Slovakia reforms retirement pensions

Slovakia

Autumn 2022 brought long-awaited reform to the Slovak retirement pension system, which seeks to remedy the heavily criticised changes implemented by Slovak government in 2013. Most of the recent changes will go into effect in 2023.

Since 2004, the Slovak retirement pension has been based on the following three-pillar system:

  • First pillar – mandatory pension insurance funded on an ongoing basis (i.e. a pay as you go system) from social contributions and administered by the Slovak Social Insurance Agency;
  • Second pillar – retirement pension saving defined by contributions (from the first pillar plus voluntary payments from the insured person) and capital-funded insurance managed by private pension fund companies;
  • Third pillar – voluntary supplementary pension saving defined by contributions and capital-funded insurance managed by supplementary pension companies.

Below is the summary of the most important changes to the pension system:

First pension pillar

  • Introduction of the Parental pension (or the so-called Parental bonus): The bonus will allow the retired person to receive additional pension funds financed from the social contributions of working (i.e. socially insured) children. The bonus will be calculated for each parent as 1.5% of 1/12 of the child's aggregate taxable earnings for the preceding two years. This new addition was criticised as expensive and unsustainable, but also as unsystematic, since parents who are childless, have unemployed children or have children working abroad will not receive a bonus.
  • Cancellation of retirement age cap: The previous retirement age, which was capped at 64 years, is cancelled and the retirement age will again be bound to average life expectancy, rising by approximately one to two months per year. People born before 1967 will not be affected. Experts consider this to be the most crucial and beneficial change for the stability and sustainability of the retirement pension system.
  • New option for Early retirement: Early retirement will now also be possible for persons after 40 years of service (i.e. social insurance). An inpidual with 40 years of service will be able to apply for an early pension and could in theory choose to retire early at age of 58, if working from eighteen.

Second pension pillar

  • Automatic entry: Entry to the second pillar will be automatic (until now the entry was voluntary). Persons under the age of 40 who have started working for the first time will be automatically included in the second pillar with the option to leave the system within two years from entry. Even people who are over 40 will be able to join voluntarily.
  • Change of conservative (guaranteed) funds: Current savers in the second pillar under the age of 54 will be automatically moved from guaranteed (i.e. bond) funds to non-guaranteed (i.e. index) funds. The aim of this measure is to achieve higher valuation of savings since the effectiveness of guaranteed (bond) funds was rather low in the last decade.
  • Default investment strategy: New joiners to the second pillar will be automatically placed in the non-guaranteed (index) funds to achieve the higher valuation of savings. At the age of 54, they will be gradually moved to guaranteed (bond) funds.
  • Reduction of fees: The fees of pension-fund companies will be decreased, which should allow higher savings for the savers in the future. The Ministry of Labour predicts that it can generate more savings (on average of 10%) for savers after 40 years of saving.
  • Taxation of savings: Withdrawing savings from the second pillar will now be subjected to income tax. (Lump sum withdrawals are possible even today, but they are not being taxed).

Third pension pillar

  • Reduction of fees: To make saving in the third pillar more attractive, the fees of supplementary-pension companies will be lowered. (The management fees will be gradually reduced from the current 1.20% to 1% in 2025).

For more information on Slovakia's pension system and how these reforms could affect your business, contact your CMS client partner or local CMS experts: Tomáš Matějovský, Pavol Kundrík, Ivana Hovancová.