Central and Eastern EuropeanPensions 2007Systems and Markets
ContentPreface                                                             3Introduction                                  ...
PrefaceThe provision of retirementincome is currently a hot topicall over the world, particularlyin countries where the po...
Introduction
IntroductionDemographic and MacroeconomicDevelopments in CEE CountriesThe fundamental things apply – as time          mark...
Introductioneconomic performance. Nevertheless,              relatively small economic weight of the newcontribu tions or ...
Introductionsubstantial subsidies are granted in the                                                           decades to ...
IntroductionGDP growth rates [%]  Country                 1997–2005            2006                2007*                  ...
IntroductionWhile the Baltic states, the Czech Republic      already very limited, interest rate policy isand Slovenia hav...
IntroductionExchange rate systems in CEE countries                                  government debt is not an issue in CEE...
IntroductionBulgaria. It is in all of these countries’ best                  Public financesinterest to postpone EMU membe...
IntroductionIn the absence of any sizeable immigration,                                                                   ...
IntroductionPensions in Central and Eastern Europe:Reforms, Regulation and MarketsReforming Central and Eastern           ...
Introductionas the second pillar in the other countries,     before, but a certain share was redirected toexcept that part...
Introductionemployers often pay the bulk of these.                               Reform Pressure Gauge*Contribution rates ...
Introduction  Allianz Pension Reform Pressure Gauge  The ability of state pension systems across Europe to cope with demog...
Introductionregulations, asset performance is very                               lead to distortions in asset pricing. Hen...
IntroductionIn some regards, therefore, retirement                              their disposal, while Slovenians, the rich...
Introductionare of minor importance in the Baltic states.    pensions may gain a foothold in someThis indicates that there...
Introductionhave individual DC accounts without              Hungary, this requirement will beemployer involvement in the ...
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
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Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
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Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
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Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
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Pensions in Central & Eastern Europe
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Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
Pensions in Central & Eastern Europe
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  1. 1. Central and Eastern EuropeanPensions 2007Systems and Markets
  2. 2. ContentPreface 3Introduction 5 Demographic and Macroeconomic Developments in CEE Countries 6 The economy and the pension system 6 Catching up 7 Labour markets 9 The road to EMU 10 Demographic development 12 Pensions in Central and Eastern Europe: Reforms, Regulation and Markets 14 Reforming Central and Eastern European pensions 14 Regulating pension funds 17 Financial assets and their allocation in CEE countries 19 Regulatory trends in CEE 20 The future development of pension assets 21 Life Cycle Asset Allocation – A Suitable Approach for Defined Contribution Pension Plans 25 Challenges for defined contribution plans 25 How to invest retirement savings 25 An advanced life cycle approach 26 Conclusion 29Country reports 31 Bulgaria 32 Croatia 38 Czech Republic 44 Estonia 50 Hungary 55 Latvia 62 Lithuania 68 Poland 73 Romania 80 Slovakia 86 Slovenia 92Appendix 972
  3. 3. PrefaceThe provision of retirementincome is currently a hot topicall over the world, particularlyin countries where the popula-tion is quickly getting older.Ageing populations are a major challengefor countries that rely mainly on state-run,pay-as-you-go pension systems. This isbecause contributions either rise to unac-ceptable levels, or benefits decrease to thepoint that retirees are no longer guaranteeda decent standard of living.The present study is Allianz Global Inve- This study aims to analyse CEE pensionstors’ second on pension market develop- systems and their market potential. In thement in Central and Eastern Europe. After first part of the study, we analyse macroeco-the fall of the Iron Curtain, governments nomic and demographic developments inacross the region faced economic upheaval CEE. This is followed by an overview of theand unfavourable demographic develop- main pension, regulatory and market trendsment, both of which had a crippling effect in the region. We discuss all CEE states thaton state-run pension systems. Some CEE are members of the European Union, inclu-countries have felt the impact of demogra- ding new members Bulgaria and Romania,phic trends even more than their Western as well as accession candidate Croatia. ToEuropean counterparts, and populations in conclude the first part of the study, we con-the region will continue to age rapidly in the tribute to the discussion on asset manage-coming decades. As a result, pension system ment solutions for defined contributionreform has made its way to the top of the plans by analysing lifecycle models.political agenda, with structural reformsbeing introduced in most countries. In The second part of the study contains indiv-many cases, reforms in CEE have been more idual country profiles that provide detailedradical and courageous than in Western information on each country’s pension mar-Europe, with Eastern European countries ket. We investigate the design of pensionintroducing mandatory funded pension pil-lars of the defined contribution type. Inaddition, some countries have drasticallyreduced public pension provision. systems in CEE by analysing each pillar, dis- cussing pension fund regulations, exploring the pension markets and projecting future potential for each country. PrefaceIn light of longer life expectancy, diver- We hope that that this study will contributesifying sources of retirement income has to a better understanding of the new pensi-become vital to reduce the risk of old-age on systems’ mechanisms and of marketpoverty. With its reliance on funded pillars, development in CEE, and we look forward toCEE countries have set an inspiring example a fruitful debate.for their Western neighbours. Indeed, CEEhas become a promising market for theasset management and insurance industry, Brigitte Miksa,as asset management solutions are vital for Head of International Pensionsaccumulating pension assets. Allianz Global Investors AG 3
  4. 4. Introduction
