Complete guide to the third pillar

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What is the 3rd pillar?

Supplementary pension savings, also known as the 3rd pillar is a voluntary form of saving and investing. The purpose of the third pillar is to allow participants to secure an additional source of income in retirement. Oversight of the supplementary pension savings sector is carried out by the National Bank of Slovakia.

The third pillar combines saving with investing. By establishing a third pillar account, you open an account with a pension management company. Contributions are paid into this account by you and/or your employer. Once the contributions are credited to your account, they are invested in a mutual fund. You thereby become the owner of fund units. Fund units represent your share in the fund’s entire portfolio, which may include stocks, bonds, and other financial assets. As a participant, you choose which mutual fund all your contributions will be invested in. Upon reaching retirement age and completing your savings period, you will have several options for withdrawing your funds.

What are the advantages of the third pillar?

The second advantage of the third pillar is the tax relief. Tax relief allows a participant to reduce their taxable income by up to €180 per year. If you save at least €15 per month, you can document these contributions at the end of the tax period with a statement provided by your pension management company. Your payroll or accountant will then reduce your taxable income by €180 saving you €34.20. This benefit effectively means paying less tax.

The main advantage of the third pillar is the employers contribution. Each employer can choose how they contribute to their employees. Some employers do not require any employee contribution, while others require matching contributions (e.g. 50/50) or a specifically defined amount (for example €15 per month or 1.5 % of gross salary).

What are the disadvantages of the third pillar?

The main disadvantage of the third pillar is the high management fee. This fee is 1.00 % per annum and is the same across all pension management companies.

Another disadvantage is the limited choice of mutual funds. Each pension management company typically offers around 3–4 mutual funds, categorized by risk level as conservative, balanced, growth, equity, and index funds. The issue is not the number of funds itself, but the restrictions on combining them if you want to set up your own investment strategy.

The final disadvantage of the third pillar is low liquidity. You can access your funds only once every 10 years (participant’s contributions) or upon reaching retirement age. Although in a certain sense, this can also be considered an advantage – it prevents you from dipping into savings intended for retirement.

How to Choose a Pension Management Company ?

There are four supplementary pension companies operating on the Slovak market: UNIQA d.d.s., a.s.; DDS Tatra Banka d.d.s., a.s.; NN Tatry-Sympatia d.d.s., a.s.; and STABILITA d.d.s., a.s. The fundamental question when choosing a provider is how you want your portfolio to be managed. There are two basic approaches to investing – active and passive management.

Active management – A portfolio manager actively manages your investment, purchasing various assets and adapting to market conditions. Their goal is either to achieve a higher return than the market average or to reduce risk, or gradually lower it, as is done at DDS Tatra Banka through the Comfort lifeTB mutual funds.

Passive management – With passive management, the portfolio is set up once at the beginning of the investment period and generally tracks a specific stock index, or in the case of multiple funds – several indices. This is how it is done at UNIQA, NN, and STABILITA. It is up to you whether you adjust this portfolio or reduce its risk by adding other funds before retirement.

If you are a client who prefers active management and the benefits offered by a life cycle portfolio, choose Tatra Banka. If you prefer a passive, index-based investment portfolio, continue reading the following section.

How to Choose a Fund in the Third Pillar?

Selecting a fund should be preceded by at least a brief analysis of your financial situation, asset composition, and risk tolerance. For example, if the total value of your assets is €100,000, of which €80,000 is in real estate, €10,000 in cash savings, and €10,000 in gold, it can generally be concluded that you should not consider anything other than an equity index fund. The situation would be different if you had less than 10 years until retirement.

In general, based on practical experience, an index fund is suitable for 90% of clients. Therefore, I will focus on comparing index funds. The difference between the index funds of individual companies lies in their composition:

• UNIQA: 90% MSCI World Index; 10% MSCI Emerging Markets Index
• NN: 60% S&P 500; 25% Eurostoxx 50; 5% MSCI Japan; 10% MSCI Emerging Markets Index
• STABILITA: 100% MSCI World Index

Looking at the index funds, NN is closest to the market portfolio, while STABILITA is the furthest. In the MSCI World Index, which is purchased by both UNIQA and STABILITA, the USA represents approximately 72%. This creates an overweighting of US stocks, which account for 42% of the global stock market. Therefore, I recommend either NN or UNIQA to my clients.

Is the Third Pillar Worth It?

Not if your employer does not contribute. The disadvantages mentioned above outweigh the benefits. If, however, your employer contributes a significant amount, setting up the third pillar is worthwhile. Ideally, contribute only a small amount, e.g., €15 per month, to fully benefit from the tax deduction. Invest any additional funds through better and, most importantly, cheaper capital market products.  

