CZECH REPUBLIC – Czech parliamentarians have finally cleared the way for the country's second-pillar pension system to start operating in 2013.

The lower house of parliament approved the Budget – which included an increase in VAT needed to fund reduced contributions to the state pension, and which prime minister Petr Nečas's government linked to a no-confidence vote – and overruled September's veto by president Vaclav Klaus of the second pillar itself.

The pension reforms were introduced by the centre-right coalition in 2011, at a time when other Central and Eastern European countries were either clawing back second-pillar contributions – as in the case of the Baltic states, Poland and Slovakia – or effectively nationalising privately managed systems, as in Hungary's case.

Nečas's Civic Democrat-led coalition argued that the Czech pension system – a state-run system alongside a sizeable third pillar with 4.7m members and some €10bn of assets under management – was unsustainable in the long term.

The Czech second pillar is to be funded with a 3% contribution from the existing 28% gross wage social security contribution, augmented by an additional 2%.

Workers have the choice to opt in, but having done so, cannot leave.

Pension companies must each offer four funds – a government bond fund, two balanced funds and an equity-weighted fund.

From the start, the second pillar attracted widespread opposition from trade unions, left-of-centre parties and latterly within the coalition itself from a Civic Democratic faction loyal to party founder Vaclav Klaus, and whose defections have left the beleaguered Cabinet scrabbling for a voting majority.

Klaus himself vetoed the pensions bill on the grounds of lack of political and public consensus.

The Social Democratic party, the largest opposition body – and currently the most popular party – has repeatedly stated that it would repeal the system if it got into power.

In November, it publicly advised fund managers not to bother participating, and while the next elections are not due until 2014, the government could fall before then.

Meanwhile, a recent opinion poll indicated that only some 9% of the public would join the second pillar.

Despite these inauspicious beginnings, most of the existing third-pillar fund management companies have applied to offer second-pillar funds, although they have scaled back their expectations of the numbers participating.

Pavel Jirák, chairman of the board and chief executive at Penzijní fond Komerční banky, initially expected around 750,000 to join the system, largely those on above-average salaries and younger workers. But he has since revised this down to 500,000.

"There is high political uncertainty, and we don't see significant interest from the Czech population yet," he said.

His pension company will also be using AXA, which announced earlier this year that it would not be participating, to distribute its products.

ING also announced in November that it would not be participating.

Jiří Rusnok, director of the ING Pension Fund in the Czech Republic, told IPE that while he supported the idea of individuals increasing their pension savings, the reforms lacked the support of a broad spectrum of society.

"There was no positive or educational campaign," he said. "People don't understand the changes, and the political risk is huge because of the opposition to the second-pillar launch."

Given ING's stance, Rusnok himself has also stepped down as president of the Association of Pension Funds of the Czech Republic.

The lack of public interest will also make it difficult for the smaller providers, Rusnok added, as second-pillar companies must by law have a minimum of 50,000 members within two years.

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