Experience from Slovenia, EBRD’s credibility and PREF’s support guarantee the success of the voluntary pension insurance system in the Republic of Srpska
Mr. Završnik, you were one of the actors in the process of establishing a voluntary pension insurance in Slovenia in 2001. Having in mind your experience, what is your point of view of the situation in the Republic of Srpska when it comes to the first voluntary pension fund?
The situation is similar like it was case in Slovenia about 18 years ago. Initially, there were many skeptics, and I can freely say the distrust of this way of saving. However, this way of providing funds for the third era is in Western Europe, as well as in most of the countries of Southeastern Europe, for many years now, established practice. In order that the current pension funding system would function, i.e. the first pillar of pension insurance, i.e. mandatory pension insurance, it is necessary that we have at least three workers per one pensioner, that is, that this ratio is 3:1. According to the data of the Pension and Disability Insurance Fund of the Republic of Srpska, the Republic of Srpska ended last year (2017.) with a ratio of 1.16 workers to 1 pensioners (1.16:1). The question that arises is whether we have enough confidence in this way of financing and paying pensions, or we will take the matter into our own hands and think about additional incomes for old age already today.
How does voluntary supplementary pension insurance work?
Any adult person may become a member of the European Voluntary Pension Fund in two ways – through an employer if the person is employed, and individually, regardless of whether the person is employed or not. The minimum amount of payment is 10 BAM. We certainly emphasize the advantages of membership through the employer – the Law on Contributions of the Republic of Srpska and the Law on Income Tax of the Republic of Srpska if employer pays up to 100,00 BAM per month, or up to 1200 BAM per year, he is exempt from contributions. This is the basis for tax deduction. In this way, the employer has the opportunity in the most favorable way for additional stimulation of the workers. Employees have the opportunity to co-finance the payment with the employer from their gross salary.
In the case of individual membership, employed persons have the opportunity to independently finance the entire amount of the payment, from their gross salary, but also to indicate the employer as a payer in order to exercise the right to a tax deduction. Unemployed persons can also access the fund, they earn the Fund’s income, but not tax relief.
Each account in the fund is an individual account of the individual person, regardless of the way in which the person joined the Fund (through the employer or individually), but also regardless of the change of workplace or employer. An individual decides on how the payment will be made, whether in a one-time amount, in the special circumstances and conditions defined by the Agreement, or in the form of a programmed payment of a lifetime pension annuity. Payments can start from the age of 58, or from the age of 53 years and at least 5 years of accumulation (payment). The withdrawal of money must begin at the latest with 70 years.
Key differences between products offered by the EPF and other forms of savings and insurance in the Republic of Srpska are tax incentives and voluntary character. What does this mean on a practical example?
On a practical example, this means that if the employer and employees decide to finance the payment in equal amount, and if this amount, for example, is monthly total of 56 BAM, the employer will pay 28 BAM, the employee will receive a tax deduction and the payment of his salary will amount to 18,10 BAM, and the tax deduction, which also goes to the employee’s account, in this case amounts to 9,90 BAM. According to estimates, with these amounts and the real minimum expected annual yield of the fund, the individual could have 31,792 BAM in his account after 30 years of savings. As I have already mentioned, the individual decides on how the payment will be made.
When it comes to voluntary character, each individual decides on a voluntary basis whether he wants to exercise the right to voluntary supplementary pension insurance or not. We often have the question how this type of savings differs from, for example, life insurance. The thing is that these are quite different types of products. One of the key differences is the right to obtain tax relief, as well as the absence of any penalties for terminating or pausing payments to the European Voluntary Pension Fund.
It has been several months since obtaining all necessary permits for work and the beginning of work. What is the current situation, do citizens in the Republic of Srpska recognize the need for additional savings for old ages?
I can freely say that I am satisfied with the readiness of employers to talk and present their employees the possibility of additional voluntary pension insurance. We are constantly in negotiations with employers, both from private and public companies. In the upcoming period, we expect more employers who will show that they directly care about their employees, but indirectly about the entire economy of the Republic of Srpska as well as the environment in which they operate.
What are your plans when it comes to the Republika Srpska market?
When it comes to the Republic of Srpska, and also Bosnia and Herzegovina, our goal is to make the voluntary supplementary pension insurance system work, to do business successfully and to be a trusted partner both to employers and individuals. Considering the experience I have from the Skupna Pokojninska Druzba from Ljubljana, and having in mind the credibility of the European Bank for Reconstruction and Development, as well as the support of the Pension Reserve Fund of the Republic of Srpska, I believe that citizens will recognize the advantages of this method of saving, but also that this first voluntary pension fund will be some kind of trigger for them to start thinking about pension and incomes they will earn in their old age.