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Erste Group fears 'second Hungary' in Czech Republic

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  • Erste Group fears 'second Hungary' in Czech Republic

EUROPE - Austrian banking group Erste Group has called on the Czech government to create more incentives for people to join the funded second-pillar pension system currently in the works.

Last week, the Czech government confirmed it was looking into the possibility of creating a voluntary supplementary pension system, into which 3 percentage points of pension contributions from the first pillar would be transferred. 

People who opted would have to pay another 2% of their gross wages into a pension fund.
In a special report, analysts at Erste Group, which has operations in the Czech Republic, wrote: "The major risk is that only a small part of the population will opt in, and this immediately creates the risk of (at the time of retirement) there being a much larger share of the population that has not been saving over its productive life and now finds its state-guaranteed pension too 'low'."

They contrasted the situation to that in Slovakia, where a few years ago a voluntary second pillar was set up without additional contributions and which 60% of the eligible workforce joined.

If too many people remain outside the second pillar in the Czech Republic, the pension gap could lead to political pressure to confiscate savings in the second pillar - "see Hungary now", Erste analysts warned.

The bank called on the government to "force a sufficient number of people" to opt in - "at the very least by saying outright how much the government pension will be and how much funds can add".

In general, the report states that the government's current proposal appears to be "more of a trigger for discussion than a fully articulated and carefully crafted plan".

Among the questions that remain unanswered are those regarding investment regulations, as well as choice of life-cycle funds and switching between risk profiles.

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