PRAGUE, Feb 28 (Reuters) - The Czech ruling coalition agreed
earlier this month on an outline of pension reform, the key
point of an agenda aimed at defusing the threat that budget
deficits will rise as the country's population ages.
The plan to strengthen the savings pillar of the pension
system 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 following are the main details on the introduction of a
second pillar to the Czech pension system, the first reform of
the system since the end of communism.
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ANALYSIS on the planned reforms []
INTERVIEW on regulatory changes []
Graphics on the demographics http://r.reuters.com/qat28r
Graphics on pension spending http://r.reuters.com/pat28r
Graphics on pension fund assets http://r.reuters.com/jad38r
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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
* The government sees the total cost for the budget at
around 66 billion to 95 billion crowns per year, depending on
inflation and unemployment, including deficits already accrued
annually in the pay-as-you-go system, according to various cost
items announced.
* 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.
* The coalition also agreed to lower the contribution that
employers pay on top of employee's social tax by 1.8 percentage
points, at a cost of 20 billion crowns to the budget every year.
* Current pensions will be raised at a cost of around 6
billion to 11 billion crowns depending on inflation.
* Tax rebates to compensate families for higher value added
will cost another 6 billion crowns. Another 4 billion crowns
would go to increases in social spending.
* The coalition estimates the gap in the current
pay-as-you-go system this year to be 35 billion crowns. The
parties believe this should fall to 10 billion to 15 billion if
unemployment drops to 7-8 percent in the next few years from the
current elevated level of 9.7 percent.
REVENUE
* To help cover those costs, the government wants to unify
value-added tax at the current higher rate of 20 percent.
Several staples will be kept at the lower rate of 10 percent.
The VAT change could take place as early as the fourth
quarter of 2011, but the government still has to approve this.
* The government estimates the VAT unification will bring
revenue of 58 billion crowns per year, which will help pay for
the reform as well as the deficit already in the current system.
* 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.
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)
