoever.

i es meContributions received are converted into fund units, with the moneys being invested in a diversifiedportfolio of assets.

The unit price is dependent on the market value of the assets and the number of units on issue.

Roma a has a class chree-p llar pe s o s s s em,he mecha cs o h ch

are u c o g ell ollo ghe comme ceme o

co r bu o s Ma2007 ( acul a e) a d Ma2008 (ma da or ).





January 2010

25

Be e sThe value of the units is paid out to the participant in the event of reaching the state retirement age oron becoming totally and permanently disabled.

In the event of the participant’s death prior to retirement, the participant’s account is paid out to theparticipant’s legal heirs.

In some cases the benefit payment is required to be paid as an annuity, but enabling legislation is yetto be enacted.

Insured benefits may be available, if offered in the fund’s prospectus by the administrator.

Approaches o Ac uar al R sks a d Guara ees, Reser g, a d Sol e cGuaranteesAs in Poland, the mandatory pension system requires administrators to ensure that their returns arebroadly in line with market averages. If, over a two-year period, the investment return is more than 4%below the average or less than 50% of the average, the administrator’s licence will be withdrawn.

The mandatory system's account balance paid on transfer, death, disablement, or retirement issubject to a minimum of contributions paid to date minus fees. In some interpretations of the law andregulations, the amount guaranteed ratchets up annually with investment income credited through theunit price, and the guarantee also applies to transfers.

Prudential ReservesNo solvency margin is required to be set up.

Administrators are required to establish actuarial reserves to provide for the ' return of contributions less fees ' guarantee in the mandatory system. The reserve is essentially the amount required tobe held now to fund at date of exit any currently existing gap between account balances andguaranteed values.

No reserves are formally required for the market-relative guarantees, insured benefits, or any otherrisks faced by the funds and administrators.

A guarantee fund is to be established as a separate legal entity. Administrators will be required tocontribute around 0.3% p.a. of assets under management (which is hefty in relation to the allowedadministrator commissions) from their own resources. The purpose of the guarantee fund is to protectparticipants when administrators are unable to fulfil their obligations.

O her Sa e Mecha smsThe system has a dedicated regulator and supervisor, in the form of the Commission for theSupervision of the Private Pensions System (CSSPP).

A depository bank must be appointed to have custody over the fund’s assets and to check theadministrator’s unit price calculations.

Every fund is subject to an annual audit requirement.

Every administrator must retain an actuary, who must complete a simple financial conditionreport annually.

€ 4m of initial paid-up capital is required for mandatory pension administrators, although there isapparently no requirement that a particular level of capital be maintained in the long term.

the s s em has a ded ca edregula or a d super sor, he

orm o he Comm ss o orhe Super s o o he Pr a e

Pe s o s S s em (CSSPP).





26

January 2010

Role o i surers a d O her f a c al Ser ces Compa esPension administration companies are typically owned by large multinational financial services groups.Mandatory pension funds may only be managed by dedicated administration companies, which arenot allowed to undertake any other form of business activity.

In most cases, however, the operations of the administration company complement and are tightlywoven in with the other financial services operations of the group in question, in order to minimisecosts and maximise revenue synergies.

Dr ers o Pro ab lThe key driver of profitability is the asset management fee charged by the administrators, as over thelong term this is expected to be the most significant item of revenue. The fee on contributions has a

useful role in covering initial costs but is not a major contributor to profitability.Another key driver is the contribution rate, as this determines the volume of assets undermanagement and hence the amount of asset management fees collected. The contribution ratewas supposed to rise to 2.5% in 2009 but was held down at 2.0% by the government in a move torestrict its budget deficit.

Expenses also play a critical role. Low charge levels render profitability very sensitive to small changesin expenses incurred. Information from 2008 indicates maintenance expenses in the vicinity of € 5 perparticipant for companies tightly integrated within a financial services group and € 8 per participant forcompanies operating more independently.

Investment guarantees represent a significant hidden cost. These are not properly charged orreserved for at the current time, and hence are not well understood.

Pr c g a d Res r c o s o ChargesAdministrator fees levied on mandatory pension contributions are restricted to 2.5% ofcontributions paid.

Asset management fees are limited to 0.05% of assets per month.

Fees of up to 5% of account value are chargeable on transfer out of a fund during the first two yearsof membership.

Most administrators have established pricing at the maximum allowable level. This is understood to bebecause profitability is marginal, even at this level.

The only discounts offered on the maximum fee levels in the mandatory system have come in the formof a one- or two-year holiday from the asset management fee.

Adm s ra o S s emsRomanian private pension funds are akin to mutual funds in their operations, hence client accountmanagement systems designed for the mutual fund industry may be reused.

A further option is to utilise administration systems designed for life insurance unit-linked products,although these need to be adapted to reflect the restricted benefit design and off-balance-sheet nature of the client’s accounts.

Some administrators have chosen to reuse systems already in use by a sister company (i.e., lifeinsurer or mutual fund operation). Others have installed new systems designed for the purpose,typically by Romanian software houses.

the ke dr er o pro ab ls he asse ma ageme ee

charged b he adm s ra ors,as o er he lo g erm h s sb ar he mos s g ca

em o re e ue.





January 2010

27

For cost-minimisation purposes, some administrative processes are tied as closely as possible tothose of a sister company, while preserving any necessary legal separation of functions.

D s r bu o S ra eg a d Age /Broker Remu era oThe initial adhesion campaign lasted four months, running from 17 September 2007 to 17 January2008. During the course of the campaign, 4.4 million prospective participants were signed up.

During the initial adhesion campaign the following distribution methods were used:

Tied agency forcesMulti-level agency forces operated by brokersBank branches

Union organisationsThe sales results produced by union organisations were extremely poor, while the passive approachof sales through bank branches delivered only moderate volumes of business (albeit at a lowacquisition cost—less than € 25 per case).

The most successful channels were those using active sales approaches—tied agents and MLMbrokers. Total commission costs per case for the former were in the range € 24– € 34, while for MLMbrokers commission costs per case ranged from € 50– € 90 per case. 3

Agent commissions were typically structured as a fixed amount of RON or euros per case, as it wasimpossible to tell how large a participant’s contributions would be. Overrides were paid to the salesmanagement structures in proportion to the underlying sales.

Deals between administrators and brokers were struck on the basis of fixed amounts per case plusbonuses for achieving predetermined levels of sales.

Commission levels changed frequently throughout the course of the adhesion campaign ascompanies adapted their strategies in response to (a) their performance relative to budget, (b) theactivities of competitors, (c) agent responsiveness, and (d) shareholder imperatives.

Because of the way in which cases were validated, commissions were paid on all adhesions submitted,but many were never validated and many others have become erratic payers of contributions.

Subsequent to the initial campaign, sales activity has been limited and is targeted at new entrants tothe workforce, a market of perhaps 100,000–150,000 per annum.

Theoretically, bank distribution should have an advantage in capturing new entrants to the workforce,given that these are typically students finishing their studies, setting up bank accounts, and takingconsumer and housing loans.

In practice, however, over 90% of new entrants to the workforce are failing to make an election withinthe allotted time period. The result is that they are allocated by lottery to funds in proportion to thecurrent member numbers of each fund.

i es me S ra eg esThe CSSPP classifies investment strategies according to levels of investment risk, and sets strictguidelines on allowable holdings by asset class for each classification. Low-risk funds are essentiallybond funds while medium-risk funds have a small degree of exposure to risky assets such as shares.High-risk funds can have up to 50% of their holdings in risky assets .

3 Source: http: //www.pensiileprivate.ro.

the CSSPP class eses me s ra eg es

accord g o le els oes me r sk, a d se s

s r c gu del es o allo able

hold gs b asse class oreach class ca o .





28

January 2010

In the mandatory pension market, because of the one fund per administrator restriction, mostadministrators have decided to follow a medium-risk strategy in the hope that this will provide bothcomfort and a moderately enhanced long-term return to their clients. Only one administrator hasopted for a high-risk strategy.

Average holdings across the mandatory pensions market as of 30 June 2009 4 were: 7.6% bankdeposits, 54.8% government bonds, 3.6% municipal bonds, 26.6% corporate bonds, 6.7% bondsissued by multinational organisations such as the World Bank, and 3.7% shares.

Holdings of shares have been kept artificially low under a dispensation from the CSSPP in relation torecent economic volatility; fund prospectuses actually require higher levels of investment than 3.7%.

Risks related to the holding of corporate bonds do not appear to be well-appreciated by the market.taxa o o Co r bu o s a d Be e sIn the mandatory pension system, all contributions are deductible and are also not subject to socialsecurity levies.

Pension benefits are currently tax-free up to an amount of 1,000 lei per month, but this provision ofthe tax code was written with state pensions in mind and could be adapted for private pensions oncethey commence the payout phase.

Investment returns are generally not taxed.

Voluntary Pensions

Par c pa oParticipation in a voluntary pension fund is possible for all employees who have at least 90 monthsremaining before they turn 55.

Participants choose which fund they want to belong to, and are free to transfer their moneybetween funds.

Currently there are 14 funds offered by 10 administration companies.

Co r bu o sContributions are voluntary and are collected directly from employers.

There is no fixed contribution rate; some participants set their contributions as a percentage of salary,

while others use a fixed amount per annum (typically, this is the level of maximum deductibility). Bylaw, a maximum of 15% of salary may be contributed to such a fund.

i es meInvestment structures are the same as for the mandatory system.

Be e sThe value of the units is paid out to the participant upon reaching age 55 or in the event of becomingtotally and permanently disabled.

In other respects, benefit structures and payments are similar to the mandatory system.

4 Source: CSSPP half-yearly report. Note: Figures do not add up to 100%.

there s o xedco r bu o ra e; somepar c pa s se he r

co r bu o s as a perce ageo salar , h le o hers usea xed amou per a um( p call , h s s he le el omax mum deduc b l ).





January 2010

29

Approaches o Ac uar al R sks a d Guara ees, Reser g a d Sol e c

GuaranteesThe voluntary pension system requires administrators to ensure that their returns are broadly in linewith market averages. If, over a two-year period, the investment return is more than 4% below theaverage or less than 50% of the average, the administrator’s licence will be withdrawn.

Prudential ReservesPrudential reserves are largely the same as for the mandatory system.

O her Sa e Mecha sms€ 1.5m of initial paid-up capital is required for voluntary pension administrators, although there is no

requirement that a particular level of capital be maintained in the long term.In other respects, safety mechanisms are as per the mandatory system.

