Association of Pension Funds (APF) President Jiří Rusnok maintains that under the current circumstances APF’s members would not want to take part in the pension reform. Even the financial officer of AXA penzijní fond, Mojmír Boucník, said that after their experiences abroad his shareholders won’t rush into the Czech Republic.
In both Poland and Slovakia the pension reforms didn’t meet expectations and they recorded loses. But is this merely a threat or pressure on the Ministry of Finance to improve the conditions for the pension funds?
In an interview for Czech Position, Pavel Jirák, the executive director of Penzijní fond Komerční banky, says right now it is difficult to guess whether shareholders in today’s funds will be interested in getting involved in the second pillar. One reason is that the detailed parameters of the system are not yet known. Penzijní fond Komerční banky is the pension fund subsidiary of Komerční banka (KB), which itself is majority owned by France’s Société Générale.
Q: What parameters should the second pillar have to make it an interesting business proposition for pension funds?
A: The key issue is how interesting it will be for the citizens. If, say, 500,000 people join, then it will have a big effect on the shareholders’ decision. On Tuesday, Deputy Minister of Finance Klára Król said they intend to put forward a capital requirement for the pension companies in the order of Kč 500 million. If those half million participants paid a 1 percent fee from the volume of the assets managed, the sum would be so low that the return on the investment would be in the order of decades. So it is very debatable whether the shareholders would even decide to set up a pension company.
Q: Can you give the pension companies’ proposal with regards to the capital?
A: APF proposed Kč 300 million, which would include the pension companies’ capital for running the second and third pillars.
Q: The capital requirement is just one of the parameters.
A: The second fundamental area is distribution and brokering. It’s necessary to avoid the excesses of Slovakia. There the pension companies paid brokers up to 10,000 Slovak crowns per person. Now they have billions of unamortized distribution costs hanging in the balance. It is essential to set a limit for brokering.
But in any event, the investment brokers should work the market with regards to the complexity of the matter and the low financial literacy of the Czech population.
Q: Has the Ministry of Finance given you any information on the level of these limits?
A: Not yet. It is difficult to estimate what sum the pension companies should allocate for these purposes. Nevertheless, Deputy Minister Król spoke about there even being a limit for marketing costs and for the other business costs per contract.
Q: What about the costs for staff and equipment?
A: Pension funds have relatively robust IT systems that administer over 4.5 million subscribers. They communicate well with the Finance Ministry about state contributions, but they lack the investment component. So it was necessary to supplement the system with other applications and information providers such as [news agency] Bloomberg. That is if they were to revalue the portfolio daily, which doesn’t work in pension funds right now. Certainly there would be monitoring costs. I assume that they would have to give the press some information, possibly on a daily basis, and also the Czech National Bank (ČNB) and the Finance Ministry.
Q: What level should the charges be set at, and how should they be constructed?
A: The level and manner of calculating the charges is crucial because, in essence, it will be the pension companies’ only source of revenue. ‘The charges in the second pillar should be balanced out so that they don’t overly burden the subscribers’ revenue.’On the basis of this, the trade and marketing costs don’t have to be overly regulated because if the charges bring in revenues in the order of tens of millions of crowns, then it will only cover the costs for employees, IT systems, marketing and distribution. It is important to keep the costs for the entire system to a minimum. The charges in the second pillar should be balanced out so that they don’t overly burden the subscribers’ revenue; but also so that the pension companies’ investments had a return over a certain time horizon.
Q: So far we’ve spoken about the reform from the standpoint of the funds. However, the current government proposal doesn’t particularly motivate people to take part in the second pillar.
A: For the majority of people the parameters as they are currently set are not attractive enough. People have to see clear benefits. Some changes must be made — and they don’t have to be fundamental ones.
A: For instance, the difference between the pension that people would receive from taking part in the second pillar and the one from staying in the pay as you go system should be reduced. Jaromír Drábek, the minister of labor and social affairs, mentioned something around 15 percent. That’s too much. If the difference was between 5 and 10 percent, it would definitely be interesting for people.
Q: Have you got any other proposals?
A: There are just three possibilities to draw your pension. The shortest one is a pension after 20 years. It could be shorter, say 10 to 15 years. In Slovakia they also have a “program selection” — part of the money can be taken as a lump sum when you retire. And we can talk as to whether it will be 10, 20 or 30 percent of the amount saved. In addition, I’m convinced that the assets in the phase of saving and paying out the pensions should be subject of inheritance.
Q: Will that be enough? Do people know why it is necessary to carry out a pension reform and actively take part in it? The Ministry of Labor maintains that if they had an intensive campaign to explain the matter it would be too soon and a waste of money.
A: I don’t agree with the opinion that it is too early to communicate anything until the parameters have been approved. There has to be a clear media campaign — if we don’t carry out the reform, the demographic changes will mean we end up here. What this will mean for our generation and that of our children. This campaign should already be running.
Q: When people choose an investment strategy, will the low level of financial awareness play a role? Besides the four proposed options (the state bond fund, the conservative, balanced and dynamic funds) shouldn’t there also by a “life-cycle” fund that buys more dynamic investments for young people and, as they get older, increases the share of conservative investments in the portfolio?
A: In the system as it is now, the Czech state bond fund is redundant. In essence, the conservative fund should be less risky because it should invest into state bonds from EU countries with a high rating. But I see it as a political casualty to the requirement for some guarantee. ‘In the system as it is now, the Czech state bond fund is redundant.’
Concerning the life-cycle fund, the current proposal for the reforms will have similar mechanisms built in. People will be able to divide their contributions between the individual funds. In addition, there will be an “autopilot” — at a certain time, let’s say five years before retirement, the resources will be compulsorily transferred from the dynamic fund to the conservative one. The citizen would then have the option of disagreeing with this in writing if, for instance, they believe that the markets will grow.
Q: How many people do you think will join the second pillar? The government is expecting 50 to 60 percent of the economically active population — over 2.5 million people.
A: We haven’t done a survey yet, but the population evidently sees the reform in a negative light. In this situation it is difficult to make any prediction. If, however, they make the system attractive, financial brokers and pension companies will be able to explain the advantages and disadvantages of the various options. And if the government starts to communicate the pension reform in a better manner, I think the lower limit would be a million.
Q: Is there any point in implementing the second pillar if there is already a relatively successful and functional supplementary pension insurance in the third pillar?
A: The best pension reform for the conditions in the Czech Republic would be introducing a mandatory second pillar. Despite this, I am convinced that the system can work well.
More stories on pension reforms can be seen here.