The Slovak government recently introduced a reform to its pension system to increase retirement savings and benefits. The reform introduces several amendments to the first pillar of the retirement program, including the introduction of a new parental pension supplement, elimination of the normal retirement age cap, and the possibility of early retirement. The reform also introduces several changes to the second pillar of the retirement program, including the automatic enrollment of first-time workers under the age of 40 and a change in the default investment option. The changes are effective 1 January 2023.
Since 2004, the Slovak pension system has consisted of three distinct pillars:
- The first pillar is a mandatory defined benefits pension scheme financed on a pay-as-you-go basis and managed by the Social Insurance Agency.
- The second pillar diverts a portion of social contributions to an individual participant account on a voluntary basis. The second pillar is a defined contribution scheme administered by pension fund management companies as selected by participants; and
- The third pillar is a voluntary employer-sponsored supplemental defined contribution scheme.
The most important changes introduced by this reform are summarized below:
Changes made to the first pillar (social) pension system:
- A new parental pension supplement known as the “Parental Pension” or “Parental Bonus,” which will allow a retiree who has socially insured adult working children to receive additional pension benefits. The supplemental bonus is calculated as 1.5% of 1/12 of each eligible child’s annual covered earnings for the previous two calendar years, limited to a maximum bonus of EUR 21.80 per month per parent. Parents who do not have children or those who have children who are unemployed or working overseas will not be eligible for the supplemental bonus.
- Eliminating the normal retirement age cap of 64 years for people born after 1967. The retirement age will instead be bound to average life expectancy, which is expected to add approximately one to two months per year. People born after 1967 will not be affected by this change.
- Allowing employees with at least 40 years of insured employment to claim early retirement without reference to specific retirement age.
- Extending the duration of spousal survivors’ pensions from 12 to 24 months.
Changes made to the second pillar (social individual account) pension system:
- Automatic enrollment of first-time workers under the age of 40 in the second pillar, with the option to opt-out after two years. Enrollment remains voluntary for all other workers.
- Switching the default investment option for new participants from guaranteed return bond funds to a life cycle non-guaranteed return index fund unless otherwise elected by the new participant. For current participants who were transferred to the guaranteed bond funds investment option in 2013 and haven’t made any changes since then, their pension accounts will also automatically migrate to the new default life cycle non-guaranteed index fund option starting in July 2023 unless otherwise elected by the current participant. All participants, current and new, will gradually move to guaranteed bond funds starting from the age of 54.
- Gradually lowering the maximum annual management fees pension funds can charge from the current 1.20% of fund assets to 1.15% in 2023, and 1.05% in 2024, and finally to 1% in 2025.
- Subjecting lump sum saving withdrawals from the second pillar to personal income tax.
- Gradually increasing the contribution rate (funded by diverting a portion of the employer’s social security contributions from the first pillar to the second pillar) from the current 5.5% of covered pay to 5.75% in 2025 and 2026, and 6% in 2027.
Changes made to the third pillar employer-sponsored pension system:
- Gradually lowering the maximum annual management fees of supplementary pension companies from the current 1.20% of the pension fund assets to 1% in 2025 as a way of promoting wider participation in the third pillar of the pension system.
Employers should review the changes to the pension system and make necessary changes to their benefits policies and practices, employment agreements, and pension-related benefits and policies as needed.