CZECH REPUBLIC – The Czech Republic's second pillar, launched at the start of 2013, is failing to win over its workers and threatening political embarrassment for prime minister Petr Nečas's centre-right Civic Democrat-led coalition.

While other countries in Central and Eastern Europe have scaled back – or in Hungary's case abolished – their second pillars to rein in budget deficits, Nečas has long reasoned that the first pillar as it stands is unsustainable, and that the current level of state pensions cannot be maintained without large rises in taxes.

In 2012, the state pension deficit totalled CZK45bn (€1.7bn).

Under the second pillar law, those aged 35 years and over have until the end of June 2013 to join.

There is already speculation that the deadline may be extended or that this cohort may be given a further chance, not surprising given that, as of end April, only 31,985 had signed up.

This is well below the government's already scaled-down projection of 500,000 members by the end of June.

By contrast, the long-established third pillar had more than 5m members at the start of this year.

According to Pavel Jirák, chief executive and chairman of the board at KB Pension company, the main reason for the indifference is hostile public opinion.

"There is a strong negative campaign lead by the opposition party CSSD (Social Democrats), supported by trade unions, some academic professors, several economists, journalists and media," he told IPE.

"In addition to that, CSSD representatives several times warned the public through the media that they will cancel the second pillar when they get power after the election in June 2014."

Tomas Kofron, spokesman for Raiffeisen pension company, added: "There is low knowledge about the second pillar and its advantages.

"Most people still don't have any clue about the system, and pension companies have had less than six months to present a completely new product."

Given that membership is voluntary, but the decision, once made, is irrevocable, workers have to decide whether they can afford to participate – they have to add an additional 2 percentage points of their wages in addition to the 3 percentage points of the 28% social contribution funding the second pillar.

Then they have to choose a fund for their risk profile.

Each licensed pension company must offer a choice of four so-called retirement funds: state bond, conservative, balanced and dynamic.

"The majority of our clients are between 35 and 45 years old, investing in more dynamic products," says Kofron.

Jirák added that more than half of KB's second-pillar members were existing third-pillar clients.

The system's supporters maintain, nevertheless, that momentum is building.

"In April, we had the same number of participants as in the whole of the first quarter," Kofron said.

"Because of the closure of the system for the over 35-year olds, we expect a much higher uptake in the coming weeks."

Jirák said one-quarter of those who expressed an interest in the new system intended to wait until June.

A similar last-dash happened twice last year in the third pillar – in February, when members had their last chance to switch pension companies, and in November, when guaranteed 'transformed' funds were closed to new members and replaced by non-guaranteed 'participation' funds.

The government itself, having initially been accused of failing to explain the system to the public, responded in mid-May with a CZK20m promotional campaign of television advertisements, social media and a dedicated website, drawing further criticism from both the opposition and media.

The objections include the fact the government spent public money promoting a privately run system, and the campaign's lack of balance.

Studies such as that published by the Institute for Democracy and Economic Analysis, the think-tank arm of the Czech educational institution CERGE-EI, have shown that only the younger, better-paid and predominantly male members would ultimately get a better retirement income from paying into the second pillar.

The rest would be better off remaining exclusively in the state system.

Meanwhile, competition for clients among the six licensed pension companies offering second-pillar accounts is hotting up, as within two years of operation they have to achieve a legal minimum of 50,000 members.

Incentives include fee holidays for up to a year.

"Since these 'last call' campaigns are just starting, we may also see other incentives such as life insurance products or bank accounts free for several years," Jirák said.

Topics