CZECH REPUBLIC - The 'fragile coalition" of the Czech government could "doom" planned pension reforms as potential rifts between the three coalition parties have already been highlighted, a risk consultancy has warned.

Analysis from the Country Risk Forecast arm of Control Risks, a specialist risk consultancy, revealed the three-step reform plan, could be difficult to implement as the ruling coalition party only has 100 of the 200 seats in Parliament and relies on the votes of two opposition defectors to pass a law.

The first stage, approved by the Czech Cabinet on February 11, plans to increase the retirement age to 65 by 2030; increase the number of years employees must work to receive a full pension from 25 to 35 years; and introduces increased penalties for people taking early retirement.

Once these have been passed, the second stage will introduce a "second pillar" pension scheme, which will be privately-funded and privately-managed but with mandatory participation.

The third stage would then allow people to split their contribution to the state pension between the state scheme and private providers of the mandatory second pillar.

However, Control Risks warned the first stage of reform, which is not expected to be implemented until 2010, "falls short of addressing any of the core problems of the country's outdated pensions system" which currently "absorbs up to 30% of the public budget".

The risk consultancy suggested the government had adopted a three-step approach to obtain gradual parliamentary approval for the reforms, which are opposed by the opposition Social Democrat and Communist parties, rather than "running the risk of having an entire legislative package dropped because of party disagreements".

Control Risks admitted this type of strategy "might bear fruit" but warned the "substantial" second-stage of reform, where the pay-as-you-go system is transferred to fund-based savings, is "unlikely to gain approval under the current political configuration".

But Petr Kudlak, senior associate at Mercer (Czech), claimed while the opposition parties disagree with the ruling coalition party's proposal, the Social Democrats "can be open to some partial changes of the current system".

Kudlak suggested the fragile coalition majority in the Lower Chamber of Parliament and a strong majority in the Upper Chamber makes it possible the reforms will pass the legislative process, however he pointed out the first stage of reform may face opposition from the Czech public.

"Support in the country cannot be judged at the moment as the pension reforms are still not well known to the majority of the population. But, generally, it will not bring popularity for the government, mainly because of increases to retirement age increases and the years of mandatory contributions," added Kudlak.
 
Mercer noted the Czech Republic is the last new EU member from Central and Eastern Europe (CEE) not to have introduced significant pension reform since 1989, and it warned the existing system has started to suffer from under-financing, while increased life expectancy and an ageing population mean without reforms the system may collapse in the future.

However the reforms will not take place until 2010 because the second pension pillar is not ready, as Kudlak warned there is "no clear idea how that should look", while there are also issues over plans to split contributions.

In addition, Kudlak said the government is waiting for feedback from other CEE countries, as Slovakia and Hungary introduced private mandatory pension pillar only to modify it after a very short period, while Poland and Romania have also implemented reforms.

That said, Control Risks warned the fragile coalition "dooms structural reforms" as discussions on the pensions system have "already highlighted possible rifts between its three constituent parties".

Meanwhile the country is also coming under pressure to speed up the reforms from organisations outside the country, as last month the International Monetary Fund (IMF) claimed the first stage of reforms would not stop deficits increasing and warned early reforms were the only way to keep public finances "sustainable". (See earlier IPE story: Czech Republic "needs early reforms" - IMF)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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