MINISTRSTVO ZA DELO, DRUŽINO IN SOCIALNE ZADEVE
REPUBLIKA SLOVENIJA
www.mddsz.gov.si, e: gp.mddsz@gov.si
Kotnikova 5, 1000 Ljubljana
t: 01 369 77 00, f: 01 369 78 32
25 September 2009
MODERNIZATION OF THE PENSION SYSTEM IN THE
REPUBLIC OF SLOVENIA
SAFE AGE FOR ALL GENERATIONS
THE PURPOSE OF THIS DOCUMENT
The pension system in Slovenia has a long tradition and is firmly placed within the overall
social security system as one of the key subsystems, providing a secure old age. We believe
that in the past, the pension system in Slovenia offered a viable answer to broad social
changes.
In the last decade, the future of pension systems became a topical issue of the Slovenian
and the wider European political and professional circles. Like most developed European
countries with a long tradition of public pension systems, Slovenia is facing modified sociopolitical, demographic and economic assumptions and projections, which highlight the
following weaknesses of the current pay-as-you-go pension system: financial
unsustainability, economic growth impact, lack of transparency, failure to comply with the
principle of equivalence, and lack of the motivation of working people to extend their active
period.
The pension system is based on the principle of intergenerational solidarity. In order to
maintain this principle, it has to provide decent and adequate pensions for all generations,
even those who will retire only in the next few decades.
The document proposes a solution for modernizing the pension system, so that it can
efficiently respond to the challenge of the modified demographic conditions.
The purpose of the document is to:
-
familiarise the general public with the status and projections of the pension system
and the need for change, thus raising the public awareness and preparing for change;
be a platform for exchanging the ideas and proposals among social partners and
other players (seniors, youth), which is the basis for drafting the legislative materials;
present the basis for informing the executive and legislative authorities who make
final decisions on the future arrangement.
The document and the proposed solutions should also serve as a basis for a wider social
debate on the modernization of the pension system in Slovenia. The pension system affects
all the people, therefore the decisions should be made carefully, based on discussions of all
stakeholders, in particular on the social dialogue, and in searching the consensus to the
highest extent possible.
In preparing the solutions, we took into account the local expertise, but we also examined the
arrangements in the comparable EU countries.
It should be noted that the modernization of the pension system is not finished with the
proposed solutions. We expect and wish to receive many suggestions from the professional
public, both as regards the updating of the existing proposals, and as regards eventual new
and different solutions, which is actually the purpose of a public debate.
The working group has managed to harmonise the essential solutions for modernizing the
pension system, as they are presented in the document, but this is only the first step in
reforming the existing system. Through the discussion, the working group developed two
ideas on how to design a system which will guarantee adequate pensions and the
sustainability of public finances. These ideas refer to the introduction of a point system or the
1
NDC scheme (notional defined contribution). Members of the working groups carefully
reviewed all the arguments in favour and against these two systems, their operation and
implementation in the EU Member States, but did not want to close any option before the
public debate.
It is important to point to the fact that the system needs to be modernized, regardless of
whether a point system or an NDC system will be introduced. However, it is true that the
current system of adjustment factors and the application of on-going adjustments of pensions
for persons who had retired under the so-called old system, and those retiring after the
reform (2000), has become unsustainable From this perspective, it would be smart to
immediately implement all the adjustments for a rapid introduction of a points system, if no
decision for the NDC introduction is made by 2011.
Finally, I would like to thank all the members of the working group who actively participated
with their undisputed expertise in the preparation of this document beside their regular
duties. We hope that this cooperation will continue when putting the modernization of the
pension system into practice.
2
INTRODUCTION ....................................................................................................................................... 5
A BRIEF DESCRIPTION OF THE EXISTING PENSION AND DISABILITY INSURANCE.................................... 7
1
KEY OBJECTIVES ....................................................................................................................... 9
1.1 General objectives ................................................................................................................... 9
1.1.1
Financial sustainability of the pension system ................................................................. 9
1.1.2
Adequacy of pensions .................................................................................................... 11
1.2 Specific goals .......................................................................................................................... 12
1.2.1
Increasing the proportion of active insured persons by extending the working age .... 12
1.2.2
Establishing the principle of interdependence between the contributions and
payments in the pension scheme .................................................................................. 14
1.2.3
Maintaining solidarity in the pension scheme ............................................................... 15
1.2.4
Transparency of the pension and disability insurance................................................... 17
1.2.4.1
The pension system in the function of old age insurance - elimination of institutes
which do not belong in the compulsory pension ...................................................... 17
1.2.4.2
Informing the individuals on the amount of funds collected and the expected
retirement ................................................................................................................. 17
2
PROPOSAL OF SOLUTIONS TO ATTAIN THE OBJECTIVES ....................................................... 19
2.1 MODERNIZATION OF THE EXISTING PENSION AND DISABILITY INSURANCE......................... 19
2.1.1
Changes in the compulsory Pension and Disability Insurance ....................................... 19
2.1.1.1
Compulsory increase of the minimum age and equalising conditions for the
acquisition of rights of women and men .................................................................. 19
2.1.1.2
Increasing the incentives for longer retention in employment ................................ 21
2.1.1.3
Elimination of the time bonus (added pensionable service, lowering the retirement
age for children) ........................................................................................................ 22
2.1.1.4
The extension of a voluntary admission to the compulsory insurance..................... 22
2.1.1.5
Bringing about greater flexibility and openness of the instrument of partial
retirement ................................................................................................................. 23
2.1.1.6
Extension of the accounting period for assessing the pension ................................. 24
2.1.1.7
Determination of limited payments of contributions ............................................... 25
2.1.1.8
Adjustment of the indexation system ....................................................................... 26
2.1.1.9
Exclusion of net social transfers ................................................................................ 27
2.1.1.10 Introduction of the gross pension system ................................................................. 27
2.1.1.11 Modernisation of invalidity insurance ....................................................................... 28
2.1.2
Changes in the compulsory supplementary pension insurance .................................... 30
2.1.2.1
Transforming the compulsory supplementary pension scheme - the establishment
of an occupational pension scheme.......................................................................... 30
2.1.2.2
A single contribution rate .......................................................................................... 31
2.1.2.3
Procedure for setting the posts on which the compulsory inclusion in the
supplementary pension insurance ............................................................................ 31
2.1.2.4
Occupational pension ................................................................................................ 31
2.1.2.5
Amendments set the amount and the assessment of occupational pension ........... 31
3
3
2.1.2.6
The implementation of occupational pension schemes ........................................... 32
2.1.3
Changes in the voluntary supplementary pension insurance ........................................ 33
2.1.3.1
Modernisation of the system .................................................................................... 33
2.1.3.2
Uniformity of supplementary pension insurance providers and the appointment of
pension plan managers ............................................................................................. 33
2.1.3.3
Separation of individual and collective supplementary pension insurance.............. 35
2.1.3.4
Fixing the amount of payments of supplementary pension savings and a more
specific determination of tax and similar incentives to increase inclusion in the
system ....................................................................................................................... 35
2.1.3.5
Fixing the amount of payments of supplementary pension saving and a more
specific determination of tax and similar incentives to increase involvement in the
system ........................................................................... Error! Bookmark not defined.
2.1.3.6
Minimum guaranteed return .................................................................................... 36
2.1.3.7
Determining the management costs to which the providers are entitled ................ 36
2.1.3.8
Participation of members in managing the assets of the pension fund or ensuring
supervision of the management of funds by members ............................................ 36
2.1.3.9
Rights from the supplementary pension insurance (savings) ................................... 36
2.1.3.10 Providing a more transparent operation of the providers and timely informing the
members ................................................................................................................... 37
2.1.3.11 The standardization of supervision and ensuring efficient action in case of
infringements ............................................................................................................ 37
LAUNCHING OF THE NEW PENSION SYSTEM ......................................................................... 38
3.1 Basic features of the zero pillar ............................................................................................. 40
3.2 Basic features of the first pillar .............................................................................................. 40
3.2.1
The system of virtual pension system accounts............................................................. 40
3.2.2
Disability Insurance ........................................................................................................ 41
4
INTRODUCTION
In the next decades, aging of the population and adverse demographic trends will put
Slovenia before the challenge of ensuring long-term financial sustainability of the system,
which largely depends on demographic trends The need to reform the public pension system
has been underlined both in the European multi-dimensional policies and in the national
pension strategy which, as a short-term and a long term measure, stresses the need to
increase the working age of elderly people.
Due to reduced number of the working age population and the increased share of elderly
people, which creates the age/employment paradox, the expected economic consequences
of increasingly longer lives can be alleviated only by extending the working age and by
involvement of elderly people in the social-economic life, i.e. generations which even recently
decided to take a (too) early retirementTaking into account that the Slovenian and the
European workforce is aging only in relation to retirement age, but not in terms of extended
life expectancy, the changes in age structure of the labour force are also the result of a late
entry of young people into the labour market and the extended study period, which causes a
double deficit of the pension fund (because of reduced number of insured persons and a
longer entitlement to rights, after a shorter period of paying into the scheme). Extended
schooling period of young people (15-24) is the result of allowing young people to work
through student agencies (services), which are financially extremely favourable for
employers because of easier adaptation of the scope of work and a lower taxation.
The fact is that the existing pension scheme is relatively expensive, although it provides
relatively low (and steadily lower) old-age pensions.
The modernization of the pension system should be an opportunity for the return of the
pension system to its roots, to the purpose for which this insurance was founded in the first
place: the insurance for old age, invalidity and death, and avoiding the risk of poverty in old
ageIn Slovenia, as well as in many other countries, the development of the pension scheme
was used to regulate the rights which, by their nature, were not related to its primary goal
This resulted in a system which is complex, difficult to understand even for professionals, let
alone the individual persons.
The long-term financial sustainability of the pension system therefore cannot be our only
goal. Modernization is also an opportunity to analyze and address the shortcomings of the
current system, which are mainly reflected in the complexity, non-transparency and
inadequate relationship between the pension rates and the contributions paid. One of the
modernization results must therefore be a greater dependence of the pension amount on the
contributions paid.
The proposed modernization of the pension system is trying to achieve the following
objectives:
-
a decent pension from the public pension system;
an adequate pension which guarantees that the individual maintains his social
position; its sources are various pension scheme pillars;
a greater transparency of the system;
a greater financial sustainability of the system.
5
While discussing the proposed modernization of the pension system, we have to recognize
that the challenges of an aging population and the aging workforce can not be dealt with
successfully and integrally only with a more appropriate pension system, but they require the
adjustments of other social security sub-systems, notably in the field of labour legislation,
legislation on the safety and health at work, and an active employment policy The mere
reform of the pension scheme will not be enough if not accompanied by simultaneous
structural changes of the economic and the public sector.
