How much savings will pension funds swallow up?

The fees for administering the planned pension funds will be a key issue that decides the long-term benefit of the government’s pension reforms. The Finance Ministry on March 23 published material for public discussion that gave the first indication of the options on how and how much the private funds can make on managing future pensioners’ money.

The document describes four types of fund that are to be available and also the fees that the fund administrators would take, depending on the investment strategies and the manner of charging. The range is quite wide, from 0.3 percent to 1.5 percent of the amount administered. The question is whether the administration of the money will be an attractive proposition for financial institutes and their clients.

The answer is not clear-cut. According to Tomáš Matoušek, the CEO of pension fund Penzijní fond České pojišťovny, it will depend on whether and how the funds’ marketing activities will be regulated when acquiring clients or how extensive and costly the state’s regulation of the funds will be. In this case, for instance, it concerns the amount of capital that the fund administrators will have to keep to one side. “The estimated volume of assets that would be administered in the new pension funds will also be key in deciding the fees,” he added.

For illustration, it is possible to calculate how much the fees will burden the final yield: after 40 years, a 1 percent annual fee from the overall sum of the money invested is equivalent to a deduction of 18 percent on every contribution. So, if you were to invest Kč 1,000 a month, the fund would take Kč 180 right away, but it would then manage your money for “free.” The growth is nonlinear — according to analysts from bank Česká spořitelna, a regular fee of 2 percent, for instance, would correspond to a single charge of 32 percent of the investment.

Four investment strategies

People will be able to transfer 3 percent of the basis for calculating social security contributions to the “second pillar” of the pension system, meaning private funds. They will have to add an extra 2 percent. The MF counts on having four types of fund available:

• State bond fund (FSD) — investing into state bonds issued by the Czech Republic.
• Conservative fund (KF) — investing into state bonds issued by EU member states, into money-market tools and funds and similar liquidity assets.
• Balanced fund (VF) — part of the resources can, additionally, be invested into collective investment shares and securities
• Dynamic fond (DF) — it will correspond to an investment profile based on greater willingness to bear the investment risk. It will invest into money market instruments, government bonds, bonds issued by states or international institutions, other highly reliable bonds, shares and certificates of participation from standard funds.

Let’s look at the fees. The Finance Ministry proposes four options that should be comparable concerning their burden on investors:

1.  A fee charged from the volume of assets administered — a regular annual deduction with a level that would be graded depending on the fund. In the first five years, the rate would be higher and would then drop.

2.  A combination of a collection charge and a fee from the volume of the assets administered — a one-off charge from the monthly contribution plus a regular annual fee from the volume of administered assets.