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© 2007 International Monetary Fund - page 20 / 41





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Box 2. Slovak Republic: Further Development of the Pension Sector

Several issues should be addressed in order to ensure the sound development of the new second pillar of the Slovak pension system. Specifically, steps should be taken to ensure further diversification of portfolios by, and to ensure a sound revenue base for, the PFMCs.

Up until now, the PFMCs have been investing second pillar funds primarily in very highly secure instruments, such as bank deposits and government bonds. This strategy may be aimed at convincing risk-averse individuals to participate in the new pillar. Irrespective of the reason, the real returns arising from this very low risk investment strategy have been low—between zero and 2 percent—in part because Slovak government security yields have to a large extent converged to Euro-levels. Consequently, the second pillar funds will need to diversify more into other instruments, including equities and foreign instruments.

There may also be a need to review whether the PFMCs, and their associated financial groups, are leveraging incomes from their pension management business. The relatively low management fees and consequent low margins for PFMCs have created incentives to seek other sources of revenue. Although, there is no tied cross-selling of pension products with products from other members of the same financial group, there may be some non-tied cross-selling in practice (e.g., marketing credit cards and other financial instruments, that have little relation with the pension business, to second pillar participants by PFMC parent companies). Marketing products in this way may create confusion for contributors about whether these products are tied to the pension product or not, and could also affect participants’ future decisions regarding switching PFMCs.

In late 2006, there was some discussion of a proposal to switch part of the contributions from the second pillar to the first pillar. Subsequently, the Slovak government announced that there would be no reduction in second pillar contribution rates. While this issue now seems to have been dealt with, it is worth emphasizing that reductions in the contribution rate should be avoided. It would potentially undermine the viability of the second pillar (PFMCs are already operating with low margins due to the low mandated fees), and could create uncertainty for contributors regarding whether other changes might take place in the future.

  • C.

    Capital Markets

    • 21.

      The capital markets in Slovakia are small and illiquid. Despite EU membership

and developments in the regulatory framework and economic performance, the capital markets have not changed much in Slovakia since 2002. The most liquid segment is the government bond market, but it is dominated by only three to four active banks and has little secondary trading. The Bratislava Stock Exchange (BSSE) is now the only operating

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