It will therefore be necessary to create appropriate policies and measures in all the areas of
human engagement in order to promote extended working age of elderly people, change
people's attitudes to work and to active spending of the later life period, and contribute to the
awareness of the society, the businesses, and the individuals that age does not preclude the
employment potential but, on the contrary, increases the productivity of elderly workers by
creating suitable jobs and investing in human capital.
Changed attitudes of the society, the employees and the employers will have to be
accompanied by the adjustment of the working environment and working conditions to rapid
technological and organizational changes, since the longevity significantly changed the
physical and mental fitness of the population which is maintained far into mature years. In
future, high quality and suitable jobs for the elderly workers will reflect their long experience,
their fairly developed social network and other competencies arising from the work
experience which are crucial and have a positive impact on the competitiveness of the
organizations. Such a working environment can be created only by a simultaneous promotion
of health care, workplace flexibility, flexible working hours, redistribution and provision of
career development, and access to further training and lifelong learning.
The proposal of modernization is divided into two sets of changes that parallelly build upon
each other and refer to different groups of individuals by taking into account their age. Both
the modernization and the introduction of the new system pursue the same general goals.
The first set of measures refers to the modernization of the current system with effect on 1
January 2011. In the context of modernization, the measures mainly pursue specific goals,
such as the increase of active insurees, greater dependence between the amount of paid
contributions and the amount of revenue, transparency and introduction of an efficient
supplementary pension scheme which will serve the purpose for which it was established by
the 2000 reform.
The upgraded pension system remain and exercise the right to a pension scheme, all
insured persons born before 1960, or those who are at least 55 years old on 1 January 2015.
The second cluster relates to the establishment of a new pension system in Slovenia, with
effect on 1 January 2015, which includes all insured persons who were born in 1960 or later,
and are less than 55 years old on 1 January 2015. The parallelism of the two pension
systems is expected to expire in 2025, when Slovenia fully and finally introduces the new
pension scheme.
6
A BRIEF DESCRIPTION OF THE EXISTING PENSION
AND DISABILITY INSURANCE
The last reform of pension and disability insurance in 2000 brought radical changes into the
pension system, which were needed if Slovenia, despite declined birth rates, increased life
expectancy and changed ratio between the active and inactive population, wanted to secure
pensions which would allow a safe age and a smooth disbursement of pensions also in the
future.




According to the Statistical Office, the Republic of Slovenia had 2,032,362 inhabitants
at the end of 2008, of which 25.97% were pensioners;
In 1990, the average number of people insured under the compulsory insurance
totalled 782,222; in 1998 - 784,193, and in 2008 - 904,667 people;
In 1990, there were 384,094 pension beneficiaries (excluding those receiving state
pensions); 472,394 in 1998, and 527,975 in 2008;
the coefficient of ratio between the number of insured persons and the pensioners
was 2.03 in 1990, 1.66 in 1998, and 1.71 in 2008.
Data suggest that the ratio between the number of the insured and the number of pensioners
is improving again, but we should point to the expected retirement of the generations who
had postponed their retirement due to stricter retirement measures after the introduction of
the 2000 reform. The number of pensioners will therefore grow again.
Since the introduction of the pension reform, the pension system includes the compulsory
and the supplementary pension and disability insurance. Only persons with compulsory
insurance may be included in the supplementary pension and disability scheme. The
difference between the two systems is huge, because the pensions from the compulsory
insurance are paid from the current contributions of the insured, while the additional pillar is
based on the principle of investment (savings on personal pension accounts; the holders
manage and guarantee for this property).
Compulsory pension and disability insurance






keeps the rights to pension (old age, disability, widow, family pension), the rights from
disability insurance, and some additional rights such as entitlement to the allowance
for care, and a protection supplement to the pension,
retirement conditions are more stringent and the difference between the sexes is
gradually eliminated,
two conditions must be fulfilled simultaneously - the age (higher than before), and the
longer working life,
longer retention of employment is rewarded, while retirement before the full
pensionable age means a reduced pension,
the period for calculating higher pensions is longer (before: 10, now: 18 years),
a state pension is introduced (for those who have no income and comply with the
condition of residence in Slovenia for at least 30 years).
7
Supplementary Pension and Disability Insurance
The supplementary voluntary pension scheme is rapidly evolving, as in December 2008, this
form of insurance already included 56.78% of the compulsory pension and disability
insurees. The assets managed in the field of supplementary pension insurance have
exceeded 1.2 billion, finally establishing the supplementary pension scheme as an important
factor in the financial environment.
Supplementary insurance is divided into compulsory and voluntary pension insurance.
Compulsory supplementary pension insurance is a compensation for the insurance period
with an increase and is intended for people engaged in particularly difficult and harmful work,
or work which can not be performed successfully after a certain age.
Voluntary supplementary pension insurance is the insurance where the insured persons pay
amounts on their accounts, so that after retiring they can obtain a supplementary pension,
since the current system of compulsory insurance will not be able to provide adequate
pensions in the future. This insurance is stimulated, as tax relief is provided to a certain
amount of payments they. The voluntary supplementary insurance can be collective, where
the premium is paid by the employer, or individual, where the premium is paid by the insured.
8
1 KEY OBJECTIVES
1.1
General objectives
Rapid changes require continuous adjustments of the social insurance systems. These
systems differ from each other also by the need of permanent preservation of rights, while it
is true that the pension scheme must guarantee the rights based on long period (insurance)
and for ever longer time. The amendments enabling the rights from the pension and disability
insurance, and preserving the standard of living should therefore be focused primarily on
providing appropriate pensions within the scope of the public finance capacity.
1.1.1 Financial sustainability of the pension system
Changes in the population age structure, which Slovenia is about to face in the future, will
have an impact on the budget expenditure. The largest economic impact of an aging
population will increase the expenditure for health care, pensions, social security, long-term
care, and a reduced scope of working-age population in the labour market.
Table 1: Long-term sustainability of public finance in % of the GDP
Source: Stability Programme, April 2009 (UMAR, IER, MF RS).
The expenditure on pensions will increase substantially after 2020. Thus, the projected
increase in these expenses in the period 2010 - 2020 amounted to 0.93%, while the increase
in pension expenditure in the period 2020 to 2030 has amounted to 2.18% a change occurs
in some other factors, the projected increase will be even higher in the next few decades.
So far, the pressure on budget expenditure on pensions has quite successfully offset the
reform of the pension system in 2000. The actual retirement age gradually increased, and by
2008, the compensation ratio between pensions and salaries has diminished. However, the
pension reform of 2000 maintains similar expenditure for pensions only for a short period of
time upon the assumptions which do not consider the effects of the current crisis. At the
current expenditure and the applicable indexation of pensions with wages, taking into
9
account demographic projections, and with unchanged other factors, it will not be possible to
avoid the increase of the pension fund deficit after 2020 without taking suitable measures.
The deficit can not be financed from the RS budget, as this would mean that with the current
inflow of contributions, the state should ensure additional 8% of gross domestic product
annually in the next 40 years (i.e. 3 billion annually in today's terms). There are 2 possible
solutions for covering the deficit without any structural changes of the pension system:
increasing the contributions (this is not feasible due to international competitiveness of the
Slovenian economy, as the labour tax Slovenia is among the highest), and reduction of
pension rights.
The simulation of age-related expenditure, in particular the expenditure on pensions, shows
an increase in GDP spending at various options of extending the retirement age:
Table 2: Sensitivity analysis on age-related expenditure of the pension system changes
% of GDP
Basic scenario (no
change of the
pension system)
The extension of
retirement age of 1
year
The extension of
retirement age of 3
years
The extension of
retirement age by 5
years
Overall increase Increase in pension Increase in
in age-related
expenditure
debt
expenditure 2008
2008 - 2060
- 2060 2008 –
2008 - 2025
2060
12.99
8.15
63.99
Increase in
deficit
2008 - 2025
INCOME RATIO
7.58
2008
61.9
2050
59.6
2060
59.7
12.17
7.61
55.40
6.48
61.9
58.6
58.9
10.60
6.55
39.35
4.45
61.9
57.0
57.6
9.24
5.65
25.13
2.65
61.9
56.0
56.7
The table shows that the overall increase in age-related expenditure will rise by almost 13%
of GDP until 2060, and the pension expenditure by 8.15% of GDP, unless there are
significant changes in the pension and disability insurance. In this case, the debt would rise
from the current approximately 22% of GDP to more than 85% of GDP by 2025 had risen (in
today's amounts, the interest rates would total more than EUR 900 million in 2025). One of
the most efficient measures to ensure the stability of public finances would be to postpone
the retirement age. Thus even a 3-year extension of retirement age would lower the total
increase in age-related expenditure by more than 2% GDP, and the expenditure on pensions
by 1.6%, while the compensation rate would fell only slightly under 4 percentage points in
2060. Even greater impact on public finances is the extension of retirement age by 5 years,
where the age-related expenditure would decrease by more than 3.5% of GDP, and by 2060,
the compensation rate would fall by slightly more than 5 percentage points.
The economic crisis has also turned our attention to the fragile stability and unsustainability
of the pension system. A shortfall of contributions due to increased unemployment, lower
wages and lack of liquidity, and the current method of adjusting pensions have already
claimed an additional transfer of EUR 125 million from the state budget to cover this year's
pension liabilities. The current system where the state budget covers the difference between
the expenditure for pensions and the paid contributions actually ensures a balanced financial
performance to the pension fund, but in the short run it requires a thorough transformation of
10
expenditure for other public functions financed from the state budget. Since the latter does
not have any reserves, the (state) deficit is financed with increased borrowing. It will
therefore be necessary to adapt the method of determining the State's commitment to
finance the deficit caused by minor contributions such as expenditure for pensions.
Long-term financial sustainability of the pension system could also be provided by keeping
the annual growth of pension benefits (the adjustment formula) at a level lower than the
growth of wages, and by extending the accounting period for calculating the pension rating
base.
Expenditure within pay-as-you-go system are also increased by the growing needs for social
security, because the system of ongoing contribution coverage does not provide enough
funds to pay all the benefits due to unfavourable demographic trends.
Because of the principle that the pension rights are linked to financial contributions of an
individual, the method of determining the amount of pension entitlement will have to be
amended, taking into account both the expected period of receiving the pension, and the
coverage of expenditure with contributions.
A demographic reserve fund could mitigate the consequences of rapidly rising expenditures
due to changes in demographic structure of the population, and (with balanced funding) the
resulting relative reduction in pensions compared to wages, and an increased coverage of
expenditure by general taxes. In the process of ownership transformation, the assets
managed by the State were transferred to the Pension Fund Management Company (KAD).