Supplementary Pension Funds (SPF)

Supplementary pension companies create and manage supplementary pension funds. Every pension fund must have a Fund Statute and an Information Prospectus, which describe all important details – investment strategy, asset allocation, and fees. Assets in a supplementary pension fund are not part of supplementary pension savings own assets. Management of these assets is recorded separately from the company’s own accounts.

Types of Pension Funds:

• Contribution-based pension fund: receives contributions from participants.
• Payout pension fund: used to pay retirement benefits.

Participants can allocate their investments among different funds:

• Conservative funds
• Balanced funds
• Growth funds
• Equity funds
• Index funds
• Lifecycle funds

Plans and Payout Conditions

Depending on when your third pillar contract was signed, your plan may have different rules:

Contracts signed after 2014, or pre-2014 contracts with a signed amendment:

• Option to withdraw your own contributions and earnings once every 10 years.
• Full withdrawal possible only after reaching retirement age.
• Contract cancellation is not possible.
• Tax-deductible contributions.

Contracts signed before 2014 without amendments:

• 9 different withdrawal plans.
• Contract can be canceled after age 55 with at least 10 years of contributions.
• Possible to withdraw up to 80% of the account value.
• Contributions are not tax-deductible.

!!Note: Signing a new contract automatically moves you to the new benefit plan – it is not possible to have two different plans simultaneously.

What is more advantageous? It depends on client preferences: liquidity vs. tax benefit.

Payout Options from Supplementary Pension Savings

Lifetime Supplementary Retirement Pension

• Your savings are used to „purchase“ a pension from an insurance company.
• Calculation is based on your pension account balance and average life expectancy for your gender in the current year.
• Upon payout request, you can choose to take 50% as a lump sum and use the remaining 50% to calculate a monthly pension.
• If the participant dies before the account is exhausted, the remaining balance stays with the insurance company to pay pensions to those who live longer.
• Not inheritable.

Temporary Supplementary Retirement Pension

• Based on account balance and chosen payout period. Minimum payout period is 5 years.
• Participant can take 25% as a lump sum and use 75% for monthly pension calculation.
• Paid out by DDS, which transfers the amount to the payout fund for further growth.
• If the participant dies before the account is exhausted, the balance can be inherited or assigned to authorized beneficiaries.

Lump-Sum Payment

• Full disability pension: 100% of the account balance is paid. Can be used for insurance purposes.
• Full old-age pension: if the account balance is less than twice the average monthly wage, 100% is paid. Useful for withdrawing from secondary contracts.
• In case of death, the authorized person receives 100% of the account balance. If no person is designated, the balance becomes part of the estate.

Early Withdrawal

• Only from participant-paid contributions and their earnings (not from employer contributions).
• Can request full or partial withdrawal.
• First early withdrawal possible after 10 years from contract signing.
• Subsequent withdrawals possible 10 years after the previous withdrawal.
• Early withdrawal does not terminate the contract.

My recommendation – choose the Temporary Supplementary Retirement Pension

• Possibility of partial withdrawal.
• Possibility of relatively quick withdrawal of the full amount if the minimum payout period is set to 5 years.
• The accumulated amount is subject to inheritance.
• The accumulated amount continues to grow, providing at least partial protection against inflation.

Fees / forms of remuneration

• A fee for managing the supplementary pension fund of up to 1% of the average annual net asset value in the contribution-based supplementary pension fund.
• A fee for managing the supplementary pension fund of up to 0.6% of the average annual net asset value in the payout supplementary pension fund.
• A fee for asset appreciation in the contribution-based supplementary pension fund of up to 10% of the appreciation. The entitlement expires if the appreciation is negative.
• A fee for transferring a participant to another supplementary pension company of 5% of the balance on the participant’s personal account as of the day before the transfer, but not exceeding 1 year from the effective date of the participant agreement.

Rights and obligations

What are your rights:

• Have one or more participant agreements with the same pension management company.
• Have one or more participant agreements with multiple pension management companies.
• Transfer between contribution funds within the same pension management company without a fee.
• Change the proportion of funds within the same pension management company without a fee.
• Transfer from a contribution-based supplementary pension fund to another contribution-based pension fund managed by a different pension management company. The company from which the participant is transferring must complete the transfer within 30 days of receiving the participant’s written request.
• Request pension management company to consolidate participant agreements if the participant has multiple agreements within one company.

What you must do:

• Without undue delay, notify the pension management company of changes in the data specified in the participant agreement.
• Without undue delay, notify pension management company of changes or transfer to another benefit plan.
• Provide the payroll/accounting department with a statement from pension management company for accounting purposes.

FAQ