27 June 2008

Czech Republic and Slovakia eye pension reforms

The Czech parliament approved changes to the pension system and Slovakia is planning to alter its private pension investment rules following pressure from the Commission, IPE reports.

The Czech parliament has finally approved changes to the pension system which will increase the State retirement age and incentives savings in private plans, and Slovakia is planning to alter its private pension investment rules following pressure from the European Commission.

 

Under the terms of the deal finally secured on Wednesday to ratify the Czech pensions bill, both men and women will now be required by 2030 to work until the age of 65, replacing an earlier agreement which would have seen men retire at 63 from 2013 and women retiring between the ages of 59 and 63 by 2013, depending on how many children they have raised.

 

Additionally, the number of years they are prepared to have worked before retiring will increase from 25 to 35 years, though this is unlikely to be controversial as ministry of social affairs officials told IPE in January the average number of years people work in the Czech Republic is 40-42 years.

 

As part of this latest round of reform, the Czech ministry of labour and social affairs has slightly improved incentives to both employers and employees if they contribute to saving for retirement.

 

Changes to state pensions policy are very much in line with other European countries. But an estimated one million trade union members staged a one-hour strike on Tuesday to protest against the raising of the retirement age and it has taken over six months to secure approval on this bill because of fierce opposition from the right-of-centre Christian Democrats.

 

Pensions experts say a substantial amount of work is still needed to really improve Czech individuals’ future pensions benefits, even though some of the reforms being discussed in parliament today (Friday) relate to the growth of private pension arrangements.

 

Jiri Rusnok, who is currently pensions director at ING and head of Czech pension fund association, but was formerly the Czech finance minister, told IPE the completion of this pensions bill should really only be considered “an informative document” as this is only the second of three phases to the government’s promised pension reform and completion of this stage means the first stage of the new law will only come into effect from next year.

 

“It should be viewed as an informative statement or an updating review of government policy which allows the government to say that we have discussed this together and discussed it with the industry and we now propose to do it this way,” said Rusnok.

 

“It does open the opportunity to build up the new pension company with they multi-fund approach but these are very small steps of adjustment or a ‘face lifting’ of the existing schemes.

 

“We are very much in favour of that change because we do think it is necessary to modernise the existing system, which is very old-fashioned in how companies can be run, how they are treated by the regulator.

 

“A small opt-out from the mandatory scheme will be the best encouragement of pensions savings. But the second option is what the government is now approaching, so lets modernise the system and incentives for employers and individuals, let’s give the pensions industry the broader opportunities to cover the differing needs of client segments. We have one fund for everybody but it is not useful. And there are very high level of guarantees on a yearly basis, which is crazy. A fund cannot be appropriately structured,” he added.

 

He suggests while additional work is need to grow Czech pension arrangement, the political will of the government means little real change is likely to be achieved.

 

“The best option would be to create a pension plan which would be linked to the existing mandatory pay-as-you-go scheme. But this is not possible in this Czech political environment. There is not enough will to do it. The government is too weak to be able to go through with such a major change in parliament. The left opposition is strongly against the reforms and it is unrealistic to expect it,” continued Rusnok.

 

At the same time as these pension changes are occurring, the European Commission (EC) is demanding to know why the Czech government still have tax rules governing interest and real estate income which penalises foreign pension fund investors.

 

The Czech Republic levies a 15% withholding tax on dividends paid to both domestic and foreign pension funds but, domestic pension funds do not effectively pay tax on these dividends as they can either credit the withholding tax against corporation tax payable on other income or they get a refund of the withholding tax.

 

This move by the EC was also accompanied by a demand issued to Slovakia to remove the investment restrictions on the third pillar statutory pension funds.

 

Officials in the Slovakian ministry of labour and social affairs have immediately responded by stating they are working on amendments to the social insurance and pensions savings act.

 

Under the current rules, Slovak third pillar pension funds must invest 30% of their assets in the Slovak capital market and are not allowed to invest more than 20% in fixed income notes issued by other EU-member states, even though this debt has government backing.

 

The EC claims these restrictions are in breach of Article 56 of the EC Treaty – relating to free movement of capital rules - so Slovakia now has two months to give officials a “satisfactory reply” or the government could face action from the European Court of Justice.

© IPE International Publishers Ltd.