This reserve fund should be further expanded and it should be made sure that it will be used
solely for supplementing the pensions expenditure only after 2020 (these, by the way, should
be significantly reduced because of lower current revenues).
The objective can be accomplished with the following measures:


changed indexation;
increased demographic reserve fund and a more detailed definition of its purpose.
1.1.2 Adequacy of pensions
Adequate pension is a pension which allows pensioners to maintain their relative position in
the society even in the period of enjoying the rights from the pension scheme. Pensioners
can enjoy adequate pensions from different pillars of the pension system, where each pillar
has a well-defined role.
The public pension system should have the function of providing pensions which guarantee
adequate social security to all pensioners. The maintenance and improvement of economic
and social security of the whole population, not just pensioners, with sustainable public
finance, will only be possible by conducting a policy focused of extended active (working)
period, and the creation of different options of progressive retirement, while rewarding the
maintenance of active employment.
By establishing an efficient system of supplementary pension, pensioners have an option
(voluntary) to combine an important share of pension from the public scheme also from the
supplementary pension scheme.
11
The proposed modernization ensures that the main source of adequate pension for
individuals will continue to be provided from a modernized compulsory pension scheme, i.e.
the public system based on solidarity between the generations. It should be noted, however,
that the supplementary pension insurance should also have an important role in providing
adequate pensions, mainly due to demographic trends of the population.
In the context of so created multi-pillar system, the public pillar, the compulsory pension
scheme, has to provide social security, while the second and third private pillars are intended
to provide or maintain the social position of the insured also in the period of enjoying the
rights under the pension scheme. This system allows the individual to plan or determine the
standard of living which he wants to enjoy in retirement also in terms of the lifestyle he had
during his working age.
The adequacy of pension benefits under the existing system is further reduced by a strong
element of solidarity within the pay-as-you-go system among and within individuals or
generations, which is the characteristic of social transfers, more than it applies to pension
benefits based on contributions paid. Certain elements of redistribution and solidarity will, of
course, still persist in the pension system (it is nevertheless a social insurance), but the state
has to provide social transfers primarily within other social security schemes, not in the
context of and on behalf of pension rights, based on paid contributions.
This objective can be achieved by:
-
-

establishing an efficient supplementary pension insurance (a single operator, the
option of choosing the investment policy, harmonising the control with the
participation of members);
introducing additional incentives for including the employees with low wages into the
supplementary pension scheme;
promoting a greater participation in the individual supplementary pension insurance.
1.2 Specific goals
1.2.1 Increasing the proportion of active insured persons by extending
the working age
A simultaneous decline in fertility and an extended life expectancy lead to changes in age
structure and decline of the working age population since 2006, which is critically reflected
especially in the ratio of the number of insured persons to pensioners. The ratio between the
number of insured persons to the number of pensioners, which was 2.3 in 1990 (782,222
insured persons and 384,094 pensioners), amounted to 1.7 in 2008 (904,667 insured
persons, 527,933 pensioners).
Negative demographic trends in the pension system could only be alleviated by extending
the working age period for the age group 55-64 where Slovenia stands among the lowest in
the European Union. The low employment rate of persons aged 55 to 64 years is the result
of early departure from the labour market or early retirement, which was typical of the
transitional period of the Slovenian economy
12
Low employment rate of elderly people was pointed out as one of the major problems by the
European Council in Lisbon already in 2000. A year later, a commitment was made in
Stockholm to reach the objective of raising the employment rate of the elderly (55-64) by
2010 to 50% within the EU, while the next year a new goal was added in Barcelona to
promote more active elderly people, in the form of increased average age of withdrawal from
the labour market in the Member States by 5 years until 2010. Both objectives are part of the
Lisbon strategy by 2010 and of the European employment policy.
In 2005, the Lisbon Strategy was renewed and amended by the Employment Guidelines,
where a particular attention was drawn to developing national strategies for active aging, of
which the most important in the field of age management are Employment Guidelines 17 and
18. They concern the previously mentioned increase in the employment rate of the elderly to
50% by 2010 and the promotion of access to employment by periods of life, with a
recommendation to support active aging, including the appropriate working conditions, the
improved health status, and adequate incentives for work and against early retirement.
Raising the employment rate of elderly people in Slovenia is one of the priorities in the field
of labour and employment. In 2006, the Government of the RS, after a warning by the EU
Council, began developing the national strategy for active aging, which constitutes the action
plan for active aging in the field of employment and complements the Strategy for the
Protection of the Elderly by 2010 (solidarity, coexistence and quality ageing), adopted by the
Government of the RS in September 2006; it represents an umbrella strategy enabling
solidarity and coexistence among the elderly, middle-aged and younger generations, as well
as quality ageing and care of the rapidly growing share of the third generation.
The objectives must also be accompanied by other relevant policies and measures in all
areas of the human engagement which will promote the extension of working age of elderly
people, change the attitude of people towards work and the active livelihood of the older age,
and contribute to the awareness of the society, businesses, and individuals that age does not
exclude employment potential, but on the contrary, increases the productivity of the elderly
workers by creating suitable jobs and investing in human capital. Such a working
environment can only be created by a simultaneous promotion of health care, workplace
flexibility, flexible working hours, redistribution and provision of career development, further
training and lifelong learning.
Considering that the Slovenian and the European labour force is aging only in relation to the
retirement age, but not to the extended life expectancy, changes in the age structure of the
labour force are also due to the more subsequent admission of young people in the labour
market and extended duration of the study period, which means a double deficit in the
pension fund because of a reduced number of insured persons and longer period of enjoying
rights with a shorter period of pension scheme. Extended schooling of the young (15-24)
results from allowing young people to work through student employment agencies, which are
financially extremely favourable for employers because of easier work adaptation and lower
taxes.
The objective can be achieved by taking the following measures:
-
-
a compulsory increase of the full and the minimum age and balancing conditions for
the acquisition of rights of women and men and shortening the transitional period for
the retirement of women;
increasing incentives for a longer retention in employment;
13
-
deleting the time bonus (added qualifying period, lowering of pensionable age limit by
virtue of children...);
-
a gradual exit from the labour market and retirement (partial retirement).
1.2.2 Establishing the principle of interdependence between the
contributions and payments in the pension scheme
The pension scheme is based on the work and contributions paid under this title. In the
pension system, the legislator put in the first place the principle that the rights are derived
from work. Therefore, the pension and disability insurance is compulsory except in
exceptional cases and does not depend on the will of the individual. Given that the pension
system follows the principle of generalizing the circle of insured persons, under which the
compulsory Pension and Disability Insurance covers the widest possible range of insured
persons, it is necessary to extend the compulsory insurance coverage on all work carried out
within a subsidiary relationship.
As it became popular to carry out work based on the contracts of work, or work through
dependent relationships other than employment relationships (due to a low burden of social
security contributions), it is necessary to examine the option of paying relatively equal
contributions, depending on the level of income, for any work regardless of its legal form
(employment contract, work contract, copyright contract, and other contracts governed by
civil law, student work, or work under any other type of contract (the measure "ANY WORK
COUNTS").
Beside this measure, it is necessary to explore the possibility of amending the labour law
which provides comparable rights and obligations for each activity and does not focus on
employment relationship (in particular the employment relationship for an indefinite period).
This would provide greater flexibility of labour, since the formal legal status of the labour
provider would no longer be significant in terms of insurance. The employer would thus pay
for labour costs equally, regardless of the status and position of the labour provider.
The applicable law currently provides compulsory insurance only to persons carrying out
work under any other legal relationship who are not insured on another basis. With regard to
the very vague legal provision, it would be necessary to examine the possibility that persons
who are already included in compulsory insurance, and if, besides that, also perform some
other work or activity, should be compulsory insured for that other work as well. In this
context, it will be necessary to consider the possibility of imposing the maximum amount of
contributions the insured person will have to pay under compulsory insurance in a particular
accounting period (year).
Taking into account the trends of diversified forms of employment and the extension of
labour law to persons who are not in an employment relationship, but are economically
dependent on another person within the framework of some other (civil) contractual
relationship, minimum standards of the pension system for all persons engaged in (some)
work for others have to be provided. Persons with special status, which are not engaged in
work (e.g. spouses and unmarried partners of self-employed persons, house maids, etc.)
should have voluntary access to the compulsory insurance scheme.
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The indicated measure (extension of the compulsory insurance for the pension and disability
insurance to any work carried out within a subsidiary relationship) would thus require
changes concerning the definition of the insured persons or occurrence of the obligation to
accede to the scheme, the ways of determining the rights from the insurance, and also the
system of paying contributions, therefore the necessary interventions in the current system in
the segments indicated above should be examined.
The work of pensioners should also be analysed in terms of its inclusion in the insurance
system, or the corresponding burden of contributions, taking into account equal treatment
with respect to others who perform work within a subsidiary relationship, and the objective of
promoting a long-term retention in the activity. The scheme should allow a partial activity of
pensioners and provide economic incentives for such work (the issue of taxation continuity).
By extending the circle of insured persons and the inclusion in the insurance scheme on the
basis of all forms of work, the payments of contributions will consequently increase both at
the level of the system and at the level of an individual. That is why it is necessary to put in
place a system in which the principle of dependency of pension to the paid contributions will
be strictly respected, otherwise the individuals would be tempted to avoid or minimize the
payment of contributions.
The objective can be achieved with the following measures:
-
by extending the bases for insurance;
by extending the possibility of voluntary inclusion in the compulsory insurance;
by extending the period for determining the pension rating base;
-
by launching the NDC system.
1.2.3 Maintaining solidarity in the pension scheme
Despite the establishment of a modern multi-pillar pension scheme, two basic principles of
the current system, the principles of redistribution and solidarity, must be preserved within
the compulsory pension schemes. These principles must be provided within the public pillar
where, as mentioned above, the state ensures a decent pension for each person irrespective
of their income during employment, and irrespective of the level of contributions. Thus, in the
public pillar, each insured person contributes to ensuring decent pensions to the actual and
the future pensioners.
However, even the principles of redistribution and solidarity within the compulsory pension
schemes should be provided in a transparent manner, so that the insured person knows
which part of the public system pursues the principle of dependence of the level of payments
out and the amount of payments in, and which part ensures the principles of redistribution
and solidarity.