  5. 5. IntroductionDemographic and MacroeconomicDevelopments in CEE CountriesThe fundamental things apply – as time markets are the subject of this study. Aftergoes by. One of these fundamental things is some introductory remarks, we will look atthe ageing of populations. In many parts of CEE countries’ economies in detail. Morethe world, people are living longer lifes as particularly, we will address the closefertility rates drop. Central and Eastern interaction between demographic andEurope (CEE) is no exception. The economic development and the new EUpopulation structures of the 10 new EU members’ prospects with regard tomember states from CEE in particular will membership in the European Monetaryface a major transformation in the coming Union (EMU), which will be of greatyears. In some cases, changes will be even importance for investors.more pronounced than in the EU-15 and therest of the world. Fertility rates havedeclined sharply since the collapse of The economy and the pensioncommunism, while longevity has reachedlevels almost comparable to Western systemEurope. Pension systems are always closely relatedTogether, these two trends will result in a to the economy. With pay-as-you-go (PAYG)substantial increase in the old-age systems, the link is clear. In the mostdependency ratio, the ratio of the population common case, employees pay contributionsaged 65 and over to that aged 15 to 64. This directly out of their salaries. Returns dependfigure tells us how many pensioners (over on the number of employees, the wage level65) there are for every 100 people of working and the contribution rate. Whenever theage (15-64). At the moment, the ratio in CEE number of contributors decreases, be it foris around 20, which means that there are 20 demographic reasons or because of anretirees for every 100 people of working age. economic downturn and risingThat number is expected to grow to 33 in 20 unemployment, the pension system suffersyears time and to 50 in 2050. This means the consequences. Short-term remediesthat two rather than five people of working include contribution rate hikes or taxage will have to support one retired person. subsidies to the pension system. In the long term, however, pension benefits usually endDemographic change is only one of many up being trimmed. Tax-financed pensionreasons why CEE countries have redesigned schemes operate along the same lines.their pension systems over the past 15 years. Ultimately, the development of the nationalAbove all, the necessity to adapt the social tax base, which is closely related tosecurity system to the new economic economic performance, determines theenvironment was far more pressing than generosity of the pension system.demographic considerations. To ensure thatthe market economy could thrive, the Funded systems operate differently. Insocialist-style social system had to be principle, the pension is determined by thereformed. For example, many CEE countries funds invested and the return earned ononce had pension systems that allowed these investments, as is the case withretirement at age 55 and offered generous defined contribution systems in thebenefits. Today the CEE countries, their countries under consideration. Whereas aeconomies and pension systems look very PAYG system operates domestically, fundeddifferent compared to 15 years ago. The pensions can be invested abroad, thusprospects for this region and its pension decoupling returns from domestic6
  6. 6. Introductioneconomic performance. Nevertheless, relatively small economic weight of the newcontribu tions or inflows still have to be members. The countries added around 5 %earned at home. In this respect, the different to the Union’s GDP, measured at currentpension systems are similar. Domestic prices. However, the population of the EUeconomic performance and income increased by about 20 %. The accession ofdevelopment determine the amount that Romania and Bulgaria has had similarcan be set aside for old age, either for the effects, but on a much smaller scale.individual’s future in a funded system or thecurrent pensioners in a PAYG system. In order to compare income levels across countries in a meaningful manner, varyingIt should be noted that pension funds are price levels have to be considered, which canfrequently subject to constraints when it be done by measuring GDP in purchasingcomes to investment decisions. If they are power parities. This approach adjusts thelimited to domestic investments, the exchange rate of currencies to equalize thedifference between funded and pay-as-you- price of a given basket of goods in differentgo systems gets smaller, and ceases to exist countries. The comparison of standards ofentirely if pension funds are required to living is usually closer to the truth than ainvest their money into national comparison using market exchange rates.government debt. Under such However, purchasing power parities are notcircumstances, implicit government debt is flawless and in order to assess a country’schanged into explicit government debt that economic weight, market exchange ratesstill has to be serviced by taxes. Domestic are more suitable. A glance at GDP per capitainvestment, for instance financing figures shows that the new CEE membersinfrastructure to improve long-term growth are still very poor compared to the EU-15.prospects, makes sense when decent Only the per capita GDPs of Slovenia and thereturns can be earned at home. This is Czech Republic show purchasing powerparticularly true for the new EU member standards above that of Portugal, thestates attempting to catch up with the rest poorest of the EU-15 countries.of the Union. In any case, the proper risk/return structure, given the liabilities of a Poor regions qualify for various EU funds,pension fund, should be left to fund and as the EU’s financial outlook for themanagement. In CEE countries, return budget period spanning from 2007 to 2013potential is high thanks to sound economic shows, net transfers into the countries rangeprospects. New EU members and between 1.5 % and 3.5 % of their respectiveneighbours such as Croatia have gained GDP, depending on the economic situationgood economic growth opportunities. EU of the country in question. For Croatia themembership – or in the case of Croatia EU situation is different, since it has still toneighbourship – fosters economic growth become a EU member. For the others,through trade and members benefit fromgenerous subsidies. GDP per capita 2005 purchasing power parities [% of EU-15 average], EU-15 = 100 100Catching up 80On January 1, 2007, Romania and Bulgariajoined the European Union, boosting the 60number of member states from CEE to 10.Poland, the Czech Republic, Slovakia, 40Slovenia, Hungary and the three Balticstates have already been members of the EU 20for three years, joining on May 1, 2004. Forthe EU as a whole, the impact of the 2004 0 Slovakia Bulgaria Estonia Romania Croatia Lithuania Slovenia EU-15 Hungary Latvia Poland Republicenlargement (Malta and Cyprus were also in Czechthis round) on key macroeconomicaggregates was relatively modest due to the Source: Eurostat 7