Role o i surers a d O her f a c al Ser ces Compa es

General As with the mandatory sector, pension administration companies are typically owned by largemultinational financial services groups.

In a most cases, the operations of the administration company complement and are tightly woven inwith the other financial services operations of the group in question, to minimise costs and maximiserevenue synergies.

Voluntary pension funds may be administered either by a dedicated company or by another financialservices entity (i.e., a life insurer, asset manager, or bank). In the latter case, the financial servicesentity is required to separately hold and account for assets, liabilities, capital, incomes, and expensesrelating to its voluntary pensions.

Dr ers o Pro ab lDrivers of profitability are the same as for the mandatory system.

Pr c g a d Res r c o s o ChargesAdministrator fees are restricted to 5% of contributions paid.

Asset management fees are limited to 0.2% of assets per month.

Fees of up to 5% of account value are chargeable on transfer out of a fund during the first two yearsof membership.

For voluntary pension funds, administrators have established pricing in a range just below themaximum allowable level.

The higher caps and greater flexibility in the voluntary system have resulted in a wider range ofproduct designs and charging structures.

Some voluntary pension products include insured benefits, while others offer fee structures targetedat particular groups of participants (e.g., corporate clients).





30

January 2010

Adm s ra o S s emsAdministration systems are the same as for the mandatory system.

D s r bu o S ra eg a d Age /Broker Remu era oDistribution arrangements for voluntary pensions are very different from those for mandatory pensions.This is because there is a wider range of potential contributors, because they are continuously onsale, and because they are funded out of participants’ own resources.

One way of looking at voluntary pensions is as part of an employer-funded employee benefitspackage that may also contain life and health insurance components. This point of view leadsnaturally to the sale of the product by specialist corporate sales teams and by brokers who target thecorporate market.

Voluntary pensions can also be sold as individual retirement plans by tied agency forces, who marketthem alongside life insurance products. They are also being sold by MLM networks, although successhere has been constrained by the low levels of commissions available relative to life insuranceproducts of a similar nature.

As the size of the annual contribution is known at outset, it is more usual for the commission to be setas a percentage of premium rather than be fixed in euros or lei.

i es me S ra eg esThe CSSPP classifies investment strategies according to levels of investment risk, and sets strictguidelines on allowable holdings by asset class for each classification.

In the voluntary pension market there is more diversity with respect to investment strategies. This isbecause administrators are able to offer multiple funds, and because the CSSPP’s investment limitsare not as strict in this market.

Average holdings across the voluntary pensions market as of 30 June 2009 5 were: 5.4% bankdeposits, 59.7% government bonds, 7.2% municipal bonds, 16.1% corporate bonds, 5.3% NGObonds, 6.8% shares, and 0.8% mutual funds. Risks related to the holding of corporate bonds do notappear to be well-appreciated by the market.

taxa o o Co r bu o s a d Be e sFor voluntary pensions, tax deductibility is available to both employers and participants forcontributions of up to € 250 per annum.

The taxation of pension benefits is as per mandatory pensions.

Investment returns are generally not taxed.

Pension CompaniesNB: Unless otherwise stipulated, the sources for all data used in this section are (a) the Web site ofthe Commission for the Supervision of the Private Pension System (CSSPP), and (b) annual reportsposted on administrator Web sites. Information is presented either as of 31 December 2008 or forthe year 2008, as appropriate.

5 Source: CSSPP half-yearly report. Note: Figures do not add up to 100%.

O e a o look g aolu ar pe s o s s as

par o a emplo er- u dedemplo ee be e s package

ha ma also co a l e a dheal h sura ce compo e s.th s po o e leads

a urall o he sale ohe produc b spec al s

corpora e sales eams a db brokers ho arge hecorpora e marke .

i he olu ar pe s o

marke here s more d ersh respec o es me

s ra eg es. th s s becauseadm s ra ors are able oo er mul ple u ds, a dbecause he CSSPP’s

es me l m s are o ass r c h s marke .





January 2010

31

Ma da or Pe s o s

Market SharesThe mandatory pensions market is dominated by two companies—ING, the local subsidiary of theinternational group, and Allianz-Tiriac, which is a joint venture between Allianz and the Romanianbusinessman Ion Tiriac. A second echelon of market players is formed by local representatives ofother international insurance groups, namely Generali, Aviva, AIG, and Eureko.

: markeT sharefigure 33

ALLIANZ-TIRIAC

ING

GENERALI

AVIVA

AIG

EUREKO

BCR

AEGON

BRD

OMNIASIG

BANCPOST

OTP

PRIMA

KD

33.9%

25.6%

9.2%

7.1%

6.4%

6.1%

ING’s success can be attributed to the size and preparation of its tied agency force, its large lifeinsurance book, and its high level of brand recognition. Allianz-Tiriac also has high brand recognition,being the nation’s largest non-life insurer. Its sales effort, however, relied on more costly broker sales,including through Multi-Level Marketing (MLM) arrangements.

: markeT share ConTribuTionsfigure 34

ALLIANZ-TIRIAC

ING

GENERALI

AVIVA

AIG

EUREKO

BCR

AEGON

BRDOMNIASIG

BANCPOST

OTP

PRIMA

KD

39.0%

23.0%

8.0%

6.8%

7.3%

4.8%

3.1%

It is interesting to note that market shares determined on the basis of annual contribution levels arequite different from those determined on the basis of member numbers. As contributions are a fixedpercentage of salaries, it would appear that some companies (e.g., ING, AIG) have been able toattract higher-income earners while others have not. This may be due to their use of well-trained tiedagents in the sales process.

i s eres g o o e hamarke shares de erm edo he bas s o a ualco r bu o le els are

qu e d ere rom hosede erm ed o he bas s omember umbers.





32

January 2010

Fund MetricsA peculiar feature of a mandatory pension system is contribution dormancy and empty accounts . Dormancyarises because of periods of unemployment, while empty accounts relate to people never employed, or, inthe worst case, ineligible to participate in the pension system. The high number of empty accounts in theRomanian system as of the end of 2008 is striking. In large part this is due to Romania’s high population ofemigrant workers, most of whom are registered within the system but not making contributions.

: perCenTage of empTy aCCounTsfigure 35

0% 5% 10% 15% 20% 25%

ALLIANZ-TIRIAC

ING

GENERALIAVIVA

AIGEUREKO

BCRAEGON

BRDOMNIASIG

BANCPOSTOTP

PRIMAKD

: average monThly ConTribuTionfigure 36

ALLIANZ-TIRIAC

ING

GENERALI

AVIVA

AIG

EUREKO

BCR

AEGON

BRD

OMNIASIG

BANCPOST

OTP

PRIMA

KD

€ 0 € 2 € 4 € 6 € 8

the h gh umber o empaccou s he Roma as s em as o he e d o2008 s s r k g. i large par

h s s due o Roma a’sh gh popula o o em gra

orkers, mos o hom arereg s ered h he s s embu o mak g co r bu o s.





January 2010

33

The percentage of empty accounts also gives an indication of the quality of the sales process pursued by aprovider’s distributors, with some companies able to attract higher proportions of paying clients than others.

ING and AIG enjoy the highest average monthly contributions, although these were very low acrossthe market in 2008 as the contribution rate was only 2% of gross salaries.

InvestmentsIn their prospectuses, most funds have established a medium-risk investment policy, with proportionsin risky assets (defined as shares and mutual funds) kept between 15% and 35%. One fund,Generali’s Aripi , has a high-risk profile, allowing it to invest up to 50% in risky assets.

: % risky asseTsfigure 37

ALLIANZ-TIRIAC

ING

GENERALI

AVIVA

AIG

EUREKO

BCR

AEGON

BRD

OMNIASIG

BANCPOST

OTP

PRIMA

KD

0% 1% 2% 3% 4% 5%

Because of the convulsions in investment markets in the latter part of 2008, along with the smallamount of money in the funds, the supervisory commission gave funds a temporary dispensation fromtheir prospectuses, allowing them to invest more than 85% in safe assets . This dispensation had theeffect of allowing funds to avoid the market declines of 2008.

Most funds have replaced the target allocation to shares with larger holdings of high-yielding

corporate bonds. These instruments, of course, carry their own risks, but have not been classified asrisky by the supervisor.

The dispensation has remained in force during 2009 and funds have been slow to increase theirholdings of shares, and have not gained the full benefit of the major rally in share prices that we haveseen since the end of February 2009.

Because o he co uls o s es me marke s he

la er par o 2008, alo g hhe small amou o mo e

he u ds, he super sorcomm ss o ga e u ds a

emporar d spe sa o romhe r prospec uses, allo ghem o es more ha 85%

safe assets.

Mos u ds ha e replaced hearge alloca o o shares

h larger hold gs o h gh-eld g corpora e bo ds.





34

January 2010

: Time-weighTeD reTurnfigure 38

ALLIANZ-TIRIAC

ING

GENERALI

AVIVA

AIG

EUREKO

BCR

AEGON

BRD

OMNIASIGBANCPOST

OTP

PRIMA

KD

-10% -5% 0% 5% 10% 15% 20%

: money-weighTeD reTurnfigure 39

ALLIANZ-TIRIAC

ING

GENERALIAVIVA

AIG

EUREKO

BCR

AEGON

BRD

OMNIASIG

BANCPOST

OTP

PRIMA

KD

-10% 0% 10% 20% 30%

The graphs in Figures 38 and 39 depict annualised 2008 returns on two bases: time-weighted andmoney-weighted. Time-weighted returns have been determined using the ratio of starting and endingunit prices, while approximate money-weighted returns have been determined considering the ratio ofinvestment return to fund value. Note that the yellow line indicates the market-relative guaranteed return.

The two measures produce quite different results. This is due to the rapidly rising volume of money inthe funds and the severe volatility of investment markets in 2008.

Solvency While the mandatory pension system contains a number of prudential devices (minimum initial capital,actuarial reserves, and a guarantee fund), there is no explicit solvency margin requirement. As a result,administrators have been relatively free to establish their own policies with respect to the level ofcapital they hold.

wh le he ma da or pe s os s em co a s a umber oprude al de ces (m mum

al cap al, ac uar al

reser es, a d a guara eeu d), here s o expl c

sol e c marg requ reme .





January 2010

35

The graph in Figure 40 depicts the ratio of administrator capital to funds under management. Wehave had to use a logarithmic scale to capture all values, illustrating both the great differences inscale that exist between funds as well as differences in capital management policies.

