Mandatory pension savings faces questions, caveats

Essentially, there has been talk of reforming the pension system since November 1989. Now, it finally appears as though the current governing coalition might actually implement it. “Pension reform is basically ready,” said Finance Minister Miroslav Kalousek (TOP 09). Prime Minister Petr Nečas (Civic Democrats, ODS) agrees.

Under pressure, Nečas is backing a proposal to merge the Czech Republic’s two value-added tax rates at 19 percent, thereby raising the overall take, with plans to divert a portion of contributions to the state pay-as-you-go system to private pension funds (the opposite of what Hungary did in 2010).

The new Czech pension system should have three linchpins. The first of these is continuous in nature, in that those who are currently working will mandatorily pay for the income of today’s pensioners. The second linchpin adds a new capital aspect to retirement in that people will have to compulsorily pay for future pensions. The third linchpin is supposed to be voluntary, allowing people to continue saving for pensions on the basis of a purely commercial contributory pension plan.

So far, disputes have been waged over financing the second linchpin. Should savings for this retirement income be mandatory or not? According to opponents, the government cannot force people to invest in private funds without the state taking over liability for their contributions. This argument was also frequently cited by senior managers in Czech Position’s “Voice of the Elite” survey who don’t agree with obligatory savings in private funds and who predominated by a narrow margin.

This respondent was among their ranks: “A so-called second linchpin for the pension system is right, but the problem is compulsory saving in ‘private’ funds. In view of the negative experience of Czech citizens with private funds of every type in the recent past, there should be the option of saving in a ‘state’ or ‘public service’ pension fund,” the manager said.

“Nonetheless, the establishment, construction and operation of such a fund should be depoliticized as much as possible and should also be subject to public supervision. Foreign banks and their Czech affiliates hold 95 percent of the financial market. Consequently, it is possible to expect that the profits from a business that is as highly lucrative as the administration of pension funds would only improve the balance sheet of troubled institutions such as Erste [the Austrian parent of Czech bank Česká spořitelna] or KBC [the Belgian parent of Československá obchodní banka].” ‘The establishment, construction and operation of such a fund should be depoliticized as much as possible and should also be subject to public supervision.’

The next manager expressed the opposite viewpoint. “It should be [mandatory] but under precisely specified conditions. Besides private funds, a fund that is established and administered by the state should also exist in which the state would guarantee contributions as well as revenues that are set by way of a certain share of the discount rate on contributions received, for example,” this manager said.

“This fund would invest in guaranteed securities and pay the costs for its own administration from revenues. It would create a reserve for periods of low revenues and put any possible remainder in an account for clients,” the manager said.

“Private funds should invest according to strict rules. They should not exceed a set level of conservatism and they should be subject to the stringent supervision of a state institution such as the Czech National Bank,” the manager continued.

“It should be possible to transfer from one fund to another in accordance with set rules and for a state-regulated fee. A similar approach should be taken toward the funds as that which applies for banks or public-interest institutions. And they should be obliged to provide information on a quarterly basis like companies listed on leading international stock-exchanges. Although strict conditions would restrict the profit-making options of private funds to a certain extent, particularly at the outset, it is right to be very cautious in the nontransparent environment that prevails in our country,” the manager added.

“In the initial stages, the state will have to ‘help out’ a little bit with some kind of incentive, such as paying administration costs, supporting savers or providing support in some other legally acceptable form. I am very curious about the pension reform option that will be adopted — that is if any will be adopted,” the manager concluded.

This next senior manager also rejects the idea of compulsory savings: “It should involve voluntary saving. If the state makes this compulsory, it should guarantee the money that is deposited in case somebody embezzles or the fund makes bad investments.” 

The right to explore other options

Although another positive answer defends the second linchpin, the respondent maintains that everyone should have the option of freely deciding about compulsory saving. “The second linchpin of the pension makes sense and it should comprise part of the reforms. Countries such as Germany and Sweden, who already reformed their pension system in the past, also incorporated this ‘co-financing’ of pensions into their reforms. Their experience indicates that it is the right way, and essentially the only possible way, of doing this,” the respondent said.