Higher reserves for pension companies and stricter rules to protect the money of insured persons. This is envisaged by draft regulations approved at first reading by the FSC.
The changes come after the amendments to the Social Security Code and affect the introduction of multi-funds in capital social security. For the FSC, the main goal is to make the system more resilient to market fluctuations, so as to ensure better protection for both insured persons in the phase of accumulating pension savings and for pensioners who are already receiving payments.
Reserves for guaranteeing contributions are increasing
The most significant change is related to the increase in capital coverage requirements as a result of the permanent growth of the assets of the funds managed by the companies, with the largest of them (UPF) currently guaranteeing gross contributions with a reserve of only 0.5 percent of their net assets. The exercise of the right to a pension by an increasingly wider range of persons necessitates the allocation of more funds in the reserve for guaranteeing the gross amount of contributions. The new texts provide for this buffer to be increased twice, and in some cases even three times – between 1 and 1.5 percent of the net assets of the respective fund.
The Financial Supervisory Commission proposes to increase the requirements for reserves to guarantee pension payments. Until now, the guarantees mainly covered lifetime pensions. After the changes in the CSR, their scope is expanded to include term pension payments, with the size of these reserves increasing significantly – from the previous 1 percent to 4 percent and no more than 6 percent of the capitalized value of pensions and deferred payments.
Stricter control over financial buffers
This means that companies will have to set aside significantly more funds even in the accumulation phase in order to ensure timely provision of their commitments to guarantee gross contributions and to cover reserves in the payout phase.
In practice, the regulator will monitor compliance with the mechanism for constant “adjustment“ of financial buffers. Pension companies are obliged to recalculate their reserves every month. If their amount falls below the minimum level, the company will have to immediately supplement them with its own funds. If the reserves exceed the maximum permissible threshold, part of the funds will be able to be released. According to the FSC, this will ensure both stability and more flexible capital management.
In the explanatory memorandum to the project, the regulator emphasizes that the changes are aimed at limiting the risk of accumulating deficits in the system. The argument is that in unstable markets and higher volatility, pension companies must have sufficient buffers to fulfill their commitments to insured persons and pensioners.
New organization of pension payments
The Financial Supervision Commission also proposes a serious reform in the rules for paying pensions from the second and third pension pillars through a completely new Regulation No. 70.
In order to better share the biometric risk between individuals in a larger group, with the changes in the CSR, the payment of lifetime pensions to which insurance in the UPF and DPF gives the right is provided for by a common fund for paying lifetime pensions. In a similar way, it is provided that deferred payments upon acquired right to a pension from the UPF and DPF and term pensions from the PPF are paid from a common fund for term payments. For this purpose, the existing funds for the payment of lifetime pensions when insured in the UPF will be used to pay pensions from the DPF. The funds for deferred payments, created in connection with the activities of the UPF, are transformed into funds for term payments, from which all such payments will be made upon acquired pension rights, including term professional pensions.
The created common infrastructure in the form of common funds for making payments allows for the unification of pension savings from the UPF and DPF for the purposes of granting a common pension and the unification in a common transfer of payments with the same maturity from a single fund for making payments. According to the FSC, this will allow for better risk management and a clearer organization of funds.
The technical interest rate is eliminated
The draft adapts the method of calculating pensions from the UPF, PPF and DPF by eliminating the use of a technical interest rate (TIR). Under the current regulations (in force until December 31, 2026), this rate is used to establish an expectation of future profitability from the investments of the funds of the fund for the payment of lifelong pensions, i.e. the TIR of the fund for the payment of lifelong pensions is subject to change depending on market conditions. In this way, different groups of pensioners are distinguished in the funds for the payment of lifelong pensions, whose pensions are granted with a different TIR, which leads to a different annual update thereafter, although the funds of the individuals are invested together. After January 1, 2027, when granting a pension, the initially determined amount of the pension will be guaranteed, and not only the amount accumulated in the individual account. This means an update in the direction of increasing payments and higher protection for people.
Higher guarantees for insured persons
According to the regulations in the Social Security Act, the additional lifelong old-age pension when insured in the Pension Fund has a guaranteed amount, calculated based on the person's gross contributions. This means that if the person has funds in the individual account in a higher amount than the gross contributions, the initially agreed amount of the pension can be guaranteed, by applying a risk coefficient that reduces the amount of the payment. From January 1, 2027, the pension insurance company is committed to guaranteeing the pension based on the full amount of the funds transferred from the person's account to the fund for the payment of lifelong pensions, since the application of the TLP is eliminated and since only part of the profitability achieved in the management of the fund for the payment of lifelong pensions is used to increase the amount of payments, and the rest is allocated to an analytical account, which is used to cover any shortfall if necessary. In this way, the guarantees provided to individuals are significantly improved.
The new rules come into force in 2027.
According to the FSC, the changes will lead to higher financial stability of the supplementary pension insurance system, greater protection of insured persons and pensioners, and more effective supervision of pension companies.
The draft regulations will be published for a 30-day public consultation, and the new rules come into force on January 1, 2027.