: CapiTal/asseTs raTiofigure 40

ALLIANZ-TIRIAC

ING

GENERALI

AVIVA

AIG

EUREKO

BCR

AEGON

BRD

OMNIASIG

BANCPOST

OTP

PRIMA

KD

10% 100% 1000% 10000%

The two major players are currently holding capital ratios of around 14%, but these can be expectedto fall as funds under management rise.

ExpensesThe initial adhesion period, running from 17 September 2007 to 17 January 2008 was accompaniedby massive advertising expense in support of the sales process. In the graph in Figure 41 we haveshown the total advertising expense incurred by administrators in financial years 2007 and 2008. 6

: aDverTising eXpensefigure 41

€ 0m € 2m € 4m € 6m

ALLIANZ-TIRIAC

ING

GENERALI

AVIVA

AIG

EUREKO

BCR

AEGON

BRD

OMNIASIG

BANCPOST

OTP

PRIMA

KD

6 Based on our interpretation of published financial st atements.







January 2010

37

Voluntary Pensions

Marke SharesThe voluntary pensions system is dominated by three players—ING, Allianz-Tiriac, and BCR Life, asubsidiary of Vienna Insurance—who controlled just under 90% of the market as at the end of 2008.The success of the three companies is largely built on cross-selling to captive bank, pension, life, andnon-life customer bases that exist within their respective groups.

: share of m ember s by aDminisTraTorfigure 44

ING

AZT

Aviva

BCR

OTP

Raiffeisen

Asirom

38.9%

27.6%

5.7%

23.4%

4.0%

Market share by contributions and market share by assets are a little different than that by membernumbers, and reveals that ING and Aviva have been the most successful in attracting higher-incomeearners, which is probably due to their use of tied agency forces in the sales effort.

: share of new m embers by aDminisTraTorfigure 45

ING

AZT

Aviva

BCR

OTP

Raiffeisen

Asirom

47.0%

17.1%

23.9%

5.6%

6.0%

As the voluntary system is a year older than the mandatory system, and is open to new members ofall ages, it is informative to also look at new business market share. It would appear that ING andRaiffeisen have been able to accelerate sales, in particular relative to Allianz-Tiriac (AZT).

the olu ar pe s o ss s em s dom a ed b hreepla ers—inG, All a z-t r ac,a d BCR L e, a subs d aro v e a i sura ce— hoco rolled jus u der 90% o

he marke





38

January 2010

Fund MetricsThe voluntary pension system held assets of € 21.1 million as of the end of 2008, shared among150,745 members, resulting in an average account balance per member of € 140. Among the variousfunds, however, there are significant variations. An obvious point is the lower asset values for fundswith a higher concentration in equities (e.g., Optim, Vivace) following the market declines of 2008.

: neT asseTs per membe rfigure 46

€ 0 € 50 € 100 € 150

ING CLASIC

AZT MODERATO

PENSIA MEA

BCR PRUDENT

ING OPTIM

AZT VIVACE

OTP STRATEG

RAIFFEISEN ACUMULARE

CONCORDIA MODERAT

The average monthly contribution is just over € 10 per member. This is higher than in the mandatorysystem, but lower than typical premiums for unit-linked life insurance and lower than the maximumdeductibility ceiling (€ 250 per year).

InvestmentsRisky assets constitute a slightly higher proportion of assets under management than in the mandatorysystem, averaging 5.2%. There is quite a wide range of asset mixes available in the market, as voluntaryfunds have a high degree of freedom with respect to this and other aspects of product design.

R sk asse s co s u e asl gh l h gher propor o oasse s u der ma ageme

ha he ma da or s s em,a erag g 5.2%.





January 2010

39

: % infigure 47 Risky Assets

ING CLASIC

AZT MODERATO

PENSIA MEA

BCR PRUDENT

ING OPTIM

AZT VIVACE

OTP STRATEG


CONCORDIA MODERAT

0.0% 5.0% 10.0% 15.0% 20.0%

Time-weighted returns were very mixed in 2008, and differed markedly from the observed approximatemoney-weighted returns. This is due to the interplay between the variety of investment strategiesbeing pursued, the ability of each administrator to obtain preferential terms for debt issues/bankdeposits, and the severe volatility present in financial markets in late 2008.

: Time-weighTeD reTurnsfigure 48

ING CLASIC

AZT MODERATO

PENSIA MEA

BCR PRUDENT

ING OPTIM

AZT VIVACE

OTP STRATEG


CONCORDIA MODERAT

-20% -15% -10% -5% 0% 5% 10%





40

January 2010

Administrator FinancialsRatios of administrator capital to assets under management stand at around the 10% level for themajor players, and at somewhat higher levels for the smaller providers. As with mandatory pensions,solvency buffers should decline in percentage terms as assets under management grow.

The three major administration companies have maintenance expense ratios that range from anexceptional 3.4% of contributions (BCR) up to 8.1% of contributions (ING). Once again, the smallerplayers see much higher ratios.

: mainTenanCe eXpense /ConTribuTions (2008)figure 49

1% 10% 100% 1000%

ING

AZT

Aviva

BCR

OTP

Raiffeisen

Asirom

Perhaps of most interest is the cost of acquisition. For BCR this is very low, presumably because itis using bank distribution or making sales to member companies of the BCR and VIG groups. Forcompanies selling through tied agency forces, total commission and marketing costs have settled inthe range of € 75– € 100 per case. No data was available for OTP.

: aCquisiTion eXpense/new me mber (2007 & 2008)figure 50

ING

AZT

Aviva

BCR

OTP

Raiffeisen

Asirom

€ 0 € 100 € 200 € 300 € 400

Ra os o adm s ra or cap alo asse s u der ma ageme

s a d a arou d he 10% le elor he major pla ers, a d a

some ha h gher le els orhe smaller pro ders.





January 2010

41

Russ a

Summary of the System

Ge eralThe Russian pension system operates according to a classic three-pillar system, with a voluntary PillarIII environment that started functioning in 1997 and a mandatory Pillar II system that commenced in2002. However, active development of the mandatory pension system started only in 2004 whennon-state pension funds were allowed to participate in the accumulation phase. Before that date allaccumulation of assets was performed within the Pension Fund of Russia.

The private system functions alongside the pay-as-you-go universal state pension system and

the mandatory labour pension , as well as other forms of retirement saving such as life insurance.Non-state pension companies operate in the voluntary Pillar I II environment and the accumulationcomponent of the mandatory system (Pillar II).

The mandatory pension system (Pillar II), or labour pension , consists of three elements: basic,insured, and accumulation pensions. Private (i.e., non-state) pension funds (NPFs) participate in theaccumulation pension component, where the pension is based on the contributions accumulated inthe individual’s personal account. Basic and insured components are handled by the Pension Fundof Russia.

The voluntary pensions market is dominated by large industrial groups operating pension funds fortheir own employees.

Non-state pension funds can manage their investments in-house or outsource to an assetmanagement company.

Role o i surers a d O her f a c al Ser ces Compa esPrivate pension funds currently dominate the long-term savings market, which is due to the favourabletax treatment compared to alternative saving vehicles and the compulsory nature of Pillar II. Largecorporations have established Pillar II funds, in addition to their existing Pillar III funds, in order toexploit the opportunities of compulsory contributions.

Other savings products offered by banks generally have a limited duration—deposits no longer thanthree years—which doesn’t allow them to directly compete with pension funds.

Life insurance is potentially a closer competitor in this sense as its products can be structured in away similar to pension savings. However, for tax reasons, the majority of life insurance providers have

chosen to launch their own pension funds in order to offer pure pension savings products in additionto life insurance.

the pr a e s s em u c o s

alo gs de he pa -as- ou-gou ersal s a e pe s os s em a d he ma da orlabour pension, as ell aso her orms o re remesa g such as l e sura ce.





42

January 2010

Details of the leading Pillar II and III providers at the end of 2008 are included in the tables inFigure 51.

: pillar ii anD pillar iiifigure 51

pillar ii neT asseT value ( € m) markeT share ClienTs markeT share

blagososToyanie 194.25 23% 760,873 21%lukoil garanT 123.96 14% 569,621 16%norilskiy nike l 70.40 8% 212,832 6%gazfonD 47.62 6% 114,265 3%eleCTroen ergeTiCy 44.82 5% 147,676 4%

pillar iii neT asseT value ( € m) markeT share ClienTs markeT share

gazfonD 5,640.25 50% 186,740 3%blagososToyanie 1,843.45 16% 1,311,479 19%hanTy-mansyisk 549.62 5% 256,413 4%eleCTroen ergeTiCy 375.32 3% 486,559 7%Transne fT 317.48 3% 110,317 2%

Source: FCSM (regulator)

Mandatory Pensions

Par c pa oOnly those born after 1 January 1967 are entitled to make compulsory contributions to theaccumulation component of the labour pension . Older people are allowed to make voluntarycontributions only. Both of these groups enjoy state matching of their contributions.

Co r bu o sThere are several types of contributions allowed under the mandatory pension accumulation component:mandatory payments as a percentage of salary, additional voluntary payments by members, additionalvoluntary payments by employers, and state matching of individual additional contributions.

Starting from the introduction of the mandatory pension system, each working individual born after 1January 1967 is charged a social tax equal to 14% of salary with 8% going to the insured component

of the labour pension and the remaining 6% to the accumulation component, as described above. Forindividuals born in 1966 and earlier the entire 14% is directed to the insured component.

Individuals as well as their employers are entitled to make additional contributions for the benefit of amember’s pension account. The amount and timing can be ad hoc.

All the contributions are transferred monthly by employers to the Pension Fund of the RussianFederation, which acts as an intermediary and transfers annually the pension contributions received tothe private pension funds specified by participants.

All he co r bu o s arera s erred mo hl b

emplo ers o he s a e’sPe s o fu d o he Russ afedera o , h ch ac s as a

ermed ar a d ra s ersa uall he pe s oco r bu o s rece ed o

he pr a e pe s o u dsspec ed b par c pa s.





