EUROPE - The Czech Republic is set to buck an eastern European trend by introducing a funded pension system at a time when many of its neighbours are contemplating rolling back long-standing pension reforms.

Parties in the country's governing coalition agreed last week to introduce a voluntary funded pensions pillar, which will be financed by diverting 3% of contributions to the country's existing pay-as-you-go (PAYG) pension system to the private pillar.

If the Czech Republic implements the plan, it would become the last of the European Union's new member states to introduce a funded pension system.
A pension reform was mooted in 2009, but foundered after the collapse of the then coalition government.

The move comes at a time when many of the country's cash-strapped neighbours are revisiting the funded systems they set up in the 1990s.

Bulgaria and Poland are both contemplating holding back a larger share of pension contributions for the state pillar and capping funds' management fees, while Hungary has dismantled its compulsory funded pillar altogether in a coerced transfer of accumulated pension assets to the state treasury.

Mindful of these precedents, the coalition's centre-right Civic Democrat party insisted on a voluntary scheme - under the original proposals, only those aged over 35 would have been able to opt out.

Hungary's pension reform, introduced in 1996, was compulsory, and during the nationalisation process, the government made much in its rhetoric of giving savers the "freedom to choose".

The Czech plan will still be expensive. Miroslav Kalousek, the finance minister, told Reuters the reform would cost CZK20bn (€820m) a year once the system was operational in April.

The loss to the PAYG pension budget will be offset by levying the top 20% VAT rate on a wider range of products, bringing in CZK58bn a year.

The International Monetary Fund welcomed the move. Zuzana Murgasova, the international lender's representative in the country, said a consensual reform reduced the risk of the measure being reversed by a future government.

"We fully support the broad-based public discussions that are currently ongoing," she told the Czech news agency.

However, the reform has been criticised by trade unions. Martin Fassmann, an economist at the country's trade union federation, warned the VAT increase might not fully cover the shortfall in the pension system.

"As a result," he added, "the pay-as-you-go system may be destroyed."

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