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New Czech government looks set to dismantle second-pillar pension system

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The Czech Republic is close to forming a new government, whose policies include closing down the second-pillar pension system.

The second pillar was introduced by the former government of Petr Nečas at the start of 2013.

It was funded by diverting 3% of the 28% social contribution, alongside an additional 2% of wages from members.

The system was voluntary, but the decision, once made, was irrevocable.

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Nečas pushed through the changes despite warnings from Bohuslav Sobotka, chairman of the opposition Social Democrats (CSSD), that his party would scrap the system should it win the next election, scheduled at the time for 2014.

Nečas resigned in June following a series of scandals, while his presidentially appointed successor Jiří Rusnok failed to win the confidence vote for his caretaker government in August, precipitating an early general election in late October.

Following protracted coalition talks, Sobotka now looks set to lead a three-party coalition with political newcomer ANO 2011 and the Christian Democratic Party (KDU-CSL).

The coalition agreement includes merging members’ second-pillar accounts with those in the third pillar, and cancelling the 3% contribution.

The change would have a minimal impact on Czech finances, unlike Poland’s current second-pillar overhaul.

Pavel Jirák, chief executive and chairman of the board at KB Pension, said: “My expectation of this outflow is CZK800m (€29m) in 2014, slightly more than 0.2% of the state budget for pensioners.

“It was more of a political than an economic issue. The change is expected from the beginning of 2015.

“None of the participants would lose their second-pillar money through the merger, in accordance with the Czech constitution.”

What is not clear at this stage is what happens to those second-pillar members, thousands according to Jirák, without an existing third-pillar account.

The overall take-up of the second pillar is relatively low, with 83,753 members as of the end of November.

“By far, the most important reason has been the threat from the CSSD party, since the discussions about the creation of a second pillar started, to cancel it,” Jirák told IPE.

The requirement for workers to contribute an additional 2%, their inability to withdraw their monies before retirement and the legally capped low commission that pension companies could pay financial intermediaries also contributed, he said.

“We are still convinced the creation of the second pillar was the right step towards diversifying financial sources for retirement, and a good long-term solution given the unfavourable demographic trends and their negative impact on state pension financing,” he added. 

“So we are against this merger – but without any power to stop or influence it.”

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