The current non-transparent regime is mainly due to the fact that the factor of solidarity
between individuals or redistribution within a generation is strongly present in the system,
otherwise typical of social transfers, which the pensions are certainly not. Thus the system
incorporates vertical solidarity between the active and the retired generations (contributions
are compulsory and proportional according to the contribution base; insured persons with
higher wages and incomes pay contributions from the bases which are not limited up, while
their rights are limited by setting the maximum pension rating base); horizontal solidarity
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among pensioners (the maximum ratio between pensions for equally long insurance periods:
1:4), and solidarity among pensioners who were retired in different periods.
Certain elements of redistribution or solidarity will of course always be present also in the
pension system (it is nevertheless a social insurance), but the state has to provide social
transfers primarily in other social security schemes, and not within and on behalf of pension
rights based on the paid contributions.
This objective can be achieved:
-
by setting a minimum range of rights (this is possible in both systems - the upgraded
current system and in the NDC, where in the latter case this is only possible by
establishing a zero pillar;

by determining the maximum pension rating base.
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1.2.4 Transparency of the pension and disability insurance
1.2.4.1 The pension system in the function of old age insurance - elimination of
institutes which do not belong to the compulsory pension
The pension insurance as we know it today was established in order to provide for old age
insurance and prevent the risks of poverty in old age. The pension system should return to its
roots, to the purpose for which this insurance was founded - insurance for old age, or
avoiding the risk of poverty in old age. In Slovenia, as well as in many other countries, the
development of pension insurance was used to regulate many issues which, by their nature,
had nothing to do with this primary purpose. The result is a complex system, difficult to
understand, non-transparent, and especially quite expensive since it provides relatively low
old-age pensions.
In determining the future of the public pension system which has to be evaluated both from
the insurance point of view and in terms of systemic social functions, it is therefore necessary
to clean the system of the rights guaranteed under the pension scheme which have no basis
in the contributions paid, which is the essence of the social insurance systems. The pension
insurance basically means that pension rights and other rights from the previous work are
recognized based on the contributions paid, therefore the rights for which contributions were
not paid, and are intended to provide social security, should be placed in other sub-systems
in the field of social security - particularly in the field of social protection.
To achieve a more transparent pension fund, it is fundamental to explore the possibility of a
systemic division of the pension and disability insurance, and, consequently, a precise
separation of the rights from the pension insurance and the rights from the disability
insurance. Such a division is even indispensable at a perspective introduction of the NDC
system or transition to the new pension system.
The objective can be accomplished by taking the following measures:
- eliminating the rights of social character from the pension system;
- eliminating the limits for the maximum pension rating base (establishing a redistribution
within the scoring system or at a zero pillar within the NDC);
- introducing the gross pension system.
1.2.4.2 Informing the individuals on the amount of funds collected and the
expected pension
One of the major specific goals within the overall target (establish a transparent system) is
the creation of a system in which each insured person would have the possibility throughout
the active period to be familiar with the amount of funds paid by then, as well as the amount
of revenue that can be expected under this title after retirement. Such an objective can be
achieved primarily by a system with a clear link between the contributions paid and the
amount of acquired rights, while the system itself must be simple by nature and
understandable to an ordinary insured person.
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By establishing a system which provides individuals with an overview of the contributions
paid and the expected rights, the individuals can make decisions on the age at which they
will enforce the rights under the pension insurance, or how long it is reasonable to postpone
retirement after having fulfilled the conditions for obtaining an old age pension. The above
stated also stimulates the individuals to complete their studies as soon as possible, enter the
labour market, and, consequently, be included in the pension scheme.
The objective can be accomplished by taking the following measures:



by introducing a scoring system or the NDC;
by extending the insurance bases to all forms of work;
by establishing a transparent pension fund (setting up the principle of gross pension).
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2 PROPOSAL OF SOLUTIONS TO ATTAIN THE
OBJECTIVES
There are of course many methods and measures to achieve the above stated objectives, as
there are many different combinations of measures and time dynamics of enforcing them.
The proposal of solutions consists of two lots: modernizing the current system of compulsory
pension insurance, and establishing a new system. The lots follow up each other in a parallel
manner and refer to different groups of individuals, taking into account their age. However,
both the modernization and the introduction of a new system pursue the same general goals.
The first set of measures is related to the modernization of the current system, with effect
from 1 January 2011. The measures within the modernization mainly pursue specific
objectives, such as increased share of the active scheme members, greater dependence
between the amount of contributions paid and the amount of revenue, transparency of the
system, and establishment of an efficient system of supplementary pension scheme that will
serve the purpose for which it had been designed by the reform in 2000.
All pension scheme members, born until 1960 and aged 55 years or more in January 2015,
remain in the modernized pension scheme and can exercise their right to pension.
The second set of measures relates to the establishment of a new pension system in
Slovenia, with effect from 1 January 2015, which includes all the insured persons who were
born in 1960 or later, or who are aged less than 55 years in January 2015. The parallelism of
the two forms of the pension system should expire in 2025 when Slovenia will fully and finally
put in place the new pension scheme.
2.1 MODERNIZATION OF THE EXISTING PENSION AND
DISABILITY INSURANCE
2.1.1 Changes in the compulsory Pension and Disability Insurance
2.1.1.1 Mandatory increase of the minimum age and equalising conditions for
obtaining the rights of women and men
The mandatory increase of age is a way to raise the actual retirement age, which is not
popular because it is always viewed as the so-called "hard" measure. Overview of reforms in
other EU countries shows that this measure is implemented by all countries, because the
minimum (lower) limit for the retirement must be set administratively. However, because the
full pensionable age is already applied in the RS (the possibility of retirement at a certain age
which provides the pension assessed for the completed pensionable age) and is already set
at 63 years for men, this age should be introduced sooner, like it is provided for women, and
equalize it with the age set for men, while raising it to 65 years for both sexes.
In general, the current "full pensionable age" in the Slovenian pension system does not
work. The transitional period of its implementation for women is too long. During the
phasing-in of the new minimum age, both the minimum age and the full pensionable age
are equalised. For the insured women it means that there are no deductions in this period,
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and allowances are minimal, as they are envisaged only for full pensionable age retirement.
The system has a limited application for men due to a large number of exceptions. The
most common retirement is with 40 years of service and the age of 58 years, which is not
considered as early retirement and there are no deductions in such conditions.
As regards the Slovenian pension system, the so called bonus/malus system does not work
sufficiently well, therefore its shortcomings should be eliminated as soon as possible by
limiting the impact of incentives, and determining a uniform higher full pensionable age for
men and women. Each retirement before full pensionable age shall be considered as early
retirement.
Upon enforcing stricter legal conditions, it is necessary to pursue the principle of gradual
change of conditions, since the pension system can not cope with rapid interventions.
Introduction of a new, higher full pensionable age, the new higher minimum age, and the
effect of the revised bonus/malus system shall be carried out gradually, with adjusted
longer transition periods, particularly for women and men, as the entry conditions are
different.
The age of 65 shall be fixed as full pensionable age for both sexes. Initially, it should grow
at a faster rate for women whose full pensionable age does not apply yet. Its introduction is
expected in 2011, and its gradual transition should be completed in 2020. All retirements
before reaching full retirement age are considered as early retirements and cause
deductions, while retirements after the completed full pensionable age bring allowances.
The possibility of lowering the pensionable age limit by virtue of employment before one’s
18th birthday is determined for both sexes, as opposed to the current regime.
Gradually, the minimum age for early retirement will be raised from 58 to 60 years. The
difference between the full pensionable age and minimum age shall be equal for both sexes
- 5 years (under the current legislation it is 3 years for women).
After the completion of the transitional period, retirement will be possible with a minimum of
15 years of insurance period at 65 years of age, and early retirement with at least 38 years
of pensionable service (women), or at least 40 years of pensionable service (men) with a
minimum age of 60 years.
Changed conditions are further eased by a (higher) value of pensionable service exceeding
38 years (women) or 40 years (men), namely the value of 1.5% is increased to 2.0%.
The pension and invalidity insurance abandons the concept of "seniority" which since the
enforcement of the applicable law permits different, even unequal treatment of the insured. It
not only allows different treatment of similar types of the insurance periods, but applies only
to a limited number of the insured. It does not apply to the insured women (because in the
transitional period, the full pensionable age is equated with the minimum age).
The proposed amendments simplify the conditions laid down for the entitlement to the oldage pension, because everyone will be able to calculate how much his pension increases or
decreases.
Under the current legislation, women retire at a lower completed average age than men.
Although in the period 2000 – 2008, the average completed age of women upon old-age
20
retirement has risen by 1 year and 6 months (from 56 years and 1 month to 57 years and 7
months), while in the same period it increased only by 11 months for men (from 61 years to
61 years and 11 months), women take old-age retirement at the age which in 2008 was 4
years and 4 months lower than men. A faster growth of the retirement age for both sexes is
hindered by advantages such as reduction in the minimum age for the care and upbringing of
children, and for women if they entered into compulsory insurance scheme before reaching
18 years of age; in men also due to a reduction of full pensionable age.
The average pensionable service for the old-age retirement of women gradually increases
under the current legislation due to a progressive increase of the minimum retirement age for
an old-age pension. Thus, the pension age for women in 2008 was 2 years and 5 months
higher (36 years) than in 2000 (33 years and 7 months). The average increase in the
pensionable service in individual year was higher for women until 2000, but men still work
longer than women. In 2000, they acquired the right to old-age pension at completed
average retirement age of 37 years and 3 months, which increased by 1 year until 2008. In
2008, men could retire at an average completed age of 38 years and 3 months of
pensionable service.
The fact is that women obtain the right to an old-age pension upon reaching a lower average
age and at lower average pension age due to their longer life expectancy (in 2007 to 82.3
years for women, and 75.0 years for men), and they receive pension longer than men. Thus,
between 2000 and 2008, the period of receiving pension was significantly extended - by 3
years and 9 months (from 17 years 1 month in 2000 to 20 years 10 months in 2008), while in
the same period, the period of receiving the old age pension was extended by 1 year 7
months (from 14 years 9 months in 2000 to 16 years 4 months in 2008).
2.1.1.2 Increasing the incentives for longer retention in employment
This measure is essential to increase the efficiency and simplify the current system which is
quite complex. It encourages the retention in employment only the first years after the
conditions have been met, although less and less every year.Similarly, deductions vary
depending on the number of months that the insured persons need to reach full pensionable
ageThe calculation is complex and difficult to understand. Greater efficiency will be achieved
with a single level of incentives and deductions. This will also simplify their calculation. It is
possible to introduce various measures, but most people agree that a uniform amount of the
monthly increase or decrease is most transparent, and that a gradual transition is
compulsory.