January 2010

43

There is a state matching program that provides additional contributions to be paid to a member’saccount in case the member has made additional voluntary contributions of not less than RUR2,000 (approx. € 46) during the year. There is a limit for government matching—RUR 12,000(approx. € 275) annually. In order to participate in this program, individuals need to start makingadditional contributions before 1 October 2013. State matching will last not longer than 10years. For working pensioners (members who have reached pension age—60 for males and 55 forfemales—but still remain in full employment), the ratio of state matching is increased to 1:4, meaningthat for each RUR of additional contributions the state will pay four, with the cap of RUR 48,000(approx. € 1,100) annually.

i es meInvestments are made according to specific legislation, which places concentration limits on each

asset class.The funds of Pension Accumulations can be allocated only to listed asset classes and governmentsecurities (not subject to listing requirements), with some limitations imposed on transaction typesand issuers of corporate bonds, etc.

Additionally the following limits are imposed for asset classes:

Russian government bonds: not more than 40% of investment portfolioMunicipal bonds: not more than 40%Corporate bonds (subject to listing and concentration requirements): 80%Shares of Russian issuers: 65%Mortgage securities (according to appropriate Russian legislation): 40%Bank deposits: 20%Shares of foreign issuers: 20%

There are also additional requirements on the concentration of funds in one issuer:

Not more than 5% of assets are to be invested in one issuer (bonds, shares) except forgovernment securitiesNot more than 10% placed on deposit in one bank groupNot more than 5% can be invested in companies affiliated with an asset manager or a depositoryA pension fund’s share in any company cannot exceed 10% of the capitalization of that companyA pension fund cannot hold more than 10% of the bonds issued by a single issuer (exceptgovernment securities)The maximum share of investment in any type of securities from one issuer is 30% of the marketcapitalization of such securities (e.g., shares, bonds, etc.)

Investment options for members depend on the investment strategy of each non-state pension fund(NPF), subject to limitations imposed by the law. As an alternative to selecting an NPF, members canalso opt to have their accumulation pension managed by the Pension Fund of Russia but with theirinvestments managed by an approved asset management company. This allows members to havesome choice over their own investment strategies.

Be e sPensions are payable from age 60 for men and 55 for women. The benefit is paid by NPF. Theamount of pension is calculated as the account value at retirement divided by the life expectancy ofthe insured as defined in the legislation. Currently it is 19 years for both males and females.

It is important to note that as the pension system in Russia is rather new, legislation regulating thebenefit payment stage has not been fully prescribed and some changes are likely because thereare still several years before the first payouts from the accumulation component of the mandatorypension system.

As a al er a e o selec ga nPf, members ca alsoop o ha e he r accumula ope s o ma aged b hePe s o fu d o Russ abu h he r es me sma aged b a appro edasse ma ageme compa .th s allo s members o ha esome cho ce o er he r o

es me s ra eg es.





44

January 2010

Approaches o Ac uar al R sks a d Guara ees, Reser g, a d Sol e c

GuaranteesThere are no investment guarantees for mandatory pensions. The benefit payment is dependent onthe actual investment performance of the fund.

Prudential ReservesReserves for mandatory pensions are simply the total value of the unit fund. No additional reserves arerequired by law or regulation.

Other Safety MechanismsNon-state pension funds are strictly regulated by the supervisory body (Federal Financial Markets

Service). There are requirements for regular audits and the use of depository services.The value of administrator assets backing operations must be greater than RUR 50 million(€ 1.1m approx.).

The enabling legislation contains a provision allowing for the creation of special guarantee funds, butthis has not yet been activated.

Dr ers o Pro ab lA non-state pension fund is a nonprofit organization. It can only charge clients’ accounts to cover itsoperating expenses.

If, however, synergies can be achieved between different legal entities within one group to whichthe pension fund belongs, this can create an opportunity for profit. A pension fund can also claim forexpenses that are not directly related to pension fund activity (e.g., relating to the agency network oradministration system), thereby at least partly covering expenses from other lines of business.

The main drivers for the profitability of mandatory pensions are:

Assets under managementNumber of members

Pr c g a d Res r c o s o ChargesAsset management fee (AMF): Funds are invested using an asset management company. The assetmanagement company can receive a fee to reimburse its expenses of an amount not greater than10% of investment income received in the given calendar year. No fee can be taken in the casewhere a fund’s net asset value (NAV) per unit has decreased compared to previous year. In addition

to the expense fee the NPF can take up to 15% of investment income after the deduction of theAMF imposed by the asset management company to cover its operating expenses. Additionally, theasset management company can reimburse its costs to a total amount not greater than 1% of theaverage NAV.

Other fees: The NPF needs to have a contract with a special depository that controls NPF activity.The special depository can cover its costs, but gits(T)20arragy cnot be greatovey tn 0.1% ofey 0(e )]TJ T*[(averaTre gitlas(T)2k ofeinformttion on systems used byls NPheimple, life gnsuranc0(e )]TJ T*systems and evecaupdato





January 2010

45

i es me S ra eg esFunds are invested largely in bank deposits and government bonds.

taxa o o Co r bu o s a d Be e s

ContributionsFor mandatory pension funds, contributions are part of a single social tax calculated as a percentageof gross salary. These are currently paid by the employer and not subject to personal income tax foremployees. From 2010, the single social tax will be replaced by separate taxes for pensions and othersocial security benefits. Additional voluntary contributions by the employer are currently deductible asan expense to the employer up to the limit of RUR 12,000 ( € 275) annually per employee.

Contributions to NPF in the member’s own name, or in the name of spouse, parents, or disabledchild, can be deductible for the purpose of personal income tax (PIT) calculation. The total annualvalue of the deduction cannot exceed RUR 120,000 ( € 2,750); this amount also includes otherdeductible items such as education or medical expenses.

BenefitsMandatory pension benefits are not taxed.

Voluntary Pensions

Par c pa oParticipation in voluntary non-state pension funds can take the form of:

Corporate pension funds: established by employers for their employeesOpen pension funds: individual pension contracts available to the general population

Co r bu o sBoth defined benefit and defined contribution funds can be created. The particular form of pensionprovision is described in the pension rules , which are to be approved by the regulator.

i es meInvestments are made according to specific legislation which places limits on each asset class.Assets can be invested by the NPF or through an asset management company (AMC). The fundsof Pension Accumulations can be allocated only to listed asset classes and government securities(which are not subject to listing requirements).

Investment in foreign assets is allowed for government securities—the country must be a member of

the Organisation for Economic Co-operation and Development (OECD). The credit rating of othersecurities cannot be lower than BBB- (Fitch) or equivalent.

The following limits on particular assets are imposed:

Russian government bonds: not more than 70% of investment portfolioMunicipal bonds: not more than 70%Corporate bonds (subject to listing and concentration requirements): 80%Listed shares of Russian issuers: 70%Share in Russian enterprises: 70%Mortgage securities (according to appropriate Russian legislation): 20%Investment funds: 50%Bank deposits (only if the bank is a member of an insurance system for bank deposits): 50%Shares of foreign issuers: 30%Russian government securities of one issue: 35%Property: 10%

for ma da or pe s o u ds,co r bu o s are par o as gle soc al ax calcula edas a perce age o grosssalar . these are curre lpa d b he emplo er a d o

subjec o perso al comeax or emplo ees.





46

January 2010

Concentration limits:

Not more than 10% should be invested in one issuer or deposited in one bankNot more than 25% in investment funds managed by one asset management company

There are limitations on the instruments in which an NPF can invest by itself and (separately) throughan AMC.

Be e sDefined benefit and defined contribution schemes are possible. The pension payout can take theform of a single life annuity or a guaranteed term annuity. Lump sums are not allowed but partialwithdrawals are possible and in this case the residual fund value is inherited by the beneficiaries on

the death of the pension fund member. The provisions regarding the form of pension payout dependon individual pension fund rules.

Approaches o Ac uar al R sks a d Guara ees, Reser g, a d Sol e c

GuaranteesVoluntary pension funds can offer an interest guarantee of up to 4% p.a. There is an additionalrequirement for the pension scheme that can be treated as an embedded guarantee; this is thatthe pension payout cannot be less than 50% of the minimum pension payable by the state for thegiven individual.

Prudential ReservesNon-state voluntary pension funds must maintain reserves equal to actuarial present value (APV) offuture benefits minus the APV of future contributions. These calculations are performed by qualifiedactuaries and are subject to annual actuarial review.

In order to be able to cover their liabilities, non-state pension funds are obliged to maintain anadditional insurance reserve. The insurance reserve is created by using pension contributions, theinvestment return on pension reserves, and additional target contributions by the owners of the NPF.This reserve is intended to cover the risk that the main reserve is insufficient to cover pension fundinsurance liabilities. This reserve is used to cover:

Shortfalls in claim payout reserve (pensions, cash values)Shortfalls that are due to a change in the actuarial assumptions used to value pension liabilities

There are minimum requirements for this reserve: The insurance reserve cannot be less than 5% ofthe minimum value of reserves held to cover pension liabilities at the beginning and end of a reporting

period. The actual amount of insurance reserve is determined based on annual actuarial review.Other Safety MechanismsNon-state pension funds are strictly regulated by the supervisory body (Federal Financial MarketsService). There are requirements for regular audits and the use of depository services.

The value of administrator assets backing operations must be greater than RUR 50 million.

Legislation envisages the creation of guarantee funds, but none have been created yet.

De ed be e a d de edco r bu o schemes areposs ble. the pe s o pa ou

ca ake he orm o a s glel e a u or a guara eederm a u .

i order o be able o co erhe r l ab l es, o -s a e

pe s o u ds are obl gedo ma a a add o al

sura ce reser e. thesura ce reser e s

crea ed b us g pe s oco r bu o s, he es mere ur o pe s o reser es,a d add o al argeco r bu o s b he o erso he nPf.





January 2010

47

Dr ers o Pro ab lA non-state pension fund is a nonprofit organization. It can only charge clients’ accounts to cover itsoperating expenses. As for mandatory pensions, however, there is scope for profit through synergies—for example, for NPFs that are related to other group companies.

The main drivers of profitability for voluntary pensions are:

Premium chargeProfit sharingAssets under managementNumber of members

Pr c g a d Res r c o s o ChargesFees and charges are according to rules of the scheme.

The following limits are imposed:

Not more than 15% of investment return earned net of asset management fee and fee fordepository servicesNot more than 3% of contributions

There seem to be no limits on asset management and depository fees.

D s r bu o S ra egA wide variety of distribution networks are used for private pensions, namely: banks, brokers, agentnetworks, and corporate sales.

i es me S ra eg esNo market-level statistics on investments are available. The strategies can vary significantly betweenindividual funds but generally the main investments are government bonds, deposits, and investmentfunds, i.e., low risk. Direct holdings in equities tend to be limited, although some investment fundshave a higher equity content.

taxa o o Co r bu o s a d Be e s

ContributionsContributions to NPF are tax-deductible and the same rules apply as for the mandatory system.

