CZECH REPUBLIC - A mandatory switch to a defined contribution (DC) system, to phase out the existing 'full' pay-as-you-go (PAYG) pension system should be an option for Czech pension reform, claimed the Organisation for Economic Cooperation and Development (OECD).

In its 2008 Economic Survey of the Czech Republic the OECD warned a major issue for fiscal sustainability in the Czech Republic is ensuring that the pension system can cope with population ageing.

It highlighted that the "immediate problem" is the age of retirement, as although current reforms will increase the state retirement age to 63 for men and between 59-63 for women in the decade starting 2010, the OECD urged further extensions, as "remaining at this retirement age implies large deficits in the public pension fund".

The report also said that there was a case for "phasing out early retirement options altogether", as it claimed working pensioners make pension contributions but there is no adjustment of the payout. "Some consideration could be given to pushing the pension reductions for early retirement above neutrality," it stated.

The report, which was launched at a press conference in Prague by Angel Gurría, the OECD secretary-general, also highlighted that a "final decision should be made soon about further old-age pension reform".

Research showed the current PAYG system is sustainable as long as appropriate adjustments are made to areas such as the state retirement age, however it pointed out the Czech Republic is currently discussing the possibility of introducing a DC "carve out" where a share of the pension contribution would be channelled into private pension funds, in a similar way to Slovakia, Hungary and Poland.

The OECD survey warned that this approach has "fiscal implications", as the contributions fall immediately but savings on the payout side do not begin until the first pensioners on the new scheme retire.

In addition, because the "switching rules" between the PAYG and DC systems would be "critical" to the fiscal and monetary implications of the new scheme, the OECD suggested the Czech Republic should extend its discussions to consider phasing out the PAYG system.

The report stated: "Mandatory switching that would phase out the 'full' PAYG pension should be considered, rather than the current proposal that would allow all future generations to choose between the two systems".

The survey claimed that "providing a permanent choice risks additional public expense because net contributors are likely to switch whilst net beneficiaries will stay with the full PAYG pension".

Meanwhile, the findings of the survey revealed that though voluntary pension saving in third-pillar pension schemes is common, the actual level of contributions is low. The combination of direct subsidy and tax incentives "make some saving attractive, beyond this the returns are low".

Therefore the report highlighted that the "regulations on private pension funds need an overhaul, notably the restrictive regulation that annual returns to policyholders cannot be negative".

In addition, the OECD recommended that the subsidy and tax breaks for third pillar provision "ought to be critically assessed" and claimed the "first best solution would be if the regulatory overhaul makes saving attractive without support".

The report follows earlier recommendations from the International Monetary Fund (IMF) that the Czech Republic should implement early pension reforms, although in March the organisation warned against allowing people to opt-out of the PAYG system. [See earlier IPE.com story: IMF warns against first pillar opt-out]

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com


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