The value of incentives and deductions was proposed to amount 0.3%. In this way, the oldage pension would decline, for those who retire before the completion of full pensionable
age, for every missing month until they have reached full pensionable age between not less
than 0.3% to a maximum of 18% (12 x 0.3 = 3.6% per year).Equally, the old-age pension of
persons who qualify and remain in business after completing the full pensionable age, would
increase by 0.3% with no limit up, for each month spent in business after completing the full
pensionable age. Such a scheme would largely stimulate people to postpone the retirement
until they reach full pensionable ageThe reduced pension percentages do not fall as rapidly
as they had until now with reference to approaching full pensionable age. Therefore
retirement before the full pensionable age should become less attractive. On the other hand,
21
an increased interest to postpone retirement is expected after completing the full pensionable
age, as the pension increases are not being reduced, and will no longer be limited upwards
as they are now. It should be noted that the resulting bonus/malus are permanent.
A different evaluation of pensionable service, more than 38 years (for women) or 40 years
(for men) is expected to stimulate retirement at a higher age. Longer pensionable service
completed each year during the period until the completed full pensionable age should be
evaluated at 2% instead of 1.5%. The assessment of pension is not limited by the highest
possible percentage. Each completed year of pensionable service has an impact on the
percentage for assessing the pension.
Changes of the bonus/malus system shall be introduced gradually, in line with a gradual rise
of full and minimum age, and the applicable provisions. In the opposite case, the effects are
uncontrollable both in terms of remaining in employment, and in terms of too fast decrease of
pension.
2.1.1.3 Elimination of the time bonus (added pensionable service, lowering the
retirement age for children)
The added pensionable service is an instrument that some EU countries have practised (by
taking into account some exceptions), but most of them have removed these incentives,
because they did not directly affect the retirements. We can state as an example that the
number of children born will not increase because of retirement incentives.
If we decide to keep certain periods of time bonuses, their impact should be limited and
should in particular concern the possibility of reducing the full pensionable age (by
maximum 3 years, for example). In this case, the appropriateness of specific incentives in
other insurance schemes should be highlighted, namely the insurance for parental care and
employment, and for combating unemployment. Only concrete incentives in such systems
satisfy the insured persons and are timely.
Incentives are also much more reasonable if they are positively oriented towards additional
bonuses.
Elimination of the time bonus is also reasonable with reference to the proposed position to
clear the pension legislation from the rights which are not based on the paid contributions.
When the military service was still compulsory, the labour legislation provided that the rights
from employment relationships are suspended while the persons serve the army and their
pensionable service did not run, neither were their contributions being paid.
2.1.1.4 The extension of a voluntary admission to the compulsory insurance
The measure does not represent any complex change, but there is a question of how to open
the possibility of insurance and for whom. Some European regulations require a basis for the
insurance of specific categories of insured persons (e.g. spouses of self-employed persons,
persons in prison, insurance while studying …).
In order to include as many people as possible in the compulsory insurance system,
additional possibilities of a voluntary admission should be regulated so that this option would
22
be linked to the status of that person (e.g. a person with the status of a student, persons with
the status of assisting spouses). This would separate the conditions of a voluntary admission
to the insurance scheme from an exhaustive set of legal relationships which constitute the
basis for a compulsory inclusion in the system and are linked to certain forms of work.
By extending the circle of insured persons in the voluntary admission to the pension system,
it is necessary to define the nature and the extent of rights these persons will be eligible to.
This means that pension insurance can be established only, although insurance for any is
also possible. This of course requires greater financial participation of the individuals.
Equally, the current scheme for the so-called narrow-range continuously raises the question
of how certain categories of persons can be entitled to so little. The previous system allowed
such an exception only to insured farmers, but there are constant initiatives to increase these
pensions, although, unfortunately, this is not possible in relation to the contributions paid.
2.1.1.5 Bringing about greater flexibility and openness of the instrument of
partial retirement
According to the current rules, persons may take old age retirement when they fulfil the
minimum requirements. Retirement is not compulsory at that time, so insured persons may
decide whether to retire or remain in work because, as a rule, the status of an insured person
is incompatible with the status of a pensioner. If a person decides to retire, the system allows
a gradual transition to the passive generation by arranging a partial retirement. This allows
the worker to remain in employment or take a part-time employment. After terminating the
employment relationship and taking up partial retirement, the insured persons may enforce a
full old-age pension. In this case, the insurance period completed during partial retirement,
and the salary from that period are taken into account in re-assessing the pension. The
insured persons may, if this is more favourable, require that the assessed pension gets only
a percentage increase based on the stated insurance period.
The persons who re-enter full-time post-retirement employment or become self-employed
and thus obtain a salary or pay for work, are reactivated. While the pensioner is included in
the compulsory insurance, his pension rights are suspended, and his pension begins to be
paid again when the person terminates the employment or the activity (which is the basis for
inclusion in the scheme) in the increased percentage based on the insurance period obtained
during re-insurance time.
Persons can also perform work after retirement based on civil contracts under obligations
code (e.g. venture contract), or contracts under copyright law in cases when it concerns
author’s work. Since these agreements do not provide labour protection for workers and the
entire social protection of workers, the fundamental principle of labour law should be noted
which defines that in the presence of employment relationship elements, the parties can not
freely choose whether their relationship is defined as a working relationship or not. If there
are no elements of the employment relationship, the pensioner does not need to rejoin the
compulsory insurance under this title (e.g. depending on the level of payments for the
contractual work), and his pension continues to be paid. He is required to pay only a flat-rate
contribution to the pension and disability insurance from the contractual work.
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The current legislation allows a partial retirement only to persons who have concluded a
working relationship, which means that a partial retirement is not an option for other
categories of insured persons (e.g. the self-employed, the farmers, etc.).
Likewise, elderly workers who have already met the minimum standards for retirement and
wish to continue working part-time, have to remain in employment for at least 4 hours a day,
which means that they are not free to choose their working time. The latter arrangement
therefore does not affect the number of partial retirements, as the working time is not flexible
and pensioners are not given sufficient incentives in terms of flexible working hours.
In addition, the work that pensioners perform under other civil contracts, does not increase
the proportion of the insured persons (which would ensure a financially sustainable pension
scheme), because work under these contracts does not need to be integrated in the social
systems. However, sufficient funds for the pensions of those pensioners have to be provided.
Greater flexibility of employing the elderly persons both on the worker’s and the employer’s
side can only result from an even more gradual retirement of individuals, which would mean
that the beneficiaries of the partial pension could choose their working time, upon the
assumption of a regulatory minimum of daily hours (e.g. two hours a day), which would allow
employers to continue with a smooth organization of the working process.
At the same time, the regulatory arrangement should be amended so that all the insured
persons would have the option of partly remaining in employment and receiving partial
benefits. The option of enforcing a partial pension should be extended from the insured
persons under employment relationship to the self-employed and managing persons as
partners. Under the current pension legislation they can not keep the company unless they
only have a capital investment there, or independently pursue their activity (unless they only
manage and control the business or pursue another activity which they did not perform in
their regular employment which served as a basis for their pension rights.
2.1.1.6 Extension of the accounting period for assessing the pension
Under the current law, the period relevant for determining the pension rating base takes into
account the period of receiving the wages or insurance bases from which contributions were
calculated in any of the most favourable 18 consecutive years after 1 January 1970.
The current method of assessment, with the most favourable insurance years after 1970,
does not allow an equitable way of assessing a pension, as it takes into account the earnings
on which contributions were paid from a shorter period. Equally, taking into account the
period before the transition allows a higher pension rating base, which does not realistically
reflect the trend of workers’ income throughout their working period, especially the "baby
boom" generation whose income in the nineties would realistically reduce the pension base
in real terms if, for example, the 35 consecutive years were taken into account or the entire
accounting period.
If paid contributions from a longer period were taken into account, a fairer way of assessing
the pensions would be possible, because the income usually grows in proportion with the
years of service (e.g. the supplement for length of service), and an eventual interruption of
the sequence could result in a significant reduction in pension.
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It is important to stress that Slovenia still has the shortest period of assessing pensions
compared with other European countries (no other country calculates a period shorter than
25 years). The introduction of a longer (35-year) period must be gradual (2 years annually
starting in the beginning of 2011).
2.1.1.7 Determination of limited payments of contributions
This measure has to be clarified together with the measure to maintain solidarity in the
system. Solidarity is typical of social insurance, but must be kept to a reasonable extent, in
the sense that it is possible to pursue the principle of "reasonable remuneration for work."
The pension insurance is based on the work and contributions paid under this title. The
legislator put on top of the pension system the principle that the rights derive from work.
Thus, the pension and disability insurance is compulsory, save in exceptional cases, and
does not depend on the will of the individual. Given that the pension system follows the
principle of generalizing the circle of insured persons, where the compulsory pension and
disability insurance includes the widest possible range of the insured, it is necessary to
extend the compulsory insurance coverage to any work carried out in a subsidiary
relationship.
As it became popular to carry out work based on the contracts of work, or work through
dependent relationships other than employment relationships (due to a low burden of social
security contributions), it is necessary to examine the option of paying relatively equal
contributions, depending on income, for any work regardless of its legal form (employment
contract, work contract, copyright contract, and other contracts governed by civil law,
student work, or work under any kind of contract).
The measure »ANY WORK COUNTS«
In the context of this measure, the possibility of a re-definition of employment relationship in
the labour law should be explored in order to extend the notion of employment relationship,
making it more simulative particularly for the employers, and, on the other hand, to tighten
the working conditions and burden on work under other types of contracts in dependent
relationships. This would ensure greater flexibility of labour, as the legal status of the labour
provider would no longer matter in terms of insurance. The employer would thus pay for the
labour costs equally, regardless of the status and position of the labour provider.
The ZPIZ-1 Act currently defines that compulsory insurance is compulsory for persons who
engage in work under any other legal relationship, but are not insured on this other basis
With regard to the very vague provision of ZPIZ-1, it is reasonable to examine the possibility
that persons who are already subject to compulsory insurance and have some other work or
activity should undertake compulsory insurance for this other work. In this respect, we should
consider the possibility of imposing the maximum amount of contributions that the insured
person had to pay under the compulsory insurance in a particular accounting period (year).
Considering the trends of ever more flexible forms of employment and the application of
labour law to persons who are not in a labour relationship but economically depend on some
other person within a (civil law) contractual relationship, minimum standards should be
ensured from the pension scheme for all those who perform (some kind of) work for others. A
25
smooth voluntary admission to the compulsory insurance scheme should be provided for a
narrow range of rights.
This measure (the extension of compulsory scheme of pension and disability insurance to
any work carried out in a subsidiary relationship) would also require amendment of the
definition of insured persons, or the occurrence of compulsory admittance to the scheme,
the ways of securing the rights from insurance and the system of paying contributions,
therefore it would be necessary to change those segments of the system.