Benefits

Pensions payable to a former contributor are not subject to personal income tax (PIT).Pensions arising from employer contributions: standard PIT applies.Pensions arising from contributions paid by individuals: standard PIT applies.Transfer amounts if paid as lump sums: standard PIT applies on the excess of the cash value overcontributions paid.





48

January 2010

Hu gar

Summary of the SystemHungary was an early embracer of pension reforms in the CEE region, introducing a mandatorysecond-pillar pension system with individual accounts in 1998. It ranks second in the region, in termsof the size of both the mandatory private pension (behind Poland), and the voluntary pensions market(behind the Czech Republic).

The Hungarian pension system comprises four pillars. The first is a public pension pillar, financed ona pay-as-you-go basis. The second is a mandatory private pension pillar and voluntary private pensionarrangements that form the third and fourth pillars.

The new second-pillar pension is mandatory for all new entrants, while those previously insuredcould opt for a mixed system. The primary role of the mandatory pension system, known as privatepension funds (PPFs), is to compensate for the drop in income upon retirement, based on theprinciple of self-provision.

The third pension pillar (introduced in 1993) consists of voluntary pension funds (VPFs), whichoperate on a defined contribution basis. Mandatory and voluntary funds may be established byemployers and other specified organisations.

The fourth pillar, additional voluntary individual retirement accounts (NYESZ), was established in2006 and offers similar tax incentives to voluntary pension funds.

Mandatory Pensions

Par c pa oCareer starters, defined as any person who joins a compulsory pension scheme in Hungaryfor the first time and is under the age of 35, become members of a private pension fund on amandatory basis.

During the transition phase in 1998, existing employees were given the option of voluntarily joiningthe mandatory tier, and about 50% did so. Those who chose not to participate remain enrolled in thefirst pillar only.

Generally, private pension fund membership cannot be terminated at the member’s request. A fundmember may only decide to transfer to another pension fund. On the member’s death the beneficiarydecides on the future of the available amount. For older fund members with specific characteristicswho would come off worse as members of the mixed system, the transitional provisions of the law

allow them to return from the mixed to the state pension system.No fee is required for joining the fund.

Co r bu o sDuring the accumulation period, private pension funds collect and invest contributions, while in theperiod of disbursement they provide life annuities from accumulated funds.

Mandatory second-pillar fund members pay contributions of 8% of their gross salary, which istransferred by their employer to the pension fund chosen by the employee. Additional contributionsof an extra 2% of salary can be paid by the employee or employer. If an employer agrees to payadditional contributions, the employer’s commitment must cover each employee to the same extent.

Hu gar as a earlembracer o pe s o re orms

he CEE reg o , roduc ga ma da or seco d p llarpe s o s s em h

d dual accou s 1998.

Dur g he ra s o phase 1998, ex s g emplo ees

ere g e he op oo olu ar l jo g hema da or er, a d abou 50%d d so. those ho chose o

o par c pa e rema e rolled he rs p llar o l .





January 2010

49

i es me

Asset Management, Investment and AllocationFrom 2009, pension funds offer three different investment portfolios (dynamic, balanced, andconservative) with varying risk profiles. Previously, each pension fund ran one fund for all of itsmembers. The fund assigns members to one of the portfolios depending on the time to retirement.Pension funds voluntarily started offering these three portfolios from 2007. Members are allocatedusing the following rules:

Members with five years until retirement are assigned to the conservative portfolio with a maximumequity share of 10%.

Members who have between five and 15 years until retirement are assigned to a balanced portfoliowith an equity share between 10% and 40%.

Members who will retire in more than 15 years time are assigned to the dynamic portfolio, which hasan equity share of at least 40%, with the possibility of putting 5% in derivatives and a maximum of20% in real estate.

Fund members may switch from the category to which they are assigned, depending on the timeremaining until retirement age. The only exception is the dynamic portfolio, which is not availableduring the last five years before retirement age.

Investment ReturnsThe investment policy of mandatory pension funds in Hungary is fairly conservative. The investmentportfolio of all mandatory pension funds at the end of 2008 consisted of around 60% in bonds(of which approximately 90% were Hungarian government bonds), 14% in shares, and 25% ininvestment funds.

The mandatory individual savings funds that make up the second pillar of the pension system earnedan average annual return of 6.7% from 1998 to 2008, compared to an average inflation rate over thesame period of 6.45%.

GuaranteesA guarantee fund is operated in Hungary to protect the accumulated individual capital of pension fundmembers from insolvency. There are a number of indirect guarantees within this system: supervisionof the funds, legislative measures for the management, investment, and creation of reserves.

The contribution to the guarantee fund is compulsory for all pension funds, based on pension

regulations. The guarantee fund is a separate legal entity covering all pension funds and has tax-free status. It is the responsibility of the guarantee fund to represent the members of any fund inliquidation. The guarantee covers the total benefit for beneficiaries and the accumulated capital ofcontributing members, if a pension fund is closed. The contribution to the guarantee fund currentlydoes not exceed 0.4% of the revenues from member contributions during the quarter under review.The average annual value of the guarantee fund’s assets may not be less than 0.1% or more than1.5% of the total combined assets of the funds.

It is also the task of the guarantee fund to provide financial cover in the annuity benefit paymentperiod, i.e., to top up the benefit reserve of the fund if this is less than the amount of the claimdetermined for each eligible fund member, after the utilization of other reserves that are required to beallocated.

A guara ee u d s opera ed Hu gar o pro ec he

accumula ed d dual cap alo pe s o u d members

rom sol e c . there

are a umber o d recguara ees h h s s s em:super s o o he u ds,leg sla e measures or hema ageme , es me , a dcrea o o reser es.





50

January 2010

Investment LimitsThe maximum limits for individual asset classes according to investment portfolio regulations are asfollows:

50% for investment funds30% for bonds (except government bonds)25% for mortgage bonds10% for real estate investment funds, unquoted equities, and securities issued by the same issuer(except government bonds)5% for hedge funds, private equity funds, and direct investment in property

There are no portfolio limits for quoted equities, government bonds, and bank deposits. Pension funds

are not allowed to hold loans in their portfolios.Foreign investment is permitted for up to 30% of assets, but the maximum investment in non-OECDcountries is 20%. Regulations concerning equity holdings have been relaxed. The 50% limit onequities was abolished in 2005 and options to invest in hedge funds and private equity introduced.Pension funds may not invest in businesses in which the founders of the fund or the members’employers own more than 10% of the shares.

BenefitsThe second-pillar pension funds are defined contribution saving vehicles. The benefits fully dependon the amount accumulated and investment returns on the capital. The benefits can be provided asa lump sum or an annuity. Pensioners with membership shorter than 15 years can apply to receivea lump sum, whereas those with membership exceeding 15 years receive benefits as an annuitypayment. A lump sum benefit can also be claimed by a beneficiary if a fund member dies. Withdrawalof funds before retirement is not possible but contributions paid during the accumulation period canbe inherited. Disability or survivors benefits are not provided by the second-pillar scheme, although inthese cases there is the possibility to return to the first-pillar scheme.

After retirement, members receive pension benefits from two sources. Those who opted for the mixedsystem after the transition of the pension system in 1998 will receive 75% of benefits from their statepension (first pillar), plus benefits from the private pension fund corresponding to the amount theyhave accumulated, based on proportions of gross salary they chose to contribute (obligatory andoptional part).

According to the Act LXXXII of 1997 on Private Pensions and Private Pension Funds, mandatorypension benefits are paid out upon reaching retirement or on completion of 15 years' of membership,as one of the following types of annuities:

A pension payment (life annuity) paid to the fund member monthly in advance until the end of thefund member’s life

A life annuity that the fund shall pay to the fund member or his beneficiary for a specified period oftime (period certain) from the beginning of the pension plan benefit, and on expiry of the set period,until the end of the fund member’s life (life annuity with a fixed beginning period)

A life annuity that the fund shall pay to the fund member until the fund member’s death, andafterwards to the fund member’s beneficiary, for a period of time (period certain) determined inadvance in the benefit regulations of the fund (life annuity with a fixed end period)

A joint survivorship life annuity, a pension plan benefit paid to the fund member and the fundmember’s beneficiary (or beneficiaries) as long as at least one of them is alive

Annuities can either be purchased from an insurance company or be provided by the pension fund.





January 2010

51

Pr c g a d Res r c o s o Charges

Allocation of the Amounts Paid by MembersIn accordance with the regulations introduced by the Hungarian Financial Supervisory Authority,the mandatory fund allocates the contributions received into three reserves in compliance with theprovisions applicable to reserve allocation proportions.

A typical current structure is as follows:

the funding reserve is 95.51% (it must be at least 95.5%)the operational reserve is 4.44%the liquidity reserve is 0.05%

The operational reserve is used to cover the operational costs of the pension fund, while the liquidityreserve serves for short-term investments as well as the equalization of investment and demographicrisks and the liquidity of the pension fund.

fees a d ChargesFollowing regulatory changes, annual asset management charges excluding trading expenses may notexceed 0.8% in 2009–2010, 0.7% in 2011, 0.6% in 2012, 0.5% in 2013, and 0.4% in 2014. Thesepercentages do not apply for pension funds that were registered in 2009 or in the previous threecalendar years. The maximum front-end operational fees were reduced from 6% in 2007 to 4.5% in2008. Members are also allowed to switch between funds provided that they have been with theircurrent fund for at least six months.

Private pension funds in the second pillar are subject to a supervisory fee paid to the HungarianFinancial Supervisory Authority. The supervisory fee consists of a fixed and a variable part. The fixedbasic part is HUF 2 million ( € 7,575) while the variable part amounts to 0.025% of the market value ofthe assets of the pension fund. The fee is paid quarterly.

taxa o o Co r bu o s a d Be e sTax incentives are granted to stimulate private pension savings. The prerequisite for the tax incentivesis that the yearly income of the private individual does not exceed HUF 3.4 million ( € 12,878) in 2009.

Twenty-five percent of contributions paid on the basis of a contractual agreement concluded by aprivate individual to a mandatory pension fund are income tax-deductible.

Thirty percent of additional contributions in excess of the contractual member contributions paid by aprivate individual to a mandatory pension fund are income tax-deductible.