  7. 7. Introductionsubstantial subsidies are granted in the decades to reach 75 % of the EU-15 average,form of structural and other funds from provided that its real GDP grows constantlyBrussels, coupled with free access to the EU at 4.5 %, compared to 2.25 % for the EU-15.market. These funds will help accelerate thecatching-up process that is well on its way in These simple projections show that the EUCEE. However, the discrepancies within the member states from CEE will remainEU are enormous, and it will certainly take relatively poor compared to the EU-15 fortime for the CEE member states to close the quite some time. However, this goes handHypothetical development of per capita GDP in Portugal and Bulgaria18,00016,00014,00012,00010,000 8,000 Portugal growth 2.5 % p. a. 6,000 4,000 2,000 Bulgaria growth 5 % p. a. 0 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2009 2015 2021 2027 2033 2039 2045 2051 2057 2063 2069Source: Allianz Dresdner Economic Researchgap to the EU-15. The graph above shows the in hand with a lower cost of living anddevelopment of per capita GDP in Bulgaria lower wages, which have attracted(the poorest of the accession countries) and investment: many manufacturingPortugal (the poorest of the EU-15 countries) companies have moved production to CEEbased on the hypothetical, but realistic to take advantage of a cheap, highlyassumption that Bulgaria’s real per capita educated workforce. This, in turn, hasgrowth rate will be 5 % and twice as high as helped to boost growth. The following tablePortugal’s. In this scenario, it would take 60 shows average gross monthly earnings inyears for Bulgaria to reach the same level as CEE countries compared to the EU-15Portugal. average. While the differences are striking, wages in these countries are rising fast,Since the EU average is higher still, it will particularly for skilled labour. This meanstake decades for the accession countries to that the cost advantages that CEE countriesreach the average level. Even Poland, the offer will dwindle over time, as the gapbiggest economy of the CEE countries between old and new member statesconsidered here, will need more than four narrows.Average monthly gross income 2005 [EUR]2,500 2,2562,0001,500 1,192 882 8101,000 635 602 515 452 492 500 370 344 192 0 Bulgaria Croatia Czech Republic Estonia Latvia Lithuania Poland Romania Slovenia Slovakia EU-15 HungarySource: Eurostat, Allianz Dresdner Economic Research8
  8. 8. IntroductionGDP growth rates [%] Country 1997–2005 2006 2007* 2008* 2009–2013* Bulgaria 4.6 5.7 6 5.7 5.7 Croatia 3.3 4.6 4.3 4.1 4 Czech Republic 2.3 5.9 5 4.5 3.5 Estonia 6.8 11.4 8.7 7.3 4 Latvia 7.1 11.9 8.6 6.8 4 Lithuania 6.1 7.5 6.8 5.8 4 Hungary 4.3 4.9 2.2 2.3 4 Poland 3.9 5.7 5 4.7 4 Romania 2.8 7.2 6.3 6.1 7.2 Slovakia 4.1 8.3 7.9 6.2 8.2 Slovenia 3.9 5 4.3 4.1 3.5 EU-15 2.3 2.8 2.3 2.3 2* ForecastSources: European Commission, Allianz Dresdner Economic ResearchMember states with lower initial per capita were employed compared to the totalincome have grown faster, especially the number of people in this age group. OnlyBaltic countries and Hungary. At the same Slovenia showed a higher employment ratetime real wages increased by around 3.5 % in in 2005 than the EU-15 average, whereasthe new member states compared to 1 % per unemployment was lower than the EU-15year in the EU-15. Potential growth rates average in several CEE countries.have averaged 3.5 % since the late 1990s,demonstrating the CEE countries’ highly Clearly, CEE countries have low labour forcefavourable supply-side performance. This is participation overall, but there arealso reflected in the growth forecasts significant differences between them.depicted in the table above. Employment and unemployment rates [%] 90Labour markets 80 70Structural unemployment is one of the 60major problems that CEE countries face. 50From 2001 to 2005, the labour market 40participation rate was around 65 %, 30compared with an average of 73 % in the EU- 2015. Poor employment performance has a 10disproportionate effect on specific age 0 Croatia Czech Republic Lithuaniacohorts and groups. The employment rates Hungary Bulgaria Romania Slovenia Poland Slovakia Estonia Latvia EU-15of young, older and female workers inparticular are relatively low. The followinggraph shows the unemployment rate in2006 and the employment rate for 2005. The unemployment rate 2006 employment rate 2005latter shows how many people aged 15 to 64 Source: Eurostat; 2006, 2005 9
  9. 9. IntroductionWhile the Baltic states, the Czech Republic already very limited, interest rate policy isand Slovenia have employment rates still the task of national central banks.similar to the EU-15 average, labour market During the rapid catch-up process, theparticipation rates in the other countries European monetary policy – which caters toare considerably lower, most notably in EMU as a whole – may be too loose to keepPoland, Hungary and Romania. Higher local inflation under control. The extraparticipation rates could offset a small part degree of economic policy freedom that isof the demographically induced labour retained by not being part of EMU could beforce decline. very helpful for some time. Once the economic structures and cycles of the CEE countries are more closely aligned to those of current EMU members, the case forThe road to EMU joining will be stronger.EU membership eventually means Apart from the above-mentioned reasons formembership in the EMU. However, only not joining, there are other obstacles thatSlovenia has been admitted so far. As should be considered. With the signing ofrecently as 2005, it seemed as though most the Maastricht treaty in 1992, theof the countries that had joined the EU in foundations of European monetary policy2004 would become EMU members by 2008 were laid, and strict membership criteriaor 2010 at the latest. But things have established. These are:changed dramatically since then. In the CEEcountries considered in this publication, · Exchange rate stability, meaning 2 yearsEMU membership is no longer as high on the within the exchange rate mechanismagenda as it used to be. The reasons are without realignment;manifold, among them national politics andthe perceived consequences of EMU · Inflation of no more than 1.5 percentagemembership. points above the average of the 3 EU countries with the lowest inflation;EMU membership is an issue for pension · Long-term interest rates no higher than 2systems, too. While it has no direct effect on percentage points above the average of thethe pay-as-you-go part of the pension system, 3 countries with the lowest inflation;it does have implications for the funded part, · Sound public finances, meaning thatwhich is becoming increasingly important in government debt should not exceed 60 % ofthe CEE countries. Under EMU membership, GDP, and the budget deficit should be lowerexchange rate risk, which is manageable but than 3 % of GDP.costly to hedge, would disappear forinvestments in other EMU countries. Pensionfunds could find a broader set of assets to Exchange rate stability would not be a majorinvest in without having to consider currency obstacle to the countries under review. Amovements. Furthermore, EMU could make notable exception, however, is Hungary. TheCEE capital markets even more attractive for Euro – Forint exchange rate was ratherforeign investors, increasing liquidity and – volatile in 2006, with a fair bit of speculationhopefully – supporting asset prices, a in the market. Currencies participating inwelcome effect for local pension investment the European Exchange Rate Mechanism IImanagers. (ERM II) stayed within their corridors. The next table shows the exchange rate systemsFor current EMU members, the common of the CEE countries.monetary policy is largely considered Inflation is another area that could causebeneficial. However, the economic problems if the countries joined immediately.discrepancies between current members At the moment, most CEE EU countries wouldand CEE countries are considerable. At this fail the Maastricht test. If the three EUstage, it is not entirely clear whether countries with the lowest inflation in 2006relinquishing control over monetary policy (namely Finland, Poland and Sweden) arewould be beneficial. Even though exchange considered together, the average inflationrate movements against the Euro are rate amounted to 1.4 %. This means that the10
