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Article | Global News Briefs

Slovakia: Pension reforms — auto-enrollment and parental pensions

By Ivana Šebestová and Simona Matulová | December 22, 2022

Slovakia approves changes to its Social Insurance Law with the aim of boosting employee retirement savings and shoring up the retirement program, effective January 1, 2023.
Retirement|Ukupne nagrade |Health and Benefits
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Employer Action Code: Act

The government has approved amendments to the Social Insurance Law, with the primary aims of 1) increasing retirement savings in employees’ social security defined contribution (DC) privately managed accounts (i.e., the “second pillar”) through automatic enrollment and the use of default life cycle index (rather than bond-based guaranteed) investment funds, and 2) improving the sustainability of the social security defined benefit (DB) retirement program (i.e., the “first pillar”). The changes are effective January 1, 2023.

Key details

Changes to the social security DB retirement program include the following:

  • A new pension supplement “Parental Pensions” will benefit pension recipients who have one or more adult children in insured employment in Slovakia. The supplement will equal 1.5% of 1/12 of the annual covered earnings of the worker for the calendar year two years prior, limited to a maximum monthly benefit of 21.80 euros per parent, per child.  
  • The cap on normal retirement age (currently 64) for people born after 1967 will be removed, allowing it to increase with life expectancy.
  • Participants with at least 40 years of insured employment will be allowed to claim early retirement.
  • The duration of spousal survivors’ pensions (absent dependent children or disability) will be extended from 12 to 24 months.

Changes to the social security DC retirement program include the following:

  • New entrants to the labor market under age 40 will be automatically enrolled in the DC program, with the option to end participation after two years. For all other employees, participation will continue to be voluntary. The choice to participate or not will no longer be irrevocable. Funding of the DC accounts will continue to be based on a diversion of a portion of the employer’s social security DB contributions plus voluntary employee contributions.
  • The 2013 introduction of bond-based guaranteed return funds as the default investment option will be reversed, in large part. The new default for future contributions, unless the member specifies otherwise, will be a life cycle passive index fund with no guaranteed return. For members whose account investments were transferred to the guaranteed bond fund in 2013 and who haven’t since revised their investments, the account balance will also gradually be transferred (unless the member specifies otherwise) to the new default option starting in July 2023.     
  • The maximum annual fee (now 1.20% of assets) that pension funds can charge to members’ accounts will be reduced to 1.15% for 2023, 1.05% for 2024, and 1.00% from 2025. The reductions will also apply to voluntary individual or group DC pension plans.
  • The contribution rate (funded by a diversion from the employer’s 14% of covered pay contribution to the first pillar) will hold at 5.5% through 2024, then increase to 5.75% for 2025 to 2026, and to 6.0% from 2027.
  • Lump sum withdrawals will be subject to personal income tax; currently they are tax-exempt.  

Employer implications

As of the end of 2021, approximately 1.7 million people (out of a labor population of about 2.7 million) had second pillar DC accounts with a total value of about €12 billion (Ministry of Labor, Social Affairs and Family data). Because the accounts are funded by diverting a portion of social security retirement contributions from the DB to the DC system, the performance of the accounts is of critical importance for ensuring an adequate level of benefits at retirement, but the majority of account holders are invested in guaranteed funds with low rates of return. Over half of employers surveyed offer supplemental retirement benefits, almost all DC plans, but they are subject to the same restrictions on pension fund investments as apply to second-pillar accounts, with the result that most are also conservatively invested. The new investment approach is modeled on life cycle investing with greater levels of risk (and potential return) in earlier phases, gradually shifting to a more conservative approach, which may help improve investment returns. Employers should review the changes to the pension system and determine the possible impact on their benefit policies and supplemental retirement benefits.

Contacts

Ivana Šebestová

Simona Matulová
Prague

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