CZECH REPUBLIC - The Czech Labor Ministry has announced a plan to create a special reserve fund that would be used to kick off pension reform in the next year.

The new fund should be financed from dividends from large companies where the state owns a stake.

Economists back the idea, but question whether proceeds from dividends would be sufficient to finance it.

"I cannot imagine that real pension reform would start without a special reserve fund which will help overcome the lack of sources at the beginning,” Pavel Sobisek, chief economist of the Czech branch of HVB Bank, told IPE.

“However, the fund would need at least 50-100 billion crowns in order to play a role in the pension reform. Such an amount cannot be obtained from dividends over a reasonable period of time."

Helena Horska, an analyst of Ceska sporitelna bank, agrees: "The volume of dividends is not going to be high enough to cover the financial needs of pension reform. The government has to find other funding sources." However, she admits it is better if the state uses dividends for pension reform than if it spends them for current consumption.

Out of seven blue chip stocks traded on the Prague Stock Exchange, the state owns stakes in two firms - power giant CEZ and the country's biggest fixed-line operator Cesky Telecom. CEZ proposes a dividend of eight crowns per share, up from 4.5 crowns last year. Cesky Telecom plans to pay a dividend of 17 crowns per share, down from 57.5 crowns in 2003.

The state has a chance to receive just several billions of crowns in dividends this year.

Both CEZ and Cesky Telecom are scheduled for privatization in the coming years. The right-wing opposition Civic Democrats Party (ODS) recently came up with a proposal to set up a similar pension reserve fund that would be financed through revenues from future privatizations.

Economists say that pension fund reform is becoming an increasingly pressing issue in the Czech Republic with an aging population and decreasing birth rates. The government coalition would like to maintain the pay-as-you-go system as the cornerstone of any future scheme.

On the other hand, the ODS party calls for a cut in contributions to the state-run system and setting up mandatory private pension insurance. The government says that parliamentary consensus is a pre-condition for pension reform and does not want to try to push through its softer version of pension reform with its only one-vote majority in the Chamber of Deputies.

So far, the five parliamentary parties only agreed to set up an expert group of up to twenty members that would analyze several options of pension reform which are under discussion.

However, no real progress has been made to date and analysts say it's likely the reform will not really start by 2006 when the term of the current government expires.

"I have always had doubts whether the government would be willing and ready to start real pension reform. A delay until 2006 is unfortunate but not fatal. The delay will prolong the period when the country lives at future generation's expense and will boost pain to be felt when corrective measures are introduced," says Sobisek.