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Czech second-pillar pension closure moves ahead

The closure of the Czech Republic’s voluntary second-pillar pension system, in place only since 2013, is finally set to start entering the statute books.

This follows approval by the Chamber of Deputies (lower house of Parliament) in May, and the Senate (upper house) the following month to close the entry of new members into the second pillar, and becomes law once signed off by president Miloš Zeman.

Despite the factthe government announced in November 2014 that its predecessor’s system would shut in January 2016, workers continued to join.

According to the Association of Pension Funds of the Czech Republic (APS ČR), by the end of March 2014, second-pillar membership had grown by 1.4% (1,170) year to date to 84,383.

Assets grew over the period by 19.1% to CZK2.1bn (€74m).

The faster asset growth is the most likely explanation for the continued interest, with new members viewing the system as an attractive investment opportunity for their contributions, reportedly as high as 150% in the case of some of the 20 available funds, according to Czech press reports.

Because joining the second pillar is irreversible, members will continue paying their contributions (3% of the social security tax diverted from the PAYG system matched by a further 2% of an individual’s wages) until the end of the year.

The second part of the system’s closure, covering the reimbursement of invested funds, has yet to be approved by Parliament.

Next year, members of the second-pillar system will have the choice of either receiving all the funds – in cash, into a bank account or a third-pillar fund if they have one – or returning the 3% back to the first pillar.

The second option guarantees them a higher state pension.

The monies will be reimbursed towards the end of the year, to take account of the later tax filings by the self-employed, and the time required for the fund managers to liquidate the assets.

Separately, the Finance Ministry has been working on proposals to boost membership and savings in the third pillar.

Participation in the long-established one-cap-fits-all “transformed funds,” which offer a minimum guaranteed return but were closed to new members in November 2012, continues to shrink, with membership as of the end of March 2015 down by 312,450 year on year to 4.5m.

Membership of the replacement, non-guaranteed “participation funds,” with their range of funds suiting different risk profiles, grew by a smaller 146,767 to 266,780.

The ministry’s proposals for the participation funds, earlier lobbied for by the APS ČR, include wider investment limits; higher asset management and performance fees for all participation funds except the conservative, government bond structures; the possibility of members saving for their children; and more generous tax-deduction limits for employees and employers.

However, the ministry appears to have shelved an earlier proposal to double the commission fees.

Pension companies had argued this would have made the product more attractive for agents to sell.

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