08/03/2011
By Ilonka Oudenampsen
In late February the Czech government presented the first draft of its planned pension reform. Although opening up the discussion is a step in the right direction, the draft still leaves many questions unanswered, according to Erste Group.
The main idea of the reform is to divert part of the payments to the current pay-as-you-go system into funds. Three per cent of the current pension contributions (which now total 28% of the gross wage) is to be diverted into private pensions. This will be allowed on the condition of employees contributing an additional 2% in excess of their current contribution.
A report by Austrian bank Erste Group, one of the largest financial services providers in Central and Eastern Europe, said that the release of the draft appeared to be “more of a trigger for discussion than a fully articulated and carefully crafted plan. This is evident not only in the haphazard fashion in which the plan is being communicated to the public but also in the fact that quite a few questions, some of them very important, remain unanswered.”
The Government has already made several amendments in the last few weeks. However, the major risk of the voluntary system remains: only a small number of the population might opt in. This would mean that the majority of people would end up retiring on a low state pension and might need to fall back on the state.
Erste Group praised the Government for opening up the discussion about pensions and it hopes that people will become more interested in how their pensions will look.
Petr Bittner, macro analyst at Ceska Sporitelna, the leading retail bank in the Czech Republic and member of Erste Group, said: “They are trying to motivate people to opt in this second pillar of pensions system. The primary target is to save on the state budget, which is under pressure with the ageing population and so on. So they try to increase money in the overall pension system by motivating people to add 2% to the current 28% of pension contributions.”
Bittner pointed out that since the launch of the draft report, the Government has already made certain changes and he said that it is likely that they will look into other aspects as well, before they finalise the most fundamental rules by August or September this year.
For Bittner the main issue that needs to be addressed is the voluntary opt in. Comparing the completely voluntary system of Lithuania to the proposal of the Czech government, he said that in Lithuania only 50-60% today enter this second pillar, which is what the Government also expects will happen in the Czech Republic.
“But I don’t believe it, because of this condition of increasing pension contributions by 2%. Then there are two other important things: people’s lack of trust in finances after the crisis and secondly is a case of Hungary, where the state renationalised private investments, they even make it to the pay-as-you-go system. Because of this, I think that the real share of switching will be probably somewhere between 30-40%.”
The Czech Republic plans to have the reforms ready to be implemented on 1 January 2013. The main changes will be approved this autumn, while 2012 will offer enough time to prepare for the changes. People over 35 will be given the option to choose to enter the system in the second half of 2012.
Other stories you may find of interest:
Germans require education on pensions – Fidelity
Many Germans are clueless about the build-up of their pension, a new study by Fidelity International has shown. The investment company said that despite all the initiatives to improve people’s pensions knowledge, most employees neither know how high their pension will be nor are they familiar with the three pillar pension system
Industry responds to EIOPA consultation
Pension and investment associations across Europe have expressed different views on what they see as the future of cross-border pension provision, as the European Investment and Occupational Pension Association (EIOPA) closed its consultation on the IORP Directive yesterday
European mandates June 2009
Pension Insurance Corporation has appointed Schroders to manage an initial £100million segregated Global Corporate Bond Portfolio
