Pension system reform

The pension reform, which will take effect in 2013, is a response to unfavourable demographic trends and the ensuing unsustainability of the current pension system (see Chart 1). At the same time, it introduces elements of diversification into the financing of the pension system. The existing pension system structure, based on a state-run pay-as-you-go (PAYG) system, with the option of taking out additional private pension insurance with pension funds, will be extended to include a new (second) “fund pillar”. Entry into this pillar will be voluntary but irreversible. Persons under 35 years of age will be allowed to join the second pillar without restriction, while those aged over 35 will have to decide whether to join in the first half of 2013. Those who decide to join the second pillar will be allowed to transfer part of their pension insurance (3% of the assessment base) from the PAYG system (their state pension will be reduced proportionately), to which they will add a further 2% of their own funds. The newly established pension companies will offer four types of funds differing in terms of investment strategy.

Chart 1 (Box)  Pension system deficit
Growth in the pension system deficit-to-GDP ratio is beginning to accelerate
(CZK billions; share in % of GDP – right-hand scale; source: Ministry of Finance of the Czech Republic, CNB calculation)

It is not entirely clear from the current configuration of the new pension system whether the original objective of the pension reform, namely to enhance the sustainability of the PAYG pillar, will be achieved. The voluntary nature of the partial opt-out from the PAYG pillar means that the participants in the second pillar will probably come mostly from higher-income groups. This, in turn, will have a generally adverse impact on the long-term balance of the PAYG pillar (this effect will be reduced by the 2011 “small pension reform”, consisting in parametric changes to the PAYG system).

The Czech Finance Ministry estimates in its medium-term outlook that up to 50% of policyholders will take advantage of the opportunity to join the second pillar in 2013. This will have a negative impact of around CZK 20–27 billion on revenues from social security contributions. By comparison with the Czech Ministry of Finance, the CNB forecast assumes lower take-up for the fund pillar and thus a lower impact on revenues from social security contributions of around CZK 15 billion. The forecast also assumes that the additