In July of this year the parliament of the Czech Republic adopted a new law amending the pension reform legislation passed in 1994. Its aim was to improve on the earlier legislation, which critics had labelled inadequate.
Even the government conceded: “It (Act 42 1994) was not as effective as hoped in terms of state regulation and the guarantee of efficient long-term management.”
Currently the pension system has three aspects: firstly, a mandatory basic state pension insurance system, funded by social insurance payments; secondly, voluntary private sector arrangements to which the state will make certain matching payments in respect of members’ contributions, and finally voluntary private sector insurance contracts.
The Czech government has also appointed western advisers to help prepare a policy document on employer-sponsored supplementary pension provision, which has been on the agenda since 1998. Iain Batty of law firm Cameron McKenna, one of the advisers involved, says: “This should be the first step towards creating an occupational pensions system in the Czech Republic.”
Jiri Rusnok, deputy minister at the Ministry of Labour and Social Affairs, says that the pre-legislative phase could begin as early as the end of the year. “In August 1998, the government bound itself to lay the foundations for the creation of employer’s pension funds based on a non-profit principle.
“The main principles of the scheme should be submitted to the government by the last quarter of 1999, with a view to launching in 2002.”
Batty is confident that a meeting with government and employers representatives this month will see the way cleared for legislation. “All reports are in the government’s hands, and the process should be on target,” he says.
Tomas Machanec of Allianz-Zivnobanka Pension Fund is less certain. “Occupational pension funds still form a part of the government
programme, but progress has been very slow, and the termination of this plan cannot be ruled out.”
The original 1994 legislation provided for the founding of open
pension funds as legal entities. The
original 30 or so funds have now been
whittled down to just 20. Originally
the minimum capital was CZK20m (e620,000), but Clause 2 of the new law increases this to CZK50m.
Until last month there was little in the way of tax relief, and top-up provision was thus limited. The new legislation has attempted to correct the situation, as well as introduce measures to improve the management of the funds.
The private funds had attracted 1.7m contributors by the end of June this year, from a workforce pool of some 5m. Contributions, however, are small and administration costs high. There are also the usual teething problems seen across eastern and central Europe of transparency and enforcement.
The new legislation has introduced enhanced tax relief and increased top-ups in an attempt to not only attract more contributors, but also to increase the amount of money which the work force is prepared to put away in the funds. It also provides the Ministry of Finance with more powers in the overseeing of the funds, but critics again claim that it falls short of solving the transparency problem.
“The new legislation is designed to improve state supervision and strengthen the depository’s role,” says Rusnok. “We also intend to provide more openness for the contributor and place a higher level of responsibility and duty upon the fund managers. We are also increasing state contributions and providing tax breaks for employers and employees.”
There are critics of the new act, however, and the question of transparency is high on their list of grievances. “There would be greater transparency, and safety if clients’ funds were legally separated from the shareholders’ funds and costs, and if funds were required to raise their capital if the market price of the portfolio falls below total accumulated client liabilities,” says Machanec .
Even so, he agrees that the legislation has included most of the pension funds, recommendations. “If I have another criticism it is that the government did not react to the proposed regulation of transfers of clients between funds which brings with it substantial additional marketing and administration costs,” he adds.
Increased government support is to manifest itself in the form of a fixed monthly contribution in proportion to the individuals payment into the fund. At the present time the minimum amount paid by an individual is CZK100 per month. The state will now top up with a fixed minimum amount, rising as a percentage of the employee contribution up to a limit of CZK500, after which no increase will apply.
Under the new legislation, employers will receive a tax credit of up to 3% of wages subject to certain ceilings, and the employee 5%, including the 3% employers allowance, again subject to a ceiling, in this case of CZK12,000. The government hopes that this will lead to workplace agreements and collective administration, making the gathering of contributions simpler and more cost effective.
The positive results of these measures are already being seen, with more companies taking the decision to enter schemes. One of the major themes in the new government’s approach to pensions is their rejection of the three pillar system popular throughout the rest of the region. Indeed, Rusnok’s ministry is on record as being opposed to the system, as it does not see compulsion playing a role in the development of alternative savings and pension schemes. That is to say they are disinclined to promote a mandatory privately managed private sector, but instead intend to boost voluntary funds. “The government does not intend to penalise the basic pension system in favour of developing private and occupational pensions. Even so, reforms are focussed on promoting voluntary systems of pension insurance, so that an adequate pensioners' income level can be guaranteed by a combination of obligatory (state) and voluntary insurance,” he said.
Many social observers including a number of trades unions have expressed concern at the government’s approach, and in particular their rejection of the three pillar approach, including compulsory private provision, which other eastern and central European countries have adopted. The fear is that without some measure of compulsion, a gap will appear between the have and the have nots, penalising some older pensioners, and putting strains on the social fabric.