  10. 10. IntroductionExchange rate systems in CEE countries government debt is not an issue in CEE countries. Apart from Hungary, all of them Country Exchange rate system have very low levels of debt. Budget deficits, Bulgaria Currency board (Euro) however, could become a problem for some countries. Here, too, Hungary stands out, Czech Float with a budget deficit of 10.1 % in 2006 Republic according to EU estimates, though tough Hungary Exchange rate band +/- 15 % fiscal measures will likely help reduce this year’s deficit down to 7 % of GDP. The country Estonia Currency board (Euro), ERM II aims to get its budget in line with the Latria Currency board (Euro), ERM II Maastricht criteria by 2010, but this will Lithuania Currency board (Euro), ERM II require resolute reform implementation. Poland Float Hungary is not the only country with a Romania Float budget deficit exceeding 3 %. Poland, the Slovakia Float, ERM II biggest CEE economy, also has its share ofSource: Allianz Dresdner Economic Research problems. While last year’s budget deficit turned out to be substantially lower thaninflation criterion for new member states expected, there is still cause for concern.stands at 2.9 %, and only Poland and the The European Commission argues thatCzech Republic would pass the test. Inflation corrections to budget deficits arecould be a problem for some time to come, as insufficient; in fact, last year’s positivestrong economic growth tends to keep outcome could largely be attributed to highinflationary pressure high. revenues that resulted from striding economic growth. According to EU rules,In most countries, interest rates are Poland has to fully incorporate the costs ofrelatively close to the EMU benchmark. The pension reform into its budget, which it hasaverage spreads on 10-year government not yet done. For this reason, this year’sbonds in 2006 were below 100 basis points deficit will probably stand at 3.5 % of GDP.for most countries. Only Poland, Romania That is roughly the same figure we expectand Hungary are outside this corridor. for the Czech Republic in 2007.Obviously, capital markets are notconvinced that these countries will join Except for Slovenia, none of the CEE countriesEMU in the near future. The latter two qualified for EMU membership in 2006.countries would even fail to meet the However, as discussed above, early EMUinterest rate criterion. In 2006, the 10-year membership should not be an aim in itself. Agovernment bond benchmark yield for the country must be ready for membership, bothEU was 3.8 % – with 7.3 % and 7.9 %, Hungary economically and politically. The larger CEEand Romania were substantially above it. countries such as the Czech Republic, Hungary, and Poland are certainly not thereThe public finance criterion has not been a yet, nor are new members Romania andmajor hurdle yet. In practice, generalInflation and bond yields 2006 [%]10 8 bond yield target 6 4 inflation target 2 0 Estonia Republic Slovakia Bulgaria Czech Lithuania Romania Latvia Hungary Poland EMU 10 y gov bond yield InflationSource: Eurostat 11
  11. 11. IntroductionBulgaria. It is in all of these countries’ best Public financesinterest to postpone EMU membership. BulgariaAllianz Dresdner Economic Research government debt criterion 60 % Czech Republicforecasts that Slovakia will be the nextcountry to join the EMU in 2009. The Estoniafollowing table provides the forecasts for HungaryEMU accession as of spring 2007. LatviaExpected EMU membership budget deficit criterion 3 % Lithuania Year Country Poland 2009 Slovakia Romania 2010 Estonia, Lithuania Slovakia 2011 Latvia, Bulgaria –5 5 15 25 35 45 55 65 budget deficit % of GDP government debt % of GDP Czech Republic, Poland, 2013 Source: EU Commission Forecast Romania 2014 HungarySource: Allianz Dresdner Economic Research Much like in the rest of the world, the decline in fertility coincided with increasingDemographic development longevity. Men in the Czech Republic and Slovenia benefited more than theirThe demographic situation in the CEE counterparts in other CEE countries as theircountries is marked by a steep decline in life expectancy at birth increased by 5.3 andfertility, which began in the 1970s and 4.6 years between 1990 and 2005 in eachaccelerated in the early 1990s after the country, respectively. In the major EU-15collapse of the Soviet Union. This is not countries – Germany, France, Italy andsurprising, given that times of increased Spain –, the increase was between 4 and 4.2economic insecurity frequently lead to years in that period.sudden changes in birth rates. Between 1990and 1995, fertility in the 11 CEE countries The situation for women is similar. Here, too,considered in this publication declined much Slovenia and the Czech Republic showed themore sharply than in the rest of Europe. highest increases for CEE countries betweenCurrently, the fertility rate in these countries 1990 and 2005 with 3.9 and 3.7 years,lies between 1.24 and 1.42 children per respectively. Figures for the EU-15 countrieswoman; to keep the population constant, a range between 2.9 and 3.6 years. Longevityfertility rate of roughly 2.1 children per development in the other CEE countries,woman would be necessary. The drop was however, was not nearly as positive, and wasparticularly dramatic in Latvia, Estonia and generally well below four years. To see thethe Czech Republic. Croatia, Slovenia and big picture, it is helpful to look not only atHungary were less affected, as these changes in longevity but also at overall lifecountries were less economically dependent expectancy, and here it is clear that CEEon the former Soviet Union. countries are well below the EU average.Fertility [children per woman]3.02.52.01.51.0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 Bulgaria Czech Republic Estonia Latvia Lithuania SlovakiaSource: Eurostat12
  12. 12. IntroductionIn the absence of any sizeable immigration, will be much higher still. In Bulgaria, therefertility decline is leading to shrinking will be 60 pensioners for every 100 people ofpopulations, while increasing life expectancy working age. The figure will be lowest inis boosting the average age. The age group Croatia and the Baltics, with about 42 to 45comprising people over 65 is the only one pensioners, while the EU-15 average will beexpected to grow in the future. Overall, the around 53. The following chart illustratespopulation of these 11 countries is forecast to these developments. It must be taken intoshrink by about 15 %, or roughly 16 million account that the EU-15 average is pushedpeople, by 2050. In absolute terms, Poland higher by Italy and Spain, which have the twoand Romania are among the worst hit, as fastest-ageing populations. The morethey will each lose about 4.5 million populous CEE countries are also ageing fast,inhabitants by 2050, representing 10 % and making their demographic situation even20 % of their respective populations. The worse than the EU-15 average.situation is even worse in Bulgaria. Accordingto Eurostat, the country will lose roughly a Given the rapid increase in old-agethird of its current population within the dependency ratios, CEE countries will find itnext 40 to 45 years. almost impossible to run sustainable pay- as-you-go pension systems. All of theThe old-age dependency ratio provides a good countries have reacted to the demographicindication of a country’s demographic threat in various ways and many introducedsituation and the resulting pressures on the funded pension elements to their systems.pension system. Currently the old-age In this report, we have put the spotlight ondependency ratios in the CEE countries under 11 different pension systems that rely onconsideration range between 16 and 26. With funded pensions to varying degrees.a ratio of about 16, Slovakia has the lowestold-age dependency, while Croatia has the Dr. Jürgen Stanowsky,highest with a ratio of 26. In 2050, these ratios Allianz Dresdner Economic ResearchLife expectancy [years]90858075706560 Croatia Czech Republic Estonia Latvia Lithuania Hungary Poland Romania Slovakia Slovenia France Germany Italy Spain Bulgaria men womenSource: EurostatOld-age dependency ratios*70605040302010 0 Croatia Republic Estonia Latvia Lithuania Poland Romania Slovakia Slovenia EU 15 Spain Hungary Italy Bulgaria Czech 2005 2030 2050* Ratio of over 65-year-olds to 15–64-year-olds; source: Eurostat 13
  13. 13. IntroductionPensions in Central and Eastern Europe:Reforms, Regulation and MarketsReforming Central and Eastern by dividing the sum accumulated in the notional account by cohort life expectancy.European pensions In this way, NDC systems establish a strict equivalence between contribution andAfter the fall of the Iron Curtain, Eastern benefits.European states faced the daunting task ofreforming their outdated pension systems. At In eight of the eleven CEE countries includedthe time, the systems in place were not in this study, reforms went further than thatcompatible with demographic developments and introduced mandatory second pillaror the new economic environment. Under the schemes with fully funded individualold regime, pensions were the exclusive accounts of the defined contribution (DC)responsibility of the state. Retirement type. Hungary was the first country tobenefits depended on years of service, not on introduce a second pillar along these lines,contributions paid, so that a link between followed by Poland. Most recently, Slovakiacontributions and benefits was more or less introduced a second pillar and Romania isnon-existent. Retirement age was low, and in the process of doing so. This is a radicalcertain occupational groups enjoyed reform step and has been inspired by theprivileges. Early retirement was widespread World Bank model of pension reform, inand was extensively used as a means of hopes that a fully funded second pillar willreducing the workforce during the transition help diversify retirement income and allowperiod. more people to participate in capital markets. This, in turn, will likely pushFaced with this situation, all CEE countries domestic capital market development.initiated similar reform strategies in the1990s that applied to the first pillar of their The only countries that have not introducedpension systems. Parametric reform of the funded second pillar systems are the Czechpay-as-you-go (PAYG) system was essential Republic, Slovenia and Lithuania. However,to cope with enormous financial pressure Lithuania has implemented a fundedand secure the solvency of public pensions. second pillar, which works in the same waySooner or later, every country increased theretirement age, reduced incentives for earlyretirement, changed the benefit formula to Overview of the pension systems after the reforms.establish a stronger link betweencontributions and benefits, scaled back NDC system Reformed PAYG systemprivileges for certain occupational groups Mandatoryand increased the required contribution Poland Bulgaria second pillarperiods. First-pillar reforms in Poland andLatvia were the most far-reaching. These Latvia Croatiatwo countries introduced a notional defined Estoniacontribution (NDC) system in the first pillar. HungaryNDC systems impose the logic of fundedsystems on public pension schemes by Slovakiagiving participants a hypothetical account Romaniacontaining all contributions made Voluntary second or Lithuaniathroughout their working lives, credited at a voluntary third pillar Czech Republiccertain rate of return. At the time of only Sloveniaretirement, pension benefits are calculated14
  14. 14. Introductionas the second pillar in the other countries, before, but a certain share was redirected toexcept that participation is voluntary. The the funded second pillar. An exception to thisCzech Republic relies on first pillar public rule is Estonia, where contributions werepensions and voluntary savings in the third increased to achieve higher contributions topillar, while Slovenia runs voluntary second pillar schemes. Some countries, suchoccupational schemes in the second pillar, as Latvia and Lithuania, have allowed thesimilarly to Western European countries. proportion of the second pillar share toExcept for the latter two countries, the third gradually increase; also Romania will do so inpillar of voluntary pension savings remains the future.fairly underdeveloped in Eastern Europe. In most cases, participation in the secondAfter the reforms, most CEE countries now pillar was made mandatory for new labourhave a three-pillar system with a reformed market entrants, while existing employeesfirst pillar, a mandatory second pillar made up to a certain age could choose whether toup of funded individual accounts and a join or not. Employees near retirementthird pillar comprising voluntary pension usually could not join, since the capital theysavings. The pillar terminology applied in could still accumulate was not sufficient toCEE is different from the common OECD cover appropriate retirement benefits.classification, which defines the first pillar Redirecting contributions to the secondas the state pension system, the second as pillar implies financing problems for theoccupational pensions based on first pillar, which previously received theemployment contracts and the third as full share of contributions. The losses inpersonal pension plans. While this revenue for the first pillar mainly depend onclassification is suitable for Western the number of contributors to the secondEuropean and other industrialised pillar and the share of contributioncountries, it is hard to apply it to CEE redirected. World Bank estimates for 2004pension systems. suggest that revenue losses in the public pillar ranged between 0.3 % and 1.3 % of GDPAs already mentioned, the CEE countries in CEE. In order to offset these losses,based their pension reform strategies on the countries such as Bulgaria, Poland andWorld Bank model, which is why we have Slovakia established a demographic reservechosen to follow the World Bank fund to be filled with privatisation revenues.classification in this study. The maindifference lies in the second pillar, which Overall, social security contributions arecomprises individual DC accounts in CEE, sizeable in Central and Eastern Europe, andbut (mainly) voluntary occupationalpensions in Western Europe. In CEE,voluntary employer contributions toemployee pension arrangements are part of Pension pillar classification in CEE and Western Europethe third pillar, but contributions are madeto individual accounts, not pension fundsestablished by a firm or industry. Some CEEcountries recently established a fourthpillar that aims to generate more employer Occupational Mandatory pensions/involvement in pension provision, or simply State Private additionalallow people to set more money aside for CEE funded pension pensions privateretirement. The topic will be discussed in pensions pensiongreater detail later on in this study. The savingsadjoining graph illustrates the differencesbetween CEE pension systems and those Occupa- State Privateprevalent in Western Europe. EU-15 tional pension pensions pensionsThe funded second pillar systems in EasternEurope were introduced by way of the carve- First Second Third Fourthout method, meaning that social security pillar pillar pillar pillarcontributions stayed at the same level as 15