The amount of tax relief cannot exceed HUF 100,000 ( € 378) annually.

Investment income on pension-related savings and benefits from mandatory pension funds aretax-exempt.

fu d Reser es: Sol e cThe legislation requires mandatory pension funds to create funding and liquidity reserves from theirrevenues. In addition to the mandatory reserves, the fund may create other reserves specified in thefund regulations. From its revenues, the fund accumulates its own activity reserves if it chooses not tooutsource annuity payments. The own activity reserve shall be used to replenish the funding reservesafter the secondary reserves become exhausted in the event of operational problems. The fund’s ownactivity reserves should total HUF 100 million ( € 0.378 million) if the fixed assets of the pension fundare reported to exceed HUF 2 billion ( € 7.575 million).

the opera o al reser e sused o co er he opera o alcos s o he pe s o u d,

h le he l qu d reser eser es or shor - erm

es me s as ell as heequal za o o es me a ddemograph c r sks a d hel qu d o he pe s o u d.





52

January 2010

Voluntary PensionsThe system of voluntary pension funds (VPFs) was introduced by law in 1993 and started to operateeffectively in 1994. Hungary was the first country in Central and Eastern Europe to introduce fundedsupplementary pensions—the so-called third pillar.

The VPFs market has experienced major consolidation in recent years. The number of pensionfunds and their members initially grew dynamically and by 1999 there were some 250 funds inoperation. This number had fallen to 66 by the end of 2008 with around 1.37 million participants.Currently the 15 largest companies account for around 80% of members and 85% of assets.Assets under management of pension funds equalled 697.6 billion HUF (approximately € 2.6 billion)as of the end of 2008.

About half of the VPF entities operating in the market are single or multi-employer funds (withrestricted membership); the remainder operate as pension funds open to all individuals. They canbe considered as employer and commercial pension schemes respectively. Both types of fundswere designed to supplement benefits granted to their members under the mandatory socialsecurity scheme.

VPFs provide individual defined contribution accounts and their operations are based on the sameinstitutional frameworks as mandatory pension funds. VPFs, which are operated by employers, mustappoint a trustee to manage their assets.

VPFs are not required to yield a minimum rate of return.

Par c pa oAny person between 16 and 62 is eligible for fund membership and may contribute to voluntarypension funds. Currently the participation rate is around 32% of the labour force.

Apart from individual membership, an employer may become an employer member in a pensionscheme under a contract concluded with the fund, in which an employer agrees to pay partial or fullcontributions on behalf of his employees. Employees of an employer that operates its own employerpension scheme may join a commercial pension scheme.

Membership is terminated upon the member’s death or when the member closes the account orswitches to another fund. Members are permitted to switch between funds without constraints.

Co r bu o sContributions can be paid by the employer or the employee or both, with contribution levels set byfund regulations. There is no regulatory minimum.

An employer committing to pay the employee’s contribution cannot exclude any employee who hasbeen in employment for at least six months from its contribution. The rate of contribution should beidentical in respect of each employee who is a fund member and cannot depend on which fund wasselected by the employee. The employer must enter into agreement with the pension schemes of itsemployees, which will stipulate the contribution rate. However, the employer has a right to select adifferent rate of contribution per employee depending on the employee’s age.

In 2008, approximately 70% of contributions paid within the third pillar were made by employers onbehalf of their employees.

the s s em o olu arpe s o u ds (vPfs) as

roduced b la 1993 a ds ar ed o opera e e ec el

1994. Hu gar as he rscou r Ce ral a d Eas erEurope o roduce u dedsuppleme ar pe s o s— heso-called h rd p llar.





January 2010

53

Upon the termination of the membership because of the death of the member, the beneficiariesdesignated in the application for membership or their heirs become the owners of a member’s individualaccount. The beneficiary may either: collect his or her share for the full amount as a lump sum, leave it inaccordance with fund’s bylaws in the pension fund in his or her own name (with or without continuationof the payment of the contributions), or transfer it to another fund of the same type.

D s r bu o S ra egRecruiting new members can be performed by natural or legal persons or unincorporated businessassociations under appropriate contracts.

Any remuneration provided for recruitment services shall be paid from the fund’s operational reserves.

taxa o o Co r bu o sVPFs benefit from a number of tax incentives.

A subsidy of up to 30% of individual payments made by the fund member (employee) and any employercontribution on the employee’s behalf are credited to the member’s pension account, up to € 378(HUF 100,000) annually or € 491 [HUF 130,000] if the employee retires before 2020). If membershipcontributions are paid by employers, they do not increase the gross income of the employees.

Employer contributions can be accounted for as expenditure incurred by the enterprise, andare exempt from social insurance. Employer contributions are tax-exempt up to 100% of theminimum wage.

Investment income is also tax-exempt. After 10 years of membership, the returns on investment maybe withdrawn tax-free; in each of the following years, 10% of the capital can be withdrawn free of tax.After 20 years of membership, fund members may withdraw all benefits free of tax.

Any payouts to beneficiaries from the voluntary pension fund are exempt from tax.

i es me S ra eg esThe investment regulations applying to VPFs are the same as those for mandatory funds with twoexceptions: there is a maximum limit of 20% of bank deposits, and, unlike mandatory funds, VPFs caninvest up to 5% of the funding reserve in loans.

Third-pillar pension funds have had the right to offer different portfolio strategies to their memberssince 2001. However, only a few funds offer their members different investment portfolios. Themajority of members remained in the default portfolio of the funds, which are usually low-risk portfoliostrategies with an average 10% equity share.

Be e sThe compulsory benefit waiting period is at least 10 years. Fund members can withdraw the amountsregistered in their individual retirement accounts at the end of the waiting period or have access topension benefits after attaining the retirement age.

A member of a pension fund may take a loan from the VPF of up to 30% of his or her savingsaccount. The sum of the loan, its duration (at the most 12 months), and other conditions should bestipulated by internal regulations of the fund. If the member fails to repay the loan, the fund has a legalright to deduct the overdue amount together with all expenses from the retirement account of themember within 180 days from the redemption date.

Emplo er co r bu o sca be accou ed or asexpe d ure curred b hee erpr se, a d are exemp

rom soc al sura ce.Emplo er co r bu o s are

ax-exemp up o 100% o hem mum age.





54

January 2010

Any fund member, following the waiting period or after reaching retirement age, is allowed to pledgea maximum of 50% of the balance on an individual account as collateral security in a contractconcluded with a credit institution, if at the same time the member authorizes the fund to register theindividual retirement account as frozen on the member’s instruction.

Upon reaching retirement age, the VPF benefit may be paid out as a lump sum, an annuity with nofurther payment of member contributions, or a partial lump sum withdrawal with an annuity paid outfrom the remaining part.

taxa o o Be e sA member who withdraws before attaining retirement age and after the 10-year waiting period maywithdraw all or part of the savings accumulated in the account. In this case, the contributions paid

are subject to tax, whereas capital gains are tax-exempt. If the withdrawal occurs in the second yearafter the waiting period has elapsed, 90% of the principal is a subject to tax. The tax base decreasesby 10% each year. If the member remains in the fund for 21 years, the member will be eligible towithdraw the whole amount accumulated in the account tax-free.

Upon attaining retirement age, the lump sum benefit is tax-free only if fund membership is longer thanthree years. Annuity benefits are tax-exempt if, during the first three years of receiving payments, theamount of benefit is not decreased by more than 15% of the previous year’s remittance.

O her Sa e Mecha smsThe fund shall create safety, operational, and liquidity reserves from its revenue. The safety reserveis used for the funding of services, the operating reserve is used to cover operating costs, and theliquidity reserve is used for the collection of surplus liquid assets and, as a general reserve for theother two reserves, for ensuring the fund’s liquidity. From 1 April 2008, 1.5% of all contributions arecredited to the operational reserves.

The contributions paid both by members and employers, the proceeds from the sale of assets, andother contributions shall be credited to safety, operating, and liquidity reserves according to thestipulations of the fund’s bylaws.

Dr ers o Pro ab lProviders may charge fees for people who wish to join, leave, or switch pension funds. In 2007, a limiton operational fees was introduced. The maximum limit amounted to 6% in 2007 and was reduced to4.5% starting in 2008.

Cos sThe annual asset management charge depends on the agreement between the VPF and the asset

management company. However, the annual charge may not exceed 0.8% of the average daily marketvalues of the assets under management.

In the case where a pension fund manages all or part of its own assets, the annualized pro-rata costsof the investments that the fund manages may not exceed 0.8% of the average daily market values ofthe assets under management.

Funds are also subject to a supervisory fee covered from their operating reserves.

Other types of costs borne by the VPFs include: fees for administration and record-keepingservices, auditing fees, actuarial service fees, marketing and promotional fees, and otheroperational expenditures.

A member ho hdra sbe ore a a g re reme

age a d a er he 10- eara g per od mahdra all or par o he

sa gs accumula ed he accou . i h s case,he co r bu o s pa d are

subjec o ax, hereascap al ga s are ax-exemp .





January 2010

55

Costs of pension benefits payouts are also borne by the VPF (although, to date, the majority ofmembers have chosen the lump sum form of benefit).

four h P llarIn 2006, another form of saving for pension was introduced as the fourth pillar . These voluntaryindividual retirement accounts (NYESZ) can be operated by banks or stockbrokers. They werecreated in order to promote long-term savings in equities and to encourage people to increase theirretirement savings.

A subsidy of up to 30% of contributions paid by members to qualifying fourth-pillar accounts arecredited to the member’s pension account up to a maximum of € 378 (HUF 100,000) annually (or€ 491 [HUF 130,000] if the member retires before 2020). Investment gains are tax-free.

The annual limit for charges is € 7.6 (HUF 2,000), the maximum asset managements fees are limited to80 bps (as of 2008), and operational charges are limited to 6%.

The investment policy of the fourth pillar is that the investments are mainly made in investment funds(approximately 40%), shares (about 30%), government securities (about 20%), and deposits andother assets (about 10%).

i 2006, a o her orm osa g or pe s o as

roduced as he fourth pillar.these olu ar d dualre reme accou s (nyESZ)ca be opera ed b ba ks ors ockbrokers.





56

January 2010

Slo ak a

Summary of the SystemSlovakia has a classic three-pillar pension system, which is subject to indirect guarantees andprotection mechanisms.

The funded private system functions alongside the pay-as-you-go universal state pension system (firstpillar), as well as other forms of retirement saving such as life insurance.