The work of pensioners should also be examined from the perspective of integration in the
insurance system and the corresponding burden of contributions, taking into account equal
treatment in relation to others who perform work in a subsidiary relationship, and the set
aim of promoting long-term retention of the active period.
2.1.1.8 Adjustment of the indexation system
Adjustment of pensions is designed to maintain the real value of pensions. In the period of
receiving the pension, the ratio between the amount of pensions and average wages in the
country should be maintained at the same level as upon enforcing the pension. Any
subsequent changes of recognized and assessed amounts of pensions will depend on the
prescribed indexing method which retains their value. Different indexing methods are
therefore directly reflected in the extent of funds necessary for the payment of pensions and
other rights from the pension and disability insurance. For that reason, the regulations which
governed indexation in the past were most frequently subject to amendments.
The rules governing the pension and disability law currently provide that pensions are
indexed depending on the growth of average monthly salaries paid to the employees at legal
persons, as published by the Statistical Office in the Official Journal of RS. It takes into
account the evolution of the average gross salaries, while the previous regulations took into
account the trends of the calculated average net wages Thus recalculated salaries
corresponded to the average gross wages reduced by an average rate of taxes and fees,
while at present, the trends of average net wages are taken into account The change was a
result of enforcement of the new Income Tax Act of 1 January 2005. Among other things, this
Act affected the changed amount of the average rate of taxes and fees levied on wages in
the Republic of Slovenia which can not be determined during the year. The effects of
amended tax law created a major gap in the evolution of average gross and net wages which
were not basically different until then. This, in turn, affected the attained relationships
between the salaries and the pensions.
In future, the applicable regime of pension indexation will have an even stronger effect on the
increase of supplementary pension fund deficit. It should be therefore wise to examine the
possibility of changing the indexation in a manner that preserves the real value of the
recognized and measured amounts of pensions, while ensuring the financial sustainability of
the pension fund.
A possible solution for a timely prevention of further deficits in the pension fund is to change
the indexation of pensions by introducing the so-called Swiss formula which takes into
account both the wage growth (50%), and the change of consumer prices (inflation) (50%). A
26
new indexation would imply a smaller increase in pensions, and reduce the future financial
burden.
2.1.1.9 Exclusion of net social transfers
In order to ensure a more transparent operation of the pension fund, all transfers or social
benefits within the pension system provided for beneficiaries from the state budget which
are not financed from the contributions for pension and invalidity insurance will be excluded
from the pension and invalidity insurance. This will ensure the separation of social benefits
from net pension benefits (old-age, invalidity, widow/ers and survivor’s pension), financed
by collected contributions for pension and invalidity insurance.
In line with the stated measure, the right to assistance and attendance allowance is
transferred to the Long-Term Care Act, the state pension and the right to supplementary
allowance, which is a benefit for the recipients of old-age, invalidity, widow/ers and
survivor’s pensions ensuring social security, are transferred to the Social Security Act.
The right to disability allowance, transitional allowance, maintenance allowance, and yearly
bonus are (due to lack of connection with the payment of contributions) excluded from the
pension system or are transferred to another field (e.g. physical impairment benefit –
invalidity security system …). Currently, the Self-Management Agreement on the List of
Physical Impairments (Official Gazette of the SFRY, No 38-488/1983), which was last
amended in 1989, is still in force. Based on experience in practice and according to the
technological progress, it would therefore be necessary to verify its appropriateness and
introduce necessary amendments, since it is substantially incomplete and outdated. Here it is
necessary to consider the advisability of such regulation, since recent data show that
European countries and the countries of the former Yugoslavia have a completely different
regulation. The placement of this right in the pension and invalidity insurance system is
questionable because physical impairments do not always involve work-related disability or
loss, or reduction of capacity to perform a profession, which is a risk of the disability
insurance.
2.1.1.10
Introduction of the gross pension system
The pension insurance does not know a clear gross–net system, as in the past we did not
have enough information to introduce one. The Pension Insurance Institute now has all data,
therefore it would be welcome to launch a system that would actually rely on full data on
individuals (their salary before taxes and social security contributions), and which would not
require clearing of data with the average rate of taxes and fees from wages. The effect of the
“clearing” of salaries on the basis of average rates of personal income tax and social security
contributions paid on wages and salaries is not fair for the individual. The average rate of the
personal income tax reflects the state fiscal policy which has different impacts on the
available (net) salary of individual insured persons (exploitation of tax reliefs, especially
allowances for dependant family members). Under the system of clearing, insured persons
receiving a salary, and taxed at an individual rate which is higher than the average rate, are
in a more favourable position because the clearing takes into account the average rate,
which is lower. Especially in the period 2005 onwards, when the tax burden on wages was
reduced through an increased general tax allowance, additional general tax allowance,
changes in the scale and the personal income tax brackets, this effect on the pension base
27
of insured persons is increasing even more. Considering the fact that the system of other
rights from social security is based on the rights before taxation and the payment of social
security contributions (e.g. wage compensation for temporary leave from work pursuant to
the Health Care and Health Insurance Act - ZZVZZ), it is necessary to examine the possibility
that the pension rights are levied from the gross pension rating base.
The introduction of determining the pension rating base in the "gross" amount would also
enable a more appropriate regulation of the pensions taxation (and the related taxation in
cases when a person is receiving various types of income), and appropriate regulation of
financing health insurance for pensioners. We would also achieve greater transparency and
comparability with countries whose pension system is regulated similarly as Slovenia.
2.1.1.11
Modernisation of invalidity insurance
Intervention in the invalidity insurance needs to follow the basic goals of the latest change,
which have already greatly brought desired results. Due to ensuring and protecting the
employment of disabled workers, the right to occupational rehabilitation is of particular
importance, which became a fundamental right from the implementation of the present
invalidity legislation (2003), however it has not yet been adequately put in practice. The
reasons for this are several but they could be eliminated. Even an additional stimulation with
a higher benefit for insured persons would increase the interest. Moreover, a closer
connection with the healthcare system will be necessary for better implementation, and
investment in informing the insured persons and employers will promptly bring better results.
However, some deficiencies have been detected in the system that was enacted in 2003.
The definition of 2nd and 3rd degree disability is not completely clear, which causes many
misunderstandings. A more clear definition should explain the causal link between the impact
of changes in health condition and the capacity of the insured person to perform their
occupation.
The compulsory provisions in force that govern the rights of the disabled from 2003 explicitly
decrease the benefits in relation to the benefits that the beneficiaries from the so-called old
law are still receiving. Therefore it would be fair if the benefits were equalled, which is
possible only by examination and adjustment of the rights of the beneficiaries recognised
before 2003.
According to the data in the research 'The Income Position of Disabled Workers' (IER, April
2009), it is necessary to follow the motto “appropriate benefits amount stimulates
employment.” The realisation of such a principle implies better financial situation, and at the
same time, greater social inclusion and recognition of social affiliation.
In spite of the provisions on separate contributions rates in force, the separation has not
been realised to this date. Encouraging healthy and safe work (with the emphasis on each
employer individually) brings very good results. Higher investments in the employee do not
mean only avoiding (more severe) accidents but improve the overall healthcare situation of
the active population who will be able to prolong the activity due to its better condition.
Namely, this is one of the main goals for acquiring a better picture of the public finances of
the entire state. Due to the effects, it is necessary to speed up the activities in the described
field.
28
The placement of the list of physical impairments and the right to disability allowance in the
PIZ system is questionable for some time already, and above all, a constant stumbling block.
The main deficiency of the regulation is not the “outdated rule” but the meaning of the
recognition of the stated right. There is no comparable regulation in the world no more, since
the right as such has been abolished in all countries where it had been in force in the past.
The past regulations resulted in commercial insurances for the risk of physical impairments,
for which appropriate monthly premiums are paid. Most countries kept only pure insurances
for the case of invalidity, which as such already cover all risks, related to the capacity to
work. According to the findings, it is necessary to eliminate this institute from the system;
however, it is possible to regulate it as pure competitive product or as a benefit for
impairments that are otherwise not related to work.
Already the precise analysis of invalidity rules in 2007 identified certain irregularities related
to the possibility to exercise individual rights due to voluntary entrance in the insurance,
inappropriate regulation of control examinations, the suitability of the amount of individual
benefits, time uncertainty in the possibility to exercise certain rights. It is necessary to
remedy these irregularities.
The introduction of the Long-Term Care Act, which is being prepared, will assume the
present right to assistance and attendance allowance from the system of pension and
invalidity insurance.
Due to more prompt decisions, uniformity of competent bodies, and decreased expenses it
will be necessary to study precisely the possibility of implementing a common expert body of
the Institute of Pension and Invalidity Insurance of Slovenia and the Health Insurance
Institute of Slovenia. Among other things, the aim of uniting expert bodies is also higher
quality and greater professionalism of the expert profession.
29
2.1.2 Changes in the compulsory supplementary pension insurance
2.1.2.1 Transforming the compulsory supplementary pension scheme - the
establishment of an occupational pension scheme
Compulsory supplementary pension schemes are facing a series of shortcomings, some of
which derive from the regulation in 2000, and some of solution in the pension scheme of
compulsory pension insurance added. However, the compulsory supplementary pension
insurance system would be achieved without major changes to transform into an efficient
system of vocational savings aimed at the possibility of drawing an early pension for those
workers who work in jobs that are hard and harmful, or by a certain age can not be
successfully perform.
General development policies should be in this segment focused on reducing the number of
jobs to be as serious and harmful. Investing in a healthy and safe work needs to be regulated
at all times and activities promoted through a period of work for individual employers, who
are (along with the workers) at that time solely responsible for the safe and healthy work.
Leaving the labour market is also regulated by the disability legislation. The existence of
specific jobs of hard work and noxious work will be slowly reduced or abolished, for this type
of work, which will still remain, they will require a longer time to establish a supportive forms
of insurance. For works which are specific restrictions on the ability to work at a certain age,
it is necessary to regulate more retraining opportunities and additional promotion of
education, since they also increase the chance of employment after leaving work at work by
a certain age can not be carried out.
Establishment of an occupational pension scheme is a measure, which allows employees
who work in difficult and harmful jobs or parts, which after a certain age can not be
successfully carried out, in particular the inclusion of a capital scheme disclosed certain
contributions (defined contribution), which guarantees the right to early retirement with the
right to occupational pensions to be paid from the time of early retirement to qualify for
retirement in the compulsory pension insurance.
The current regime of compulsory supplementary pension system has features of definedbenefit (defined benefit), because the level of occupational pensions is already
predetermined. Thus, the occupational pension amounted to as much as in view of the
completed age and period of insurance of the insured amount to old-age pension at the
Institute for Pension and Disability Insurance Institute of Slovenia, with an increase of the
added period from inclusion in the compulsory supplementary pension insurance.
