Just over a year after the parliament of the Czech Republic adopted a new law amending the pension legislation passed in 1994, the reforms introduced are being hailed as a success. However, the plans to introduce occupational pensions are proving as controversial as ever.
Milan Kantor, of the Czech Association of Pension Funds (APFCR), confirms that the legislation, amending an earlier law which had been described as “wholly inadequate” by critics, has had the desired effect. “The introduction of tax relief has seen the number of participants increase significantly over the past six months to well over two million members.”
Although the government has neither pension or taxation figures for the past 12 months, projections from the Ministry of Labour and Social Affairs (MPSV) suggest Kantor is right. “We have had nothing but positive reactions to the changes,” says Dagmar Zelenkova, who is working on pension reforms at the ministry. “Discussions with the funds themselves and trades unions have not produced any negative responses.”
Until last year there was little in the way of tax relief, and consequently top-up contributions were limited. Incorporating most of the recommendations of the APFCR, the reforms were aimed at increasing contributions and adding value to the funds, as well as giving the Ministry of Finance more powers to oversee the funds. “We intend to provide more openness for the contributor .....and are also increasing state contributions” said Jiri Rusnok deputy minister at the MPSV at the time.
While the tax breaks and government contributions have encouraged participants, there remains criticism of the hybrid nature of the funds. “There would be greater transparency and safety if clients funds were legally separated from shareholders funds and costs, and if funds were required to raise their capital if the market price of the portfolio falls below total accumulated client liabilities,” says Tomas Machanec of Allianz-Zivnobanka Pension Fund in Prague.
Nevertheless, the government can reasonably point to the increased participation, which is fast approaching half of the 5m workforce. Ivo Foltyn, chairman of Penzijni Fond Ceske Pojist’ovny A.S., says his fund has seen an increase in membership from around 170,000 last June to almost 280,000 at the moment. “Significantly, there has been substantial interest from employers with around 1,600 participating in schemes under the present system”
Which brings us to the question of occupational pensions. Two years ago the government committed itself to the idea of employers’ pension funds based on a non-profit principle. (This despite the fact that with the introduction of tax concession, as Foltyn points out, we are now seeing occupational pension schemes being set up by a limited number of companies. The government seems concerned, however, that they should be managed in a different fashion.) Although after lengthy consultations a report was due to be presented to the government at the end of last year, it was not until April that the proposals were accorded general approval by the government. The new timetable was explained by Zelenkova. “Draft legislation will be prepared in 2001 after further studies which should be concluded by the end of this year. The year 2002 should see legislation going before parliament, and the law will come into effect on the 1 January 2003.” Last November Rusnok suggested the funds would be launched exactly 12 months prior to that. “Little progress has been made on the question of occupational pensions,” claims Kantor.
Some feel the government is dragging its feet on this issue, and there are a number of reasons why this may be true. “I do not think the concept has sufficient support in Parliament,” says Foltyn. “This is a minority government, and my belief is that not only will they find it difficult to get approval for these proposals in the face of fierce opposition both inside and outside parliament, I think they will find it impossible.” He also points out that employers are currently operating within the current system. “Employers do not need a new system, if they really want to be involved in pension provision. Furthermore, I do not believe that the Czech capital markets are in a position to support this new raft of funds.”
The fact that the government is proposing a voluntary scheme also hints at concerns within the MPSV and the Finance Ministry. “The lack of economic stability among private companies throughout the country makes a compulsory scheme inappropriate,” says Zelenkova. “It would be wrong to let employees risk investment on which they may see no return, as it would be to make employers invest money they can ill afford.”
Kantor, however , believes that the government still sees the state provision as inviolable, and fear that it could be undermined. Rusnok is on record as having said that “The government does not intend to penalise the basic pension system in favour of developing private and occupational pensions.
“What is more we believe any proposals to make the scheme compulsory will only lead to even more delays in its introduction,” Kantor said. He believes that the key to the success of the legislation will be in making it attractive to employers, ensuring their contributions are made at cost.
The reason for the attitude of some of the existing funds may lie in the competition which the new funds will represent, and this is a key issue which is being discussed among analysts. The government is being very coy about just how it is going to create a level playing field for the competing funds. Clearly tax relief will have to be offered to both employees and employers in occupational pension funds, in line with that offered under the amended 1994 legislation for supplementary pensions. Under that law employers receive a tax credit of up to 3% of wages subject to certain ceilings, and the employee 5%, including the 3% employers allowance, again subject to a ceiling, in this case of CZK12,000. The government hopes that this will lead to workplace agreements and collective administration, making the gathering of contributions simpler and more cost effective.
More significantly however, is the question of government contributions. Increased government support over the past 12 months has manifested itself in the form of a fixed monthly contribution in proportion to the individuals payment into the fund. At the present time the minimum amount paid by an individual is CZK100 per month. The state will now top up with a fixed minimum amount, rising as a percentage of the employee contribution up to a limit of CZK500, after which no increase applies. It is almost certain that the government will not be prepared to make a similar contribution to the occupational schemes, and therein lies the sting.
Many in the know in the Czech capital believe that the government will use the introduction of occupational pensions to remove the state contribution currently paid out under the supplementary pension system, allegedly in the name of even-handedness. The argument runs that the government is not in a position to make such a generous gesture to the new funds, and so in order to make them competitive they would remove the perceived advantage held by existing funds. This may well explain the open hostility to the proposed legislation within the existing industry. One would expect to see fierce lobbying from the funds if the government does introduce such a clause into the new law.
Despite the problems that the proposals have faced, and those which still remain, some kind of legislation is certain to be discussed over the next 18 months. Mikel Smerk is Czech pensions expert at lawyers Cameron McKenna in Prague, who have been advising the government on the policy document. He believes the government has got it right in legal terms, but recognises that the practicalities may prove difficult and contentious. “The main issues which form the core of the policy document agreed in April are that this should be a voluntary scheme, for both employers and employees, that the fund should be a separate legal entity, non-profit making and boast the added transparency which the introduction of asset managers brings.”
He believes the transparency issue is the key. “At the moment existing funds mix members and shareholders money, the new system will separate collection and investment.” He also points out that smaller companies are catered for, as they are allowed to join together to create a fund where there is sufficient interest.
A final point of criticism, that of transferability, has also been tackled, but is still the cause of debate. Machanec has been critical in the past saying: “The government has not reacted to the question of regulation of transfers of clients between funds, which brings with it substantial additional marketing and administration costs.” This raises the question of whether all funds should share more or less universal principles. If so, employee transfer is relatively simple. The problem then, as Smerk points out, is the reverse side of the coin. “Universality makes it extremely difficult for employers to provide incentives to keep members funds for a longer period of time.”
So, half way through the process the government gets top marks for work completed, that is last year’s amendments, but the jury is out on the new proposals. As one analyst says: “Occupational pensions are real pensions, and will prove attractive to the workforce, provided they see some economic stability in their own workplace.” The government has committed itself to occupational pensions and has taken time to do extensive research. Unfortunately for the MPSV, which has shown enthusiasm for the scheme, its success may depend on what happens in another government department where economic policy is formulated.