CZECH REPUBLIC – Changes in the long-established Czech third-pillar pension system that came into effect this year spurred a last-minute interest in the old system.
According to recently released finance ministry data for 2012, the number of pension plans grew by 12.5% year on year to more than 5.1m, and those with employer contributions by 3.6% to 1.3m, while the number of new pension contracts signed leapt by 146.8% to more than 1.1m.
This jump in new contracts was caused by changes in third-pillar legislation that came into effect at the start of this year, but it does not bode well for recent reforms designed to increase the relatively low amount saved for future retirement.
Under the previous system, in operation since 1995, members invested in a one-cap-fits-all fund.
Any losses generated by these funds had to be made up from their reserve funds, undistributed profits and, in the extreme, a reduction in share capital.
The guaranteed no-loss return forced funds into extremely conservative strategies that generated relatively little capital growth.
According to end-2012 data from the Association of Pension Funds of the Czech Republic, government bonds accounted for 84% of the CZK273.3bn (€25.2bn) of third-pillar assets, deposits 10% and equity a tiny 0.2%.
The nine third-pillar funds, now called ‘transformed’ funds, were closed to new members as of 30 November 2012 – hence the growth spurt in the last quarter of 2012 as Czechs rushed in to take advantage of the guarantee.
As of this year, new members can join one or more non-guaranteed ‘participation’ funds with differing profiles, with as many as five available, including an obligatory conservative fund, from some of the companies.
Tax deductions for both individual contributions and, where they choose to participate, employers, have long made the third-pillar attractive, and these remain in place.
Additionally, individual participants receive a state contribution related to the amount they contributed themselves.
In 2012, monthly individual contributions grew by 5.3% to a still meagre CZK465, and the state contribution by 2.5% to CZK108.
In order to encourage higher savings, the qualifying threshold for a state contribution was raised in 2013 from CZK100 a month to CZK300.
The 2013 regime also separates members’ assets from those of the newly licensed pension management companies authorised to manage participation funds, as well as the newly introduced retirement (second-pillar) funds.
At the time of writing, the Czech National Bank, the sector’s regulator, had licensed 11 pension management companies – the earlier nine asset managers and new entrants Raiffeisen and Conseq – 34 participation funds and 24 retirement funds.