The current system of compulsory supplementary pension scheme should be transformed
into a system of pre-defined contributions (defined contribution), as follows practice of
supplementary pensions in the Republic of Slovenia. The amount of occupational pensions
would no longer be determined, but this was dependent on the amount of funds collected on
the personal pension savings accounts of the Fund members at the time of enforcing the
right to occupational pension.
30
2.1.2.2 A single contribution rate
The current system provides for different contribution rates for certain categories of
employees, while providing the same rights.
In 'pension insurance is the uniform contribution rate for all jobs for which employers are
obliged to pay contributions for compulsory supplementary pension insurance. Given the
current situation is likely for most the insured an increase in the contribution rate and the
increased financial burden on the employer.
2.1.2.3 Procedure for determining posts with a compulsory membership of the
supplementary pension insurance
List of jobs no longer corresponds to reality, since the situation in individual workplaces has
changed significantly since 1979, causing outcry among employers, who are still responsible
to pay contributions, while investing resources in improving the working conditions.
The increase in contribution rates will mean a substantial burden for most employers,
therefore the state has to compensate this with an efficient procedure for identifying and
abolishing the posts which require the inclusion in the occupational pension scheme. For
employers, this would mean that they would pay a higher contribution, but only for those jobs
where it is really justified, while they would be motivated to make additional investments in
improving the working conditions, and ultimately restructure such posts.
At the same time it is necessary to delete the option that the obligation of inclusion is defined
by special laws for specific occupations or groups of the insured (e.g. customs, police, etc.)
2.1.2.4 Occupational pension
Occupational pension shall be payable in the form of early retirement from the exercise of the
right to early retirement to pursue the right to an old-age pension under the compulsory
insurance.
The conditions for obtaining occupational pensions are tied exclusively to the duration of the
membership in the occupational pension scheme (a quarter of the period). The only condition
for entitlement to the occupational pension is that the insured person's pensionable service
(with added period determined in a quarter period of membership in the occupational pension
scheme) is enough for the entitlement to old-age pension in the compulsory insurance. The
time of receiving occupational pensions then depends on the period of added seniority
acquired on the basis of inclusion in the compulsory retirement age.
This solution creates a transparent system of conditions for the entitlement to occupational
pension, allowing the member to plan, while leaving the decision on the date of enforcing the
right to the occupational pension depending on the amount of funds collected.
2.1.2.5 Amendments set the amount and the assessment of occupational
pension
Occupational pension and occupational pension is reduced to determine the level at which
the current assessed value of pensions, health insurance contributions and the cost of
31
paying the same weight as the payment of the member. The occupational pension was
insured paid in monthly amounts from the acquisition of occupational pensions in order to
satisfy the minimum conditions for an old-age pension under compulsory insurance.
Such arrangements (binding right to occupational pensions only on condition of pensionable
service), the insured can exercise the right of disposal of occupational pensions in relation to
the amount of funds raised and consequently the level of occupational pensions.
2.1.2.6 The implementation of occupational pension schemes
Occupational pension scheme would be implemented in the form of mutual pension fund,
managed by the insurance company that would also pay an occupational pension.
Notwithstanding the fact that the proposed amendment in its entirety establishes a defined
contribution system, it is noted that the operator is required to pursue the objective: to ensure
a sufficient amount of funds collected on the personal pension savings accounts of members
which will be enough for the appropriate level of the occupational pension.
Managers of the mutual pension fund should therefore provide a basically higher return at
lower management costs compared to the current arrangement.
Because of the system of minimum guaranteed return (and the subsidiary guarantees of the
RS) for the members, there is no special risk even at a more risky investment policy.
32
2.1.3 Changes in the voluntary supplementary pension insurance
2.1.3.1 Modernisation of the system
The basic purpose of the voluntary supplementary insurance must maintain, also with the
modernization the essential aim of this insurance, meaning that the additional old-age
pension should cover the loss of benefits of an individual from the compulsory pension
insurance.
Modernisation is necessary because the years since the introduction showed the
weaknesses of the new system established a decade ago.
When modernising the system, it would be better to distinguish between "saving" and
"insurance" part, where the first one would be bound to the Investment Trusts and
Management Companies Act1 which already now, in a narrow range regulates mutual
pension funds, and the real insurance product of the mentioned supplementary pension
saving, i.e. the annuity, would we bound to the Insurance Act or to a special new act that
would specify the forms and the manner of paying the annuities. There is also a possibility
that the issue of annuities, their forms, and the manner of payment is regulated by a special,
separate section of the Pension and Disability Insurance Act or by a new act.
The specific aims to be pursued by the modernisation of supplementary pension insurance
are:
-
establishment of a transparent and efficient system of supplementary pension saving,
which is characterized by high professionalism of asset management,
-
establishment of a system of minimum return, which promotes professionalism of
asset management and more efficiently protects the savers from the fall of value of
their saved assets than the existing regulation,
-
increase in long-term return on assets under management for those savers who want
free (less conservative) investment policies,
-
increase in average premiums paid,
-
establishment of a single and efficient supervision.
Measures that should be implemented in the modernisation, in order to achieve the
mentioned aims, are described below.
2.1.3.2 Uniformity of supplementary pension insurance providers and the
appointment of pension plan managers
To ensure business transparency of individual providers and to ensure equal rights of
insured persons or members, it is necessary to pursue the goal of unifying the product of
providers (one form of saving or investment), which would ensure more transparent
operation, efficient supervision, and especially mutual comparability of operation and results
obtained, which are crucial to individuals in deciding which provider will they approach. The
33
uniformity and comparability among providers of supplementary pension (saving) would
undoubtedly contribute also to greater competition between providers.
In view of the above, it would be reasonable to introduce, as a uniform product in the saving
part, a calculation of return with the use of units of assets and that all providers are mutual
pension funds. This would establish a uniform way of assessment, demonstration of return,
uniform supervision and a single manner of informing the members and, consequently,
greater comparability of providers.
In order to achieve higher long-term return on assets of members under management, we
propose preservation of the system of guaranteed return, while members, who so wish, can
choose between different investment policies adjusted to their time perspective and tendency
to risk. For a member who would not choose or would not want to choose an investment
policy, it would as a presumption mean that they decided for the investment policy with a
guaranteed return.
The proposed solution of unifying the providers would be in the direction of the development
of the so called umbrella (pension) fund, which was introduced into Slovenian legislation with
the amended Investment Trusts and Management Companies Act (Official Gazette of the
RS, No. 92/2007).
Figure 1: Structure of the umbrella pension fund
Umbrella mutual
pension fund
Sub-funds with various investment
policies – one with a min. guaranteed
return
Notwithstanding the changes made in the unification of the product or supplementary
pension insurance provider, the managers of the mutual (umbrella) pension fund: banks,
pension companies, and insurance companies would remain unchanged in the
modernisation. The possibility that the activity of asset management is transferred to a
management company, as a specialized form of asset manager, would also remain. Even in
relation to transfers of funds the possibility among providers will remain unchanged, which
will enable the members to transfer funds both within one umbrella fund as well as between
different umbrella funds.
34
2.1.3.3 Separation of individual and collective supplementary pension
insurance
Greater transparency between the mentioned forms would lead to a more transparent
classification on pillar II and pillar III of the pension insurance, which is in the world primarily
aimed at the creation of various properties and the recognition of various rights. This
classification would enable an undisturbed further development of a specific form without
interference with any other form, which is important in the light of the purpose of each pillar.
While the purpose of pillar II is to provide for the loss of income from public pension system
and, therefore, requires a higher degree of regulation, the pillar III provides for additional
income, with which individuals want to improve their economic situation in old age and it is
possible to leave more space to free decision-making.
2.1.3.4 The establishment of a pension plan and regulation of mutual rights
and obligations of the provider, employer, and workers or members
It would be reasonable to maintain the existing arrangement under which the employer must
establish a pension plan of collective insurance scheme on the basis of the collective
agreement or the contract on the establishment of a pension plan in cooperation with the
employees. The law should more precisely regulate the essential elements of the contract on
the establishment of a pension plan. It would be necessary to regulate afresh the relationship
between the employer and the provider, where it would be possible to prescribe compulsory
conclusion of a contract on the pension plan financing, the obligation to provide information
when premiums are not paid, etc.
2.1.3.5 Fixing the amount of payments of supplementary pension saving and a
more specific determination of tax and similar incentives to increase
involvement in the system
By contrast with the existing legislation, it would be reasonable to regulate the minimum
premium amount (payment) only in case of a pension plan of the collective insurance. Such
regulation would leave the determination of the amount of premiums in individual insurance
to agreement. This regulation would make sense also from the point of view that in a
separate system of collective and individual insurance, collective insurance is the one that
replaces the loss of income from compulsory insurance.
Due to the separation of collective and individual voluntary supplementary pension insurance
(hereinafter vspi), it will be necessary to appropriately adjust the tax treatment of these
insurances.
With the aim of greater involvement of insured persons and larger premium payments in the
vspi, which should constitute an important additional source of income to individuals in the
future, it will be necessary to fully examine the competitiveness of this type of financial
product compared to other financial products, comparable by content, and to provide
solutions or incentives in the direction that will ensure that vspi will become comparably at
least equal or even more interesting than other competing financial products.
Particular attention should be paid to promoting the involvement of workers in labour
intensive sectors in voluntary pension insurance, since their expected income from
compulsory insurance is among the lowest. The state could provide for a part of the premium
35
provided that the employer pays to workers the rest of the premium in the same amount, as
guaranteed by the state.
2.1.3.6 Minimum guaranteed return
It is reasonable to maintain the institute of minimum guaranteed return, but in a slightly
modified form. It is necessary to ensure that the new criterion index will fulfil some important
properties, such as marketability, sufficient liquidity, and determination in advance.
The minimum guaranteed return should be regulated so that the time perspective would be
significantly longer and it would be reasonable to bind it to a transparent and pre-defined
criterion index bound to instruments with relatively short maturity (the index of harmonised
investment).
2.1.3.7 Determining the management costs to which the providers are entitled
The modernisation should be directed towards reducing the maximum allowed costs, namely
to the limit that would be still reasonable or justified both for the providers and the members.
There have even been proposals to leave the amount of costs to the regulation on the
market, which presently probably would not yet have the right impact.
Particular attention should be paid to the costs related to transfers of funds between pension
funds. While the costs of transfer between sub-funds of the same umbrella fund should be
free of charge, it would be reasonable to determine that only the actual amount of the
transfer costs of the provider (e.g. 15 EUR rather than 1% of all assets transferred, as is the
case currently) may be charged for transfers of funds between pension funds of different
providers).