The Slovakian private pension system consists of two main components: mandatory pensions (secondpillar), introduced as part of major reforms in 2005, and voluntary pensions (third pillar).

The second-pillar funds are managed by pension asset management companies (Starobnédôchodkové sporenie, DSS, PAMC).

Key data for the six providers as of the end of 2008 is shown in Figure 52.

: slovakia seConD-pillar proviDersfigure 52

neT asseT value( € m) markeT share ClienTs markeT share

allianz - slovenská Dss 691.3 31% 445,564 30%aXa Dss 619.7 28% 394,088 27%vÚb gen erali Dss 323.7 15% 198,044 13%ing Dss 245.0 11% 152,877 10%

aegon Dss 226.9 10% 194,247 13%Čsob Dss 124.3 6% 98,304 7%

Source: NBS

The third-pillar funds are managed by supplementary pension asset management companies(Doplnkové dôchodkové sporenie, DDS, SPAMC).

Key data for the five providers as at the end of 2008 are shown in Figure 53.

: slovakia ThirD-pillar proviDersfigure 53

neT asseT value ( € m) markeT share ClienTs markeT share

ing TaTry - sympaTia, D.D.s., a.s. 369.6 40% 329,999 39%Doplnková DôChoDkováspolo Čnos ť TaTra banky, a.s. 261.3 28% 210,725 25%sTabiliTa, D.D.s., a.s. 177.7 19% 158,836 19%aXa D.D.s., a.s. 125.6 13% 144,290 17%aegon D.D.s., a.s. 1.0 0% 4,296 1%

Source: NBS

the Slo ak a pr a e pe s os s em co s s s o o macompo e s: ma da orpe s o s (seco d p llar),

roduced as par o majorre orms 2005, a d olu ar

pe s o s ( h rd p llar).





January 2010

57

Mandatory Pensions

Par c pa oThe second-pillar pension system is a defined contribution scheme. Initially, younger workerscould decide whether to remain in the old system or join the new pillar but new employees wereautomatically enrolled in the second pillar. As a result of legislation changes introduced in 2007,however, membership is no longer compulsory for new entrants; existing members transited frommandatory to voluntary participation between 1 January 2005 and 31 December 2007.

Following 31 December 2007, individuals born after 31 December 1986 who enter into a contractwith the pension asset management company (DSS) within six months since first becoming employedare allowed to become members.

The DSS is a joint-stock company required by law to manage three types of pension funds havingdifferent risk/return profiles (a multi-portfolio system).

The retirement age for the second pillar is currently 62 years for males and females.

Co r bu o sDuring the accumulation phase, which lasts for at least 15 years, the contributions of second-pillarmembers are credited to their personal pension accounts managed by the DSS.

The contribution rate amounts to 9% of gross salary, which is 50% of the total social securitydeduction from gross salary. The other 9% is credited to the first-pillar pension system.

The contributions are collected by the Social Insurance Agency (SIA, Národná Rada SlovenskejRepubliky), then distributed to the privately administered funds.

The new pension system has also introduced new elements that allow pensioners to retire beforethe retirement age set by legislation. In that case, the old-age pension is reduced by 6% per year ofearly retirement. In cases where pensioners work past the minimum retirement age the pension isincreased by 6% per additional year of age. It is also possible to work and receive pension benefitsfrom the second pillar simultaneously.

i es meContributions received are invested in a diversified portfolio of assets. The three possible profiles offunds are growth, balanced, and conservative.

The investment regulation for pension funds is rules-based, prescribing detailed investment limits for

each type of pension fund. These are:Growth fund: up to 80% of assets may be invested in shares

Balanced fund: up to 50% of assets may be invested in shares and at least 50% of assets must beinvested in bonds and money market

Conservative fund: the assets must be invested only in bonds and money market and the entireholdings must be insured against a currency risk

Each individual has a right to choose the type of fund in which to enroll. The individual can be amember of only one fund at a time. Individuals with less than 15 years to their retirement age maynot join the growth fund. Additionally, seven years prior to reaching the retirement age, members areobliged to switch their account balance to the conservative fund.

Dur g he accumula ophase, h ch las s or a leas15 ears, he co r bu o s o

he seco d-p llar membersare cred ed o he r perso alpe s o accou s ma aged b

he DSS.

the co r bu o ra e amou so 9% o gross salar , h ch s

50% o he o al soc al securdeduc o rom gross salar .





58

January 2010

The asset values of the three fund profiles at the end of 2008 are shown in Figure 54.

: funD profiles, 2008 year-enDfigure 54

neT asseT value ( € m)

ToTal 2,231,013ConservaTive 93,813balanCeD 649,535growTh 1,487,664

Source: NBS

The investment holdings of the three fund profiles for euro and foreign currency investments at theend of 2008 are shown in Figure 55.

: invesTmenT holDings, 2008 year-enDfigure 55

oTher foreignneT asseT value ( € m) euro share CurrenCy share

ToTal 2,231.0 11.14% 2.30%aCCounTs in banks 476.2 10.01% 1.78%

bonDs 1,504.7 8.11% 2.46%equiTie s 142.2 50.77% 49.22%oTher 307.4 24.85% 12.15%CommiTme nTs -199.5 34.99% 50.88%

Source: NBS

Guara eesThe state does not directly guarantee the performance of pension funds, nor the principal value ofpaid contributions. Indirectly, the law imposes strict investment limits on private pension funds andregulates them closely, while requiring some minimum performance relative to their competitors.Moreover, the state guarantees 100% of the granted pension in case of fraud or malfeasance.

Similarly, during the benefits payment phase of the mandatory pension system (paid by a life insurancecompany) the state does not provide any guarantees.

M mum i es me Re ur Requ reme sPension asset management companies (DSS) must achieve a minimum return for each of the threefunds (split by risk profiles). The regulation does not require absolute performance goals or the valueof paid-in capital, but a relative performance guarantee.

Under the new legislation commencing in 2009, PAMC (DSS) are required to create a separateguarantee account for each pension fund that will contain all of that fund’s earnings. If the DSSinvestment yield is a positive rate of return over a six-month monitoring period, it will be allowedto charge 5.6% of the appreciation of pension assets (performance fee) for that time period. Theremaining 94.4% will be distributed to the individual account holders. However, if a fund managedby a DSS has a negative rate of return following the six-month monitoring period, the DSS will beresponsible for making up the difference to ensure that workers’ accounts do not fall below theprincipal amounts they have contributed. The first six-month monitoring period began on 1 July 2009,with DSSs permitted to start charging this second fee on 1 January 2010.

U der he e leg sla ocomme c g 2009, PAMC(DSS) are requ red ocrea e a separa e guara eeaccou or each pe s o

u d ha ll co a all o

ha u d’s ear gs.





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59

Be e sThe net asset value is paid out to the participant in the event of reaching the state retirement age or incases where the member suffers total and permanent disability. The retirement pension, including onearly retirement, can be paid out in the form of a programmed withdrawal with a life annuity or just alife annuity. Survivor’s pensions such as widow’s, widower’s, and orphan’s pensions are also offered.

Pensions post-retirement are value-adjusted according to a ratio adding 50% of the increase in theinflation index and 50% of nominal wage growth.

Dr ers o Pro ab lIn both second and third pillars, the key driver of profitability is the asset management fee charged bythe administrators, as over the long term this is the most significant source of revenue.

There is a charge on contributions in the second pillar equal to 1% of the monthly contribution.

Second-pillar fund management companies can also charge a performance fee based on the level ofinvestment return.

Pr c g a d Res r c o s o ChargesIn the second pillar, the monthly management fee must not exceed 0.025% of net asset value.

Charges for maintaining personal pension accounts are limited to a maximum of 1% of contributionsfor each fund.

In addition there is a performance-based fee depending on the size of positive investment return overa six-month period.

The Social Insurance Agency charges 0.5% of the contributions it transfers to the individual accountfund manager.

Members are free to change to a different PAMC every two years. If they do so, they must pay a fee ofSKK 500 ( € 15) to the Social Insurance Agency.

A PAMC may not charge any other fees (e.g., for switching funds or PAMCs).

i es me S ra eg esInvestment management in the pension funds is governed by the rule the highest possible

yield at the minimum risk . Therefore, the state has introduced strict investment limits. The staterequires every pension fund to invest in a wide range of securities in a diversified portfolio of

companies and countries.The investment limits stipulate that the pension funds may invest only in liquid and public marketablesecurities with an investment-grade rating. The investment limits set by the law are supervised by thedepository organisation and by the National Bank of Slovakia.

The state has introduced a mechanism for benchmarking the required investment return for allpension funds. The procedure requires funds to maintain a specified level of yield below which theinvestment return should not fall significantly.

It is stipulated by law that, 24 months after a pension management company begins to operate apension fund, the average yield of the pension fund must at all times be at least equal to the lower oftwo values (depending on the type of fund):

Conservative: 90% of the average market yield in the last 24 months or the average market yieldminus one percentage point

i bo h seco d a d h rdp llars, he ke dr er o

pro ab l s he assema ageme ee charged bhe adm s ra ors, as o erhe lo g erm h s s he mos

s g ca source o re e ue.

i es me ma ageme he pe s o u ds s

go er ed b he rule the

highest possible yield at theminimum risk. there ore, hes a e has roduced s r c

es me l m s.





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January 2010

Balanced: 70% of the average market yield in the last 24 months or the average market yield minusthree percentage points

Growth: 50% of the average market yield in the last 24 months or the average market yield minusfive percentage points

The law requires all pension fund companies to guarantee that there will be a positive return overthat period. If the return is negative, the pension fund company has to pay the difference from itsown assets.

taxa o o Co r bu o s a d Be e sSecond-pillar/mandatory pensions in the Slovak Republic are not taxed. Contributions are currently

tax-exempt, as well as investment income and paid-out pension benefits.Approaches o Ac uar al R sks a d Guara ees, Reser g, a d Sol e c

GuaranteesThe state guarantees the amount saved on the individual accounts of the members of the pensionfunds. The Social Insurance Company on behalf of the state is obliged to compensate the loss offunds caused by a decision, procedure, or other action of PAMC or a depository that violated thecurrent law (fraud) and resulted in a loss of funds saved in individual accounts.

In the case of below-average investment performance of a fund compared with its competitors, thePAMC is obliged to pay the difference arising from its own funds in accordance with the law.

Prudential Reserves

No formal solvency margin is required by law. Only indirect guarantees exist for monitoring whetherpositive investment returns can be observed over each six-month period.

