Pension indexation

What it means

Pension indexation is the regular increase of pensions in payment so that they keep their purchasing power as prices rise. In Slovakia it happens every January automatically, without an application, and applies to old-age, disability, service and survivors' pensions.

The increase is set by a statutory formula which in recent years has been driven mainly by the rise in consumer prices for pensioner households. The formula has changed several times in the past, and in some years extraordinary adjustments were made during periods of high inflation.

Indexation differs from changes to the current pension value, which affects the amount of newly awarded pensions and follows wage growth. Indexation protects existing pensioners against inflation, while the current pension value passes wage growth on to new pensions.

How it works in practice

The rate of increase is announced by the Ministry of Labour, and the Social Insurance Agency applies it to the pension paid in January or February. The pensioner receives a decision on the increase, which is worth keeping, for example for loan applications or social benefits.

For employers of working pensioners, indexation has no direct effect on pay or contributions. For sole traders who draw a pension it does not affect the business either, but it raises total income, which may matter when entitlement to certain benefits or reliefs is assessed.

Alongside indexation there is the thirteenth pension, a separate annual benefit. In a pensioner's financial planning it helps to distinguish between the regular increase in the monthly pension and the one-off payment usually made in December.

What to watch out for

Indexation is based on past inflation, so when prices rise quickly the pension increase may lag behind current developments. Pensioners' real purchasing power can therefore fall temporarily between indexations.

Indexation rules are frequently changed for political reasons and as part of consolidation measures. In long-term planning of retirement income it is sensible not to rely solely on the current formula and to include personal savings, for example in the third pillar.