2.1.3.8 Participation of members in managing the assets of the pension fund or
ensuring supervision of the management of funds by members
Following the example of the already established model of the ZVPSJU Committee, with the
modernisation of the supplementary pension insurance (saving), individual committees would
be established for all pension funds. The main tasks of the Committee would be giving
opinion to the annual management report, opinions to the change of investment policy, to
proposals and consents to the changes of the Pensions plan, giving preliminary opinion to
status changes and changes in the ownership structure of the provider, or to the proposal to
transfer the fund management to another manager and other.
A more important competence of the Committee could be also proposing a representative of
the Fund Committee to the manager’s supervisory board.
2.1.3.9 Rights from the supplementary pension insurance (savings)
Changes would be implemented both by limiting the set of rights as well as in the field of
conditions for entitlement to additional old-age and early supplementary old-age pension.
Under the new regime, a member would be entitled to obtain the right to supplementary oldage pension when they would satisfy the minimum requirements from compulsory insurance
(age, establishment of the right to pension) and have a sufficient amount of funds for the
payment of the annuity. Similar conditions would apply for the right to early old-age pension.
36
It is necessary to accurately determine the manner of selecting the annuity so that the
individual may freely choose among the providers on the market. With regard to the
possibility of a single disbursement of funds, it would be reasonable to determine, at least in
the case of collective insurance (saving), that the single disbursement is permitted only when
the conditions for entitlement to the right to supplementary old-age pension are satisfied. It
would be reasonable to apply this provision also to individual insurance. Certain changes are
necessary also in the standstill and transfers of funds.
2.1.3.10
Providing a more transparent operation of the providers and timely
informing the members
A more transparent functioning can be achieved by standardizing the products of providers,
by establishing special committees, with compulsory current publication of gross and net
returns of individual providers and the costs structure (e.g. at the home pages of the
providers for all offered products).
One of the most important measures in order to achieve better information of members, and
of the public, is also the establishment of a single model of assumptions, on the basis of
which individual providers could make and publish information calculations.
2.1.3.11
The standardization of supervision and ensuring efficient action in
case of infringements
Supervision of the business of providers and the actual provision of rights from the pension
plan, and from the contract on the establishment of the pension plan, should be more
precisely regulated.
It would be reasonable to place supervision at three levels: internal supervision, external
independent supervision and the public authorities’ supervision.
Internal supervision of the operations would be implemented by two supervisory
authorities, a committee of members and employers, and the operations of the manager
would be supervised by the supervisory board.
External independent supervision - providers should conclude a contract on the
management of custodial services. The trustee is one of the additional mechanisms for
providing security and has become a generally accepted standard worldwide.
Public authorities’ supervision would in respect of the product be completely passed
under the Securities Market Agency (SMA). Supervision of the annuities providers in the time
of payment, or exercise of rights, and supervision of the pension companies as status-legal
forms would remain within the competence of the Agency for Insurance Supervision. The
supervision conducted by the Ministry of Labour, Family, and Social Affairs should be more
precisely defined. The supervision of tax relieves should continue to be performed by the Tax
Administration of the Republic of Slovenia.
37
3 LAUNCHING OF THE NEW PENSION SYSTEM
On the 1 of January 2015, Slovenia will apply the new pension system which will include all
insured persons who were born in 1960 or later, and were less than 55 years old on 1
January 2015.
The pension and disability insurance in the RS to be enforced in 2015 is based on the
principle of the multi-pillar system which includes:
-
the zero pillar;
the first pillar;
the second pillar;
the third pillar.
Figure 2: Individual pillars of the proposed pension system and the source of their financing
III. pillar
Defined contribution
Payments of members
II. pillar
Defined contribution
Payments of
employees and
employers
I. pillar
Notional defined contribution
Contributions of
employees
and employers
Zero pillar
Contributions of PIZ (1.5%)
and the national budget
The system of notional defined contributions will be introduced in the compulsory pension
system virtual pension account. In this system, the paid contributions of the insured person
are recorded on his personal pension savings account. Personal pension savings accounts
are virtual, because the contributions in the pay-as-you-go system are used for updated
payment of the rights of pensioners (the so-called pay-as-you-go). The amount of the
individual's pension depends on the amount of contributions recorded on his virtual personal
account, the period of payment, and the expected remaining lifetime of the person’s
generation upon retirement. The funds collected from the virtual personal accounts are
38
remunerated in line with predetermined yield. The countries that have already established
such a system coordinate the collected funds with the growth of wages (either with the
growth of real wages or the growth of the mass of real wages), or the GDP growth. Binding to
the real economic category equips the NDC system by keeping pace with the economic
progress of the society.
The essence of the NDC system operation is strict indexation of contributions from
individuals who are recorded on individual accounts, transparency and comprehensiveness.
Each individual receives information from the administrator on the value of paid and indexed
funds on his virtual account, and the amount of the pension which can be expected at certain
assumptions embedded in the calculation. In the NDC system, the currently collected funds
are promptly paid to the actual pensioners whose pensions are calculated according to the
predetermined formula that takes into account changes in life expectancy between men and
women. Therefore if the life expectancy is extended, pensions are adjusted accordingly, thus
ensuring fiscal sustainability of the pension system.Pension assessment becomes a
technically determined task following a pre-determined mechanism.
Long-term sustainability of the system is provided by indexation. In the case of a lower wage
growth, a lower ratio between the active and the retired people (binding to the growth of the
real wages mass) or longer life expectancy, the indexation will automatically perform the
adjustment.
Transformation of the current pay-as-you-go system from the "defined benefit" to the
"notional defined contribution" system would mean that it would be necessary to introduce a
strong redistributive element (zero pillar) which would provide everyone with a universal
income and would be linked to the entry age of 65, or an eventual later retirement. This
would maintain solidarity in the new NDC system to the extent that would prevent poverty.
The bulk of the compulsory pension insurance would consist of the additional first pillar
which is a strong link between the pension income and the contributions paid with the
introduction of virtual individual accounts for each individual (the NDC). Deviation from the
system of pre-defined rights to a system of pre-defined contributions determining the scope
and the quality of rights will be followed by a changed mentality of individuals who will
deposit part of their pension income to the personal pension account. They will not see the
payment of contributions as a tax burden, but as investment savings where the return is not
subject to redistribution. This pension scheme allows informing the individuals on their paid
contributions which are promptly indexed and are then paid to the individual as a "pension
credit".
Such a system strengthens the motivation of people to join the scheme and affects their
decision to continue working and delay retirement, because the minds of people are still
rooted in the belief of "unfair" redistribution of income among different groups of insured
persons (from employees to the self-employed who can circumvent the payment of
contributions; from other insured to those who take up early retirement). This brings a
number of negative effects in the labour market and discourages the individuals from
remaining in the scheme.
39
The current compulsory pillar could therefore be transformed into two parts, where the social
or the zero pillar (redistributive part) would provide a universal pension that would guarantee
security in the old age by the redistribution of funds deriving from the solidarity principle,
ensuring or maintaining the minimum scale of pension rightsBased on the model of virtual
individual accounts (first pillar), the funds of each individual would be recorded and promptly
indexed for the subsequent payment of certain actuarial pensions whose amount is
determined in advance according to the preliminary formula that takes into account the
expected life expectancy of men and women. In the context of compulsory insurance, this will
provide interdependence of paid contributions; the system would separate the rights which
are not based on contributions.
In this system, the purchasing power of pensions would be adjusted with the economic
development through the indexation mechanism, changing the ratio of active insured persons
and pensioners, and extended life expectancy, but the first pillar would be politically
unaffected because of the lack of redistributive element, the well-defined mechanism, the
management of payments and the calculation of pensions, and greater transparency
provided through payments to individual accounts, because the rights would be tied to the
funds collected on individual accounts (economic basis). Thus, there would be no unfair and
"entitled" political pressures to increase the rights from the system which ensures solidarity
between participants by redistribution from the more productive to the less productive,
regardless of the years of service and paid contributions, and independent on the life
expectancy and the economic cycle, due to the deeply rooted policy of "entitlement".
3.1 Basic features of the zero pillar
The zero system provides, based on the fundamental principles of redistribution and
solidarity, the right to a universal pension aimed at preventing poverty and providing basic
social security for old age. The beneficiary is the insured who has reached the age of 65,
provided that, in 2015, he will be 55 years old or less (born in 1960 and onwards), and
included in the NDC scheme of the first pension pillar on 1 January 2015.
The universal pension as of 1 January 2015 would, for example, amount to 40% of the
minimum wage in the RS on the same day. The universal pension will be annually adjusted
with the growth of consumer prices Resources to fund the zero pillar will be provided from a
certain share of contributions for the pension scheme, and the difference between the
income from contributions and the expenditure for universal pensions will be covered by the
state budget.
3.2 Basic features of the first pillar
3.2.1 The system of virtual pension system accounts
The first pillar introduced the scheme of virtual accounts (NDC), under which each insured
person has a virtual personal pension savings account in the Institute The (NDC) scheme is
based on pay-as-you-go system, but provides transparent recording of contributions and
fixing the amount of property which is the basis to assess the rights Paid-up contributions are
indexed annually, based on increases in real wages.
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The condition to obtain the right to NDC compulsory pension insurance is that the insured
reaches the age of 65 The insured person is then provided a pension which is calculated on
the day of enforcing the rights on the basis of documented accumulated pension assets in
line with the actuarial principles. The pensions are indexed annually on the basis of the
Swiss formula (50% change in consumer prices, and 50% wage growth).
The so-called reserve demographic fund would be provided within the NDC scheme in the
scope of incomplete indexation in terms of binding to realistic economic categories (see the
paragraph above); the reserve fund would ensure sustainability of the system in the event of
changes of the demographic and the economic conditionsThe reserve demographic fund
would be managed by the Capital company pension and disability insurance, d.d., so that the
complete capital assets of the Company (other than those necessary to ensure capital
adequacy related to the implementation of pension savings within the second and third pillar)
would be transferred to this fund The entire property must be managed according to the
principles of global portfolio dispersal of investment. The investment policy of the
demographic reserve fund should be clearly defined and a monitoring committee should be
set up to monitor the investment policy.
After 1 January 2015, the above stated conditions apply only to persons born before 1960
Those who were born in 1960 or later are entitled to the old-age pension upon completing
the age of 65.
3.2.2 Disability Insurance
A systemic separation of the pension and disability insurance will have to be made and,
accordingly, the rights under the pension and disability insurance will have to be strictly
separated, as the NDC system does not cover them.
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