Other Safety MechanismsThe system has a dedicated regulator and supervisor, in the form of the National Bank of Slovakia.

Each pension asset management company (DSS and DDS) must have a depository bank, which issupervised by the National Bank of the Slovakia (NBS). The depository bank maintains the accountsfor every pension fund managed by a PAMC. If the depository bank learns that a PAMC has exceededthe investment limits set by the law, it must not execute investment instructions and it must report thisfact to the NBS. The depository also verifies that the PAMC is setting management charges properly.The operation of the depository is also subject to the inspection of the NBS.

The accounting records of the PAMC must be verified by an independent auditor every year, whochecks that the accounting practices of the PAMC are in accordance with the law.

Every PAMC must have an internal audit unit, separated from the company operations, that controlsthe company activities alongside the external auditor.

Voluntary Pensions

Par c pa oAny individual of age 18 or older is eligible to become a member of the system.

The participation in the system is voluntary for both employers as well as employees. However, certaincategories of employees working in a risky environment or under a physically demanding condition arerequired to be members of the system. In these cases, their employers must contribute.

The retirement age for the third pillar is currently 55 years for both men and women.

Each pe s o assema ageme compa(DSS a d DDS) mus ha ea depos or ba k, h ch ssuper sed b he na o alBa k o he Slo ak a(nBS). the depos or ba k

ma a s he accou s ore er pe s o u d ma agedb a PAMC.





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61

Co r bu o sContributions are voluntary and are remitted by employers and participants directly to supplementarypension asset management companies.

i es meContributions received are invested in a diversified portfolio of assets.

The split of investments for third-pillar assets between euro and foreign currency investments at theend of 2008 are shown in Figure 56.

: ThirD-pillar asseTs, 2008 year-enDfigure 56

oTher foreignneT asseT value ( € m) euro share CurrenCy share

ToTal 935.2 9.30% 0.70%aCCounTs in banks 301.6 4.11% 0.69%bonDs 602.9 10.83% 2.42%equiTie s 13.6 33.38% 49.77%oTher 37.5 19.56% 2.64%CommiTme nTs -20.5 12.44% 87.56%

Source: NBS

Be e sThe net asset value is paid out to participants in the event of reaching the state retirement age or onbecoming totally and permanently disabled. The possible pension benefits on reaching retirementage are life annuity, partial life annuity and partial lump sum settlement, fixed term annuity, fixed termannuity with partial lump sum settlement, and a termination settlement.

In the event of the participant’s death prior to retirement, the participant’s account is paid out to theparticipant’s legal heirs.

Pensions post-retirement are value-adjusted with the ratio equal to the sum of 50% of the increase inthe inflation index and 50% of nominal wage growth.

Pr c g a d Res r c o s o Charges

In the third pillar, the management fee may not exceed 3% of net asset value (NAV).The fee for switching SPAMCs (DDS) may not be higher than 5% of the member’s account balancewithin the first three years of membership. After this period, the switching fee is equal to 1% of NAV.

O her Sa e Mecha smsFor the third pillar, the legislation states that the supervisory board of a supplementary pension assetmanagement company shall be entitled to require the managerial employee directing the internalcontrol unit to perform a control of the supplementary pension asset management company. Thisemployee reports to the National Bank of Slovakia on an annual basis.

taxa o o Co r bu o s a d Be e sIn the third pillar, the employee contributions to the voluntary pension pillar are tax-free up to a limit of€ 323 per year, while employer contributions can be deducted from the income tax base up to 6% ofthe employee’s salary. Investment income is taxed at 19%. Benefits are currently tax-free.





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January 2010

overview of privaTe pension sysTems in oTher markeTs

Czech Republ cThe voluntary pension fund market (third pillar) in the Czech Republic is well developed, covering 4.3million people at the end of 2008, some 60% of the working population. Unlike most other countriesin the region, however, there is no mandatory second pillar.

Voluntary pension funds were introduced as legal entities in 1995 as part of a major reform of theretirement system. Employees obtain personal tax relief on contributions within defined limits and a state

subsidy is also payable. More recently, tax relief was introduced on employer contributions and the shareof employers who contribute to their workers’ pension schemes has increased to around 25%.

Contributions remain low, however—employee contributions are around 2% of average gross salariesand this is one of the main problems for the system. The age profile of members is also relatively highwith those age 50 or older accounting for 48% of membership at the end of 2008.

There has been extensive consolidation among pension fund companies with the number falling fromover 40 in the early days to 10 at the end of 2008, managing total assets of just under € 6 billion. Theconservative investment policy of pension funds, with around 80% of investments in bonds and 3%in equities, has meant they have been relatively unaffected by the current crisis. This also reflects theguaranteed returns that pension funds are required to provide under legislation—any losses in theirannual performances must be made up by shareholders.

Proposed reforms to the third-pillar system, including the introduction of a second version of thecurrent voluntary third pillar with multi-funds (lifecycle portfolios) but without a guarantee, have beenunder discussion but no reforms are likely to be implemented before 2011.

Slo e aPension legislation provides for several types of pension vehicles in Slovenia but these mainly operateon a voluntary basis—there is no mandatory second pillar, other than for employees in jobs deemed tobe hazardous or with a limited term.

Voluntary supplementary pension schemes are provided by mutual pension funds, pension companies,and insurance companies licensed to provide supplementary pensions insurance. Tax relief is available

on employee and employer contributions. Mutual pension funds can operate on an individual orcollective basis and be open or closed.

Total pension fund assets were some € 1.2 billion at the end of 2008 with around 500,000members covered.

Croa aCroatia has a three-pillar pension model, with a mandatory second pillar and voluntary third pillarintroduced in 2002. The second pillar is mandatory for younger workers who were under age 40 atthe time the reform was implemented in 2004, while those between 40 and 50 could choose eitherthe first or second pillar and those over 50 remained in the first pillar.

There were four second-pillar mandatory pension funds at the end of 2008. Detailed quantitativeinvestment limits apply to pension fund managers who also have to guarantee a return based on theaverage fund performance.

Croa a has a hree-p llarpe s o model, h ama da or seco d p llara d olu ar h rd p llar

roduced 2002.





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63

The third pillar consists of "open" voluntary pension funds and "closed" occupational pensionfunds that are sponsored by individual companies. Taxation incentives are available to encourageparticipation. There were six open and 15 closed third pillar funds at the end of 2008.

In response to the financial crisis the government stated that it was considering possible changes tothe pension system, including allowing individuals to switch out of the second pillar, but to date nomajor changes have been introduced.

Some 1.6 million individuals are covered under the second- and third-pillar systems in Croatia (outof a workforce of 1.7 million), although take-up in the third pillar is very limited with just 144,000individuals. Total assets of the mandatory funds were € 3.2 billion at the end of 2008, making Croatiaone of the mid-sized pension markets in the region.

Serb aAlthough Serbia has reformed its state pension to reduce the cost of future pensions, to date it hasnot introduced mandatory private pensions (the second pillar of the classic three-pillar system).

The third pillar, the voluntary pension sector, was introduced in 2006 and there are currently ninevoluntary pension fund management companies with 160,000 members in total (out of a workforce ofsome 5 million). However, only around 65,000 members are actively contributing and the developmentof the sector has been hampered by the economic downturn as well as the recent negative investmentperformance for most pension funds.

There is tax relief up to defined limits on employer and employee private pension contributions.

Charges on contributions are limited to a maximum of 3% with the fund management charge limitedto 2% p.a. Detailed quantitative limits apply to pension fund investments.

At the end of 2008 the voluntary pension sector had net assets of some € 48 million.

Bulgar aBulgaria adopted a three-pillar pension model following a new pension law in 2000, although privatevoluntary pension funds existed before. All second- and third-pillar pension funds are established andmanaged by pension insurance companies.

There are two types of mandatory pension funds in Bulgaria, universal (UPF) and professional (PPF).Employees and self-employed persons born in 1960 or later must become members of a UPF. Thosein hazardous jobs must in addition become a member of a PPF in addition to the UPF. A pensioninsurance company may establish and manage only one UPF and one PPF. UPF contributions aredivided between employers and employees while for PPFs they are paid by employers.

The third pillar consists of supplementary voluntary pension funds (VPF) and supplementary voluntarypension funds with occupational schemes (VPFOS).

Some 3.2 million individuals are covered under the second- and third-pillar systems in Bulgaria.There were nine licensed pension insurance companies at the end of 2008 managing assets ofsome € 1.1 billion.

Bulgar a adop ed a hree-p llar pe s o model ollo ga e pe s o la 2000,al hough pr a e olu ar

pe s o u ds ex s ed be ore.All seco d- a d h rd-p llarpe s o u ds are es abl sheda d ma aged b pe s o

sura ce compa es.





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January 2010

Es o aThe second pillar covers some 600,000 individuals with assets managed by pension companiestotalling some € 850 million in October 2009. As a response to the economic crisis, the governmentin Estonia suspended contributions to the second pillar for two years from 1 June 2009, aiming torestore full contributions (6%) starting in 2012. Compensation will be payable for members mostaffected by the measure.

The voluntary third pillar consists of pension insurance policies offered by insurance companies andprivate pension funds.

La aThe second pillar covers some 1 million individuals with assets managed by pension fund companiestotalling € 660 million. Fifty-eight percent of members joined the second-pillar system on a compulsorybasis and 42% joined voluntarily.

The Latvian government decided to cut contributions from 8% to 2% in 2009 until 2010, which willincrease to 4% in 2011 and 6% in 2012.

The voluntary third pillar consists of open and closed pension funds offered by private pensionfund companies.

L hua a

The second pillar covers some 950,000 individuals with assets managed by pension fund companiestotalling some € 600 million at the end of 2008.

At the beginning of 2009 the Lithuanian government decided to cut contributions from 5.5% to 3%for two years.

The voluntary third pillar consists of individual pension accounts managed by private pensionfund companies.

the La a go er medec ded o cu co r bu o s

rom 8% o 2% 2009 u l2010, h ch ll crease o4% 2011 a d 6% 2012.



While every effort has been made to ensure the veracity of the information in the document as at the date of publication, Milliman acceptsno responsibility for errors and omissions. Furthermore, we would encourage recipients to seek specific advice rather than rely on thereport in their decision-making processes. This is because the information contained in the report is neither exhaustive nor static.



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Milliman Private Pensions in CEE 01-2010

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