  15. 15. Introductionemployers often pay the bulk of these. Reform Pressure Gauge*Contribution rates to the second pillar vary As of April 2007significantly, ranging from 4 % in Latvia to Greece9 % in Slovakia. Total net replacement rates Spainin CEE are relatively high. Net replacement Italy Belgiumrates are the ratio of pension entitlements – Portugalnet of taxes – to earnings, net of taxes and Sloveniacontributions. Net replacement rates are Austrianearly always higher than gross France Czech Republicreplacement rates, mainly because retirees Polandhave lower personal income taxes than Hungarybefore and typically pay low social security Slovakiacontributions, if any at all. In the present Germanycontext, net replacement rates refer to an Lithuania Finlandemployee with average earnings. The net Bulgariareplacement rates were calculated by the SwedenEuropean Commission and refer to the Romaniaretirement income in the first year of Denmark Norwayretirement, divided by income during the Netherlandslast year of employment. Since the pay-out Croatiaphase of the funded second pillar has not yet Estoniastarted, the rates refer to the first pillar. Over Switzerland Latviatime, the replacement rate of the first pillar UKwill decline and the funded pillar will Irelandaccount for a sizeable amount of retirementincome.1 0 2 4 6 8 * Scale from 1–10: 1 low reform pressure, 10 high reform pressurePension contribution rates, second pillar share, and replacement rates 2006 Employer Employee Second pillar Net replacement contribution [%] contribution [%] contribution [%] rate 2005 [%] Bulgaria 14.95 8.05 5 n. a. Croatia 0 20 5 n. a. Czech Rep. 21.5 6.5 79 Estonia 20 2 6 41 Hungary 18 8.5 8 102 Latvia 14.5 5.5 4* 78 Lithuania** 21.2 2.5 5.5 55 Poland 9.75 9.75 7.3 78 Romania 20.5 9.5 2*** n. a. Slovakia 14 4 9 63 Slovenia 8.85 15.5 82* gradually increasing ** voluntary second pillar *** once established, gradually increasing1 Replacement rates can be measured in different ways. The World Bank uses retirement income from the mandatory pillars – including the funded second pillar – as a share of individual average lifetime earnings. It calculates future pension entitlement based on current systems’ rules, thus considering the future contribution of the funded pillar. By applying this methodology, it shows that average earners in Bulgaria (will) have a net replacement rate of 75 % while Croatian earners get 62 %. The average net replacement ratio of the mandatory pillars in CEE (excluding Slovenia and Romania) will amount to 73.3 %, which is higher than the 67.9 % average for OECD countries. This is partly a result of a more favourable tax treatment of pensions in CEE. Further- more, since mandatory systems and thus the second pillar in CEE countries are included, this methodology tends to underestimate the replacement rates in Western countries, where pensions other than first pillar pensions are normally voluntary and thus not included.16
  16. 16. Introduction Allianz Pension Reform Pressure Gauge The ability of state pension systems across Europe to cope with demographic change varies considerably. The Allianz Reform Pressure Gauge attempts to illustrate the differences and takes developments determining the future stability of pension systems into account. These developments include demographic change and expected changes in the old-age dependency ratio. The generosity of the current PAYG pension system and reforms of first pillar pensions that have already been passed are also included, as are supplementary systems. Finally, the state budget is taken into account to assess the feasibility of financing deficits in the pension system. The result of this exercise is shown in the chart. As most CEE countries have introduced a mandatory funded part to their pension systems, they are on the right track. But much still needs to be done to remove the legacy of former pension systems. For instance, the retirement age is still low, even if it is rising in many countries, early retirement is still widespread, and some countries’ supplementary pension elements continue to be voluntary, possibly leaving a substantial part of the low income workforce uncovered. If nothing is done to change this situation, people with low incomes will be forced to rely on modest state pensions in the future. Of the Eastern European countries, Latvia and Estonia are well-placed to cope with demographic change, on a par with Ireland and Great Britain.Certainly, the reforms initiated in CEE particularly with regard to diversifyinglessened financial pressure on the assets. In contrast, in continental Europe,countries’ pension systems and made them quantitative restrictions are still prevalent.more sustainable. The Allianz Reform These specify the financial instruments thatPressure Gauge, which calculates the pension funds can invest in as well as thesustainability of pension systems and the maximum limits of certain asset classes inresulting reform pressure, shows that most the portfolio.CEE countries are ranked in the mid-rangein terms of necessity for pension reform. Central and Eastern Europe has opted for quantitative restrictions as a means of regulating pension funds. In many CEE countries, there are limits for equityRegulating pension funds holdings and other financial instruments, as well as for the share of foreign assets inPension funds, especially those in the the portfolio. From the viewpoint of capitalmandatory pillar, are heavily regulated in market theory, these limits are not withoutCEE. Fees, disclosure, number of funds problems. It is argued that restrictiveoffered and investment are the main maximum limits for certain financialregulated areas. Investment regulation is the instruments, especially equity, renderarea with the biggest impact on pension pension funds inflexible by constrainingfunds and asset managers, as it has a direct asset allocation and thus the upsideimpact on asset allocation and, consequently, potential of pension funds. If equity limitson the performance of pension fund assets. are overly restrictive, they may result in suboptimal asset performance, becauseGenerally, there are two main principles of pension funds cannot sufficiently takeinvestment regulation, the prudent person advantage of the higher-yielding equityprinciple and quantitative restrictions. The markets. Over the last 100 years, equitiesprudent person principle is applied in performed four percentage points betterAnglo-Saxon countries and increasingly in than bonds on average.Western Europe; it is the most liberal form ofinvestment regulation. It is based on the Caps on international investment canpremise that pension funds or asset hinder effective asset allocation bymanagers are obliged to invest in the same impeding an appropriate diversificationway as a prudent investor would for himself, across countries. In the case of restrictive 17
