Second pension pillar now open for business

The second-pillar pension program was launched Jan. 2, with employees now able to transfer some of their state pension contributions into the controversial scheme.

Although polls have indicated falling interest among the public in the initiative, which acts as a compromise between the state pension and purely private provision, the authorities have insisted it is necessary as the population ages.

Individuals who sign up divert 3 percent of their gross salary into the scheme, and as a result reduce from 28 percent to 25 percent of their salary the amount they pay into the state social security contribution.

An additional 2 percent of their salary is deducted by employers and transferred into the program, which consists of individual accounts managed by private pension companies.

Many private pension providers, among them ING and AXA, are not taking part, and the opposition Social Democrats (ČSSD) have said they would scrap the scheme if returned to government, something that could happen next year during scheduled elections.

Although the providers that are taking part emphasize that signing up is simple and can be completed in just half an hour, analysts believe doubts over the future of the scheme will reduce the number of people choosing to take part.

"There are big uncertainties and that raises the fears of people. That will be the main factor behind the unwillingness of people to sign up for the second pillar," said Milan Vaníček, the chief analyst at J&T Banka.

A survey by consulting company AWD, released Jan. 3, found just 4.8 percent of Czechs were interested in the second pillar, down from 11 percent in the summer. Other estimates reported by media have put the figure at 15 percent of employees, both well below the government's prediction of 50 percent.

In November, a poll by Ipsos published by Mladá fronta Dnes found that only 6 percent of Czechs agreed with the scheme, with 54 percent of respondents saying they were firmly opposed.

A key factor that could deter people from signing up, according to Vaníček, is that calculations have indicated that only those earning about 25,000 Kč or more a month will be better off financially if they joined.

"The average income here is 23,000 Kč, so it's even lower than the threshold," he said, adding that the number of people joining was likely to be "very low."

Broadly speaking, joining will more likely prove to be an advantage for younger entrants, and from the second half of this year only those aged below 35 years of age will be eligible to enter. Those who have signed up for the program, which consists of four types of funds, will not be able to leave.

There have been concerns that the state pension system could be weakened by the second pillar, as contributions into the first pillar will be reduced once an individual joins the new program.

Some have questioned the need for a second pillar in a country where the "third pillar" of purely private pensions is thriving, with 4.7 million participants.

Despite the criticism, in recent comments to media, Prime Minister Petr Nečas, who has blamed a "massive negative campaign" for opposition to the program, stated that radical changes to the pension scheme in the Czech Republic were needed.

The ageing population, brought about by improved life expectancy and lower birth rates, is seen as putting more pressure on state pension funds, making improved private provision essential if pensioners are to enjoy a decent standard of living in retirement.

"Currently there are 1.8 economically active persons for every pensioner, while in 2050 there will be 1.2 economically active persons for every pensioner. These simple numbers show that there is a need for dramatic change to the pension system; cosmetic changes are simply not enough," Nečas told the media.

The authorities have said the large deficit in the state pension system, which could grow as high as 50 billion Kč, should encourage people to search for alternative provisions.

However, the second pillar as proposed will not deal with the challenges created by demographic changes, according to Vladimír Pikora, the chief economist at Next Finance.

"It doesn't solve anything; it just solves the situation with rich people, because poor people will not have enough money to save any money in the second pillar. I'm afraid it doesn't change anything, because almost nobody will join," he said.

Pikora predicted that as few as 100,000 people would enter the program, well below some earlier estimates that have put the likely figure as high as 500,000.

Given the opposition to the second pillar and possible changes to the scheme that have already been identified, Pikora predicted the Czech Republic would probably follow Slovakia, which he said had seen continued instability in its pension provision.

"It will be change, change, change. It will be permanent change," he said.

Daniel Bardsley can be reached at
business@praguepost.com