PRAGUE, March 11 (Reuters) - The Czech ruling coalition has
scaled back plans for a sales tax rise to fund pension reform, a
key legislative agenda point aimed at defusing the threat that
deficits will rise as the country's population ages.
The three centre-right governing parties agreed last month
on the framework of a plan that will strengthen the savings
pillar of the pension system -- and is the first reform of the
system since the end of communism. []
It is also a move that also goes in the opposite direction
to steps by Hungary, which is renationalising pension fund
assets, and Poland, which also plans to restrict flows to
savings accounts to help the budget.
The Czech cabinet wants to link the pension reform vote in
parliament, expected in the autumn, to a confidence vote.
The following are the main details on the introduction of a
second pillar to the system starting in 2013.
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For TAKE A LOOK on pension stories []
Graphics on Czech pension assets http://r.reuters.com/den48r
Graphics on pension fund returns http://r.reuters.com/gup48r
Graphics on the demographics http://r.reuters.com/qat28r
Graphics on pension spending http://r.reuters.com/pat28r
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> PENSIONS
* Czechs spent 8.5 percent of GDP on pensions in 2008, below
the EU average of 11.7 percent, Eurostat data show. The average
monthly pension is 10,494 crowns ($582), versus the average
gross wage of 23,665 crowns.
* Under the current system, a pension tax of 28 percent is
derived from all salaries. The funds are directed to pay for
pensions of current retirees, under a pay-as-you-go system.
* Last year, the system produced a deficit of 29.3 billion
crowns ($1.62 billion), 0.8 percent of gross domestic product.
* An aging population will add growing strain, and voluntary
pension savings complementing the system have been too low.
Private pension assets are below 6 percent of gross domestic
product, less than half the number in Poland and Hungary.
* Under the proposed reform, those of working-age will be
able to divert 3 percentage points from their social insurance
tax, which will go to individual savings accounts, matched by at
least a 2 percentage point contribution from their net salaries.
* After retirement the pensioner has to decide between
choosing a lifetime annuity that is not subject to inheritance
and payments for 20 years, which could be inherited.
* The pension age will continue to rise after 2030, beyond
65 which is mandated by current legislation for that year.
COSTS
* Finance Minister Miroslav Kalousek estimated the opt-out
will cost the state 20 billion crowns per year. This is based on
50 to 60 percent of working age people participating.
* Tax rebates and increased social spending to compensate
families for higher value added will be another cost, but will
be lower than first planned as the measures will be softened.
It is not clear what the spending will be now. The parties
originally counted on combined spending of 10 billion crowns
when the VAT was to be unified at a higher rate.
* The parties also plan to raise current pensions based on
valorization, but it is not clear by how much. The labour
ministry estimated a less than 1 percentage point impact on
inflation, lower than in the previous plan -- which would signal
an up to 3.5 billion increase based on 2010 pensions spending.
* The coalition estimates the gap in the current
pay-as-you-go system this year to be 35 billion crowns. The
Labour Ministry believes this should fall by around 10 billion
if unemployment drops to 8 percent in the next few years from
the current elevated level of 9.6 percent.
REVENUE
* The government wants to unify value-added tax at 17.5
percent from 2013, lower than an initially planned 20 percent.
To transition, the lower VAT will rise to 14 percent in 2012
from 10 percent, and the upper VAT will stay at 20 percent.
Once unified, there will be no exemptions. Basic items like
food, healthcare items, heating, books and most home
construction are now taxed at the lower rate. The upper rate is
for goods and services like cars, electronics and restaurants.
For a breakdown of tax brackets (in Czech):
http://cds.mfcr.cz/cps/rde/xchg/cds/xsl/legislativa_metodika_3205.html?year=0
* The government estimates the VAT changes will bring in 26
billion to 27 billion in extra revenue in 2012, and 4 billion
less in 2013. This is lower than original plans for VAT
unification to generate an extra 58 billion crowns in revenue.
To make up the shortfall, the cabinet scrapped plans to
lower employers' contribution to employee's social tax, which
would have cost 20 billion crowns in the budget every year.
* The coalition also plans to direct dividends from state
companies, mainly energy firm CEZ <>, to the system.
Last year the state received 20 billion crowns from CEZ.
* Revenue will go to cover opt-out costs and also help pay
for the deficit already in the current system. The money raised
by the VAT rise in 2012 will be set aside for the 2013 launch.
SECOND-PILLAR PENSION FUNDS
* The social insurance tax diversion will go into so-called
second-pillar pension funds which will offer four investment
strategies, defined by level of risk. The lowest level of risk
will be funds investing solely in Czech government bonds. The
next level would be investments into quality sovereign bonds.
* The higher risk strategies will be able to invest into
bonds, stocks and funds. The new pension funds will only be able
to invest in publicly-traded assets.
They will be able to invest in riskier assets via other
funds, according to the Finance Ministry proposals.
* The ministry is proposing that funds invest at least one
third of the portfolio in Czech crown assets. There will be no
obligation to invest in Czech stocks.
* To gain a license, pension funds will have to sign up a
minimum of 50,000 clients in each of the four profiles. This
number might be adjusted after the start of the reform.
* The ministry plans for clients only to pay asset
management fees, not performance fees. This could be around 2
percent for the riskier profile and lower for conservative
strategies.
* At the start of the reform there will be a transformation
period of two to five years when fees might be higher. After
that the government might also widen investment strategies.
* Clients who are five years before retirement will be
automatically diverted into the conservative fund, unless they
specifically decide otherwise. This should minimize possible
losses in riskier assets just before retirement.
* It will be possible for the clients to change the fund and
the strategy once a year, however it will not be possible to
invest into two strategies at the same time.
THIRD-PILLAR PENSION FUNDS
* Existing voluntary pension funds, the so-called third
pillar of the pension system, will be able to invest in a wider
range of assets.
* The Finance Ministry is proposing to cancel a breakeven
requirement for these funds where losses are covered with fund
administrators' own capital. Industry players have said this
requirement causes more conservative strategies, lowering
returns.
* The government also wants to limit the state subsidy that
goes into the third pillar.
(Compiled by Robert Mueller and Roman Gazdik, editing by
Jason Hovet and Patrick Graham)