  17. 17. Introductionregulations, asset performance is very lead to distortions in asset pricing. Hence,dependent on domestic markets and the trade-off between the desire to developeconomic cycles, making investment risk local capital markets and efficient pensionhigher than it needs to be. fund investing is a delicate matter and policy-makers need to strike a balance.However, policy-makers have been facedwith a trade-off between the objective of Minimum return guarantees are anotherlocal capital market development and regulatory instrument that is often appliedoptimal asset allocation of pension funds. It in Eastern Europe and elsewhere. Minimumwas hoped that the funded pension system return guarantees can take the form ofwould lead to quantitative and qualitative absolute guarantees. This has been the casecapital market development. Qualitative in the Czech Republic, where pension fundsimprovements refer to the generation of have to generate positive returns every year.„institutional capital“, which includes better Or, like in Poland, they can take the shape oflegal and regulatory frameworks and more relative performance goals, where aprofessional investment management, more benchmark must be met that is based on thetransparency and better governance performance of all pension funds. Forstructures. To achieve these goals, pension pension fund members, minimum returnassets should, at least to a certain degree, guarantees have the advantage thatflow into national financial markets. retirement savings are predictable in theHowever, substantial inflows of pension case of absolute return guarantees. And inassets may result in imbalances between the case of relative return guarantees, thesupply and demand, particularly when local risk of choosing a poorly performing fund iscapital markets lack liquidity, which could minimised.Main investment limits and return guarantees in the second pillar Max. foreign invest- Max. equity share Absolute return Relative return ments [% of assets] [% of assets] guarantee guarantee Bulgaria 15 20 yes Croatia 15 30 yes None for OECD Czech Rep.* None yes countries None for EFTA and OECD Up to 50, depending on Estonia – – countries type of fund chosen Hungary 30 None – – None for EU/EFTA coun- Up to 30, depending on Latvia – – tries type of fund chosen Up to 100, depending Lithuania** None on type of fund – – chosen Poland 5 40 yes Romania*** n.a. 50 yes Up to 80, depending on Slovakia 70 yes type of fund chosen None for OECD Slovenia 30 yes countries* third pillar ** voluntary second pillar *** expected to start in 200818
  18. 18. IntroductionIn some regards, therefore, retirement their disposal, while Slovenians, the richestplanning is becoming easier. Nevertheless, country in per capita terms, have EUR 13,140.there is a trade-off. Capital market theory The modest wealth and income levelsargues that the necessity to secure short- explain why voluntary private pensionterm profitability may lead to homogeneous savings in the third pillar areinvestment strategies in the pension fund underdeveloped in CEE. Indeed, possibilitiesmarket. This „herding“ effect may result in for additional pension savings in general aresimilar performances of pension funds, limited. However, this may change if thethereby reducing the number of real choices catch-up process proceeds and incomesfor potential and existing pension fund continue to increase.members. A second related problem is thateffective longer-term investment strategies In CEE, investments in financial assetscannot be pursued if the guarantee applies compete strongly with housing investmentsto annual minimum returns. In this case, and consumption. The economicpension funds must sacrifice long-term turbulences of the transition period in thereturns for short-term profitability. In brief, 1990s resulted in plummeting incomequantitative restrictions and annual levels, which in turn led to pent-up demand.minimum guarantees are somewhat Rising income and a more favourableproblematic, as both limit the holdings of economic environment have now made itvolatile assets, including equities, which possible to realize this demand. As a result,have higher long-term returns, but can have saving rates in CEE tend to be lower than innegative returns in individual years. Western Europe. While saving rates amount to 11.7 % of disposable income in France,In recent years, some countries have relaxed 10.5 % in Germany and 8.9 % in Italy, Slovakiatheir investment regulations, especially has a saving rate of 2.4 %, the Czech Republicwith regard to equity investments. This has 0.2 % and Lithuania –2.7 %. The negativebeen the case in Hungary, for instance, saving rates can be attributed to the factwhich had a 50 % limit on equities until that people prefer to spend their savings on2004, and in the Czech Republic’s third buying houses rather than investing inpillar, where a 25 % equity limit was in place financial products.until the same year. While it is too early tospeak of a trend, these two examples In CEE, the bulk of household financialindicate that the increasing maturity of assets is often held in bank deposits. Inpension systems and capital markets might Slovakia, for example, bank depositslead to a loosening of regulatory account for two-thirds of all financialrestrictions. assets, the highest value of all CEE countries. Countries such as Slovenia, the Czech Republic, Poland, Lithuania and Latvia have a share of bank deposits of around 50 %. InFinancial assets and their Hungary, they account for roughly 40 % ofallocation in CEE countries assets. In many countries, however, there are sizeable holdings of shares and mutualNot only is there a considerable gap between funds – 22 % of total household assets in theper capita GDP among old and new EU Czech Republic, 29 % in Poland, 36 % inmember states, there are also major Hungary and 55 % in Estonia. In general, thisdiscrepancies in terms of financial assets. 2 is often a consequence of the privatisationWhile the financial assets of households in process of the 1990s.the EU-15 amount to 215 % of GDP on average,in Eastern Europe they range between 52 % The importance of life insurance andof GDP in Latvia and 100 % of GDP in Estonia. pension assets in household portfoliosThis means in per capita terms that each varies considerably in the differentcitizen of an EU-15 country has average countries. In countries like Poland, Slovakia,financial assets of EUR 57,200. In contrast, the Czech Republic, Hungary and Slovenia,Latvians have assets worth EUR 2,965 at they account for 10 % of financial assets, but2 Comparable data for financial assets were not available for Bulgaria, Croatia and Romania. 19
  19. 19. Introductionare of minor importance in the Baltic states. pensions may gain a foothold in someThis indicates that there is considerable countries. Romania has also just establisheduntapped potential for the life insurance occupational pensions as the third pillar,business in CEE countries. In Western making it the fourth country to add such aEurope, life penetration, defined as the ratio dimension to its pension system. Whileof life premiums to GDP, stands at 5.6 % on employers in most CEE countries canaverage. In contrast, it amounts to 1.1 % in voluntarily contribute to their employees’the CEE countries. The CEE country with the private pension schemes, occupationalhighest life penetration is Slovenia with schemes would give them an additional1.7 %, followed by the Czech Republic (1.5 %), employee retention tool, particularly ifHungary (1.4 %), Slovakia (1.4 %) and Poland unemployment rates continue to decrease.(1.3 %). Still, the values for these countries They are also interesting for multinationalare considerably higher than in Greece, the companies active in the region.EU-15 country with the lowest penetration(1.0 %). The introduction of occupational schemes has partly been driven by the EU’sThe predominant position of bank deposits Institutions for Occupational Retirementin household financial assets is a pattern Provision (IORP) directive. This directive hasquite typical for countries at the beginning generally been problematic for CEEof an accumulation process. The preference countries, as it mirrors Western Europeanfor consumption and the limited experience practices and is hardly compatible with theand availability of more sophisticated systems in place. Following years offinancial products result in holdings of discussion, the directive was approved inliquid assets. However, over time and as 2003. Its aim is to enable a pan-Europeanhigher-yielding financial instruments are market for occupational pensions byintroduced, this is likely to change. creating the conditions for IORPs to operate across borders. The problem for the CEE states is that the directive takes Western European pension systems with their well-Regulatory trends in CEE established employer-sponsored occupational schemes (mostly of theMoving toward four pillar systems and defined benefit type) as a starting point,the IORP directive which do not exist in Eastern Europe.Very recently, several CEE countries began toestablish a fourth pillar of pension provisionto complement the existing system. Fourth The IORP directivepillars of various shapes have beenintroduced in Bulgaria, Hungary, Lithuania EU member states were obliged toand Poland. They are based on very different implement European Union directiveobjectives. In Bulgaria, the fourth pillar is 2003/41/EC on the activities andintended to enable voluntary occupational supervision of IORPs by September 23,schemes similar to those in operation in 2005. The main goal of the directive isWestern Europe. The Hungarian fourth to enable cross-border occupationalpillar has been established primarily to pension schemes. IORPs are defined aspush the development of the domestic fully funded, separate legal entitiesequity market. Lithuania established the that provide retirement benefits. Theylegal framework for occupational pension must be authorised and registered onlyschemes, whereas in Poland its introduction by home country supervisors; hostwas driven by the unpopularity of such country social and labour laws apply.schemes in the third pillar. While the prudent person principle applies, host states may prescribeWhile most of these schemes have just been additional investment regulations.established or are still in the process ofbeing introduced, it is remarkable thatEastern European pension systems are In this sense, the directive is not tailored tobroadening in scope, and occupational Eastern European systems, which generally20
  20. 20. Introductionhave individual DC accounts without Hungary, this requirement will beemployer involvement in the second pillar. mandatory from 2009 onwards. In the otherIn Bulgaria, the establishment of the fourth CEE countries, pension funds are onlypillar was directly related to the directive. allowed to offer a single fund. Slovakia, forRomania has also adapted to the demands instance, follows the lifecycle concept quiteof the directive with its newly established closely. Pension fund members are free tothird pillar of occupational pensions. Other choose which of the three funds on offercountries, however, are lagging behind. In they would like to join. When they are lessmid-2006, Slovenia was referred to the than 15 years away from retirement, theyEuropean Court of Justice for not having can no longer be enrolled in the fund withwritten the IORP directive into its national the highest equity share. Seven years beforelaw. In October 2006, the European retirement, they are obliged to switch to theCommission announced that it would start conservative fund with no equity exposure.proceedings against the Czech Republic, The trend towards pension funds withHungary and Poland due to incomplete different risk/return profiles and automaticimplementation and sent reasoned opinions assignment to less risky funds as people getto these countries. In March 2007 it again older increases the security of pensionsent reasoned opinions to the Czech savings in CEE by minimising theRepublic and Hungary. At the moment, the investment risk of funded pensions.topic of how cross-border pension funds willwork in Eastern Europe remains a sensitiveand currently unfinished matter. The future development ofIncreasing choice in pension funds pension assetsRetirement savings in defined contributionplans have some characteristics that set Since most CEE countries introducedthem apart from other types of savings, as mandatory funded elements (second pillar)they face the risk that the time of retirement into their pension systems and begancoincides with bear markets. To prevent this sponsoring voluntary systems, a substantialfrom happening, the concept of lifecycle build-up of capital has started, which makesinvesting has been developed. One variant of CEE an attractive market for asset managerslifecycle investing advocates automatically and insurance companies. Although it isadjusting asset allocation to the age of the still in the early stages of development, thefuture retiree. This set-up reduces the market has shown annual growth of 37 % inproportion of high-risk assets as the the last few years, up from a volume of EURbeneficiary ages, making it less likely that 13.5 billion in 2002 to EUR 47.4 billion infinancial market fluctuations will have a 2006 (excluding Bulgaria, Romania andnegative effect on pension benefits. This Croatia). And there is still considerableapproach therefore presents a argument growth potential.against a „one-size-fits-all“ approach inpension savings. This study includes the newest EU members, Bulgaria and Romania, as well as Croatia. InSome Eastern European countries have this broader group of countries, pensiontaken first steps in this direction and now assets amounted to EUR 50.8 billion at therequire providers to offer funds with end of 2006. With EUR 30.1 billion, Polanddifferent types of asset allocation, also holds the biggest piece of the pie, followed byknown as lifestyle or balanced funds. Hungary and the Czech Republic. NotLifestyle funds have different combinations surprisingly, the countries with smallerof equities, bonds and money market populations show much lower levels ofinstruments and usually come in three pension assets. Croatia is the exception toforms: conservative (only bonds and money this rule: with assets amounting to EUR 2market instruments), balanced (modest billion, the country has surpassed the largerequity share) and progressive (high equity Slovakia, which has accumulated EUR 1.3share). In Estonia, Latvia, Lithuania, Poland billion. And the most recent additions to theand Slovakia, pension funds can or must EU are still in the process of reforming theiroffer funds with different risk profiles. In pension systems. With its 7.7 million people, 21

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