Supplementary pension insurance in the Czech Republic

In connection with the reform of the pension system in the Czech Republic, there is a debate over how it should be financed. Discussion particularly concerns the role of the pension system’s first pillar, i.e. the system routinely financed and guaranteed by the state, and the role and form of the second pillar, the involvement of the population itself, for instance by means of supplementary pension insurance.

This question, which in the year before the general election has a clear political accent, has however to some extent already been answered by the public: according to data from the Association of Pension Funds of the Czech Republic (Asociace penzijních fondů České republiky, APF), by the end of June 2005 approximately 3,135,000 people had taken out supplementary pension insurance, an increase of approximately 186,000 people on the start of the year. One positive finding is that among new clients for the pension funds, slightly more than half are under forty years of age. A total of CZK 103 billion has been deposited on client accounts. Present statistics therefore show that almost a third of the Czech population has entrusted money to private pension funds. However, in view of their relatively low deposits, it seems that even after operating for eleven years the supplementary pension insurance system is still at the start (on average, each client has saved just CZK 30,000).

Funds and guarantees

Pension funds have been in existence in the Czech Republic since 1994, when the first funds obtained licences from the Ministry of Finance of the Czech Republic (Ministerstvo financí České republiky, MF ČR). The number of funds soon rose to over forty, but in consequence of many subsequent mergers there now remain eleven funds. In the first half of 2005 pension funds generated a profit of CZK 2.2 billion, CZK 987 million more than in the same period last year.

The Czech supplementary pension insurance system is based on a state financial contribution for clients, and also offers certain tax advantages for both clients and employers, who as part of corporate welfare policy, and in some cases in accordance with collective agreements, contribute to their employees’ pension insurance. At present employers pay contributions for a total of approximately 730,000 employees, i.e. one in four pension fund clients. Employers base their actions on the fact that contributions are a motivating factor for employees, and in terms of the financial demands made on a company they are more advantageous than for instance a comparable wage rise (for employers, contributions to employees’ supplementary pension insurance are a tax deductible expense up to a level of 3% of an employee’s gross salary).

According to an analysis by the CRA Rating Agency, the Czech supplementary pension insurance sector is transparent, and participation in pension funds is relatively safe for their clients (which is also due to the fact that the funds’ shareholders are for the most part major European or global financial groups). 'No world financial institution could let a Czech pension fund collapse; it would damage its reputation', the President of the APF, Jiří Rusnok, told the national newspaper Právo on 23 July 2005.

State seeks to adjust the terms for supplementary pension insurance

Although effective agreement between political parties on the shape that pension reform CZ0508102F should take is unrealistic in the run-up to the general election, the state has given signals that it wants to improve the terms for supplementary pension insurance. At the beginning of August 2005 the MF CR put forward proposals to make the system more attractive. For employers that would involve a 2% increase in the level of tax-deductible contributions, to as much as 5% of an employee’s gross salary. Employers would however lose the option to specify which insurance company or pension fund an employee would use.

For the future, better terms are being drawn up for clients. So far it has been the case that a client can reduce their tax base by up to CZK 12,000 a year, and by a further CZK 12,000 if they take out life insurance. The MF ČR´s idea is for a uniform tax-deductible sum of CZK 24,000, which clients could split between the two products as they choose. They could also opt for just one of those products if they felt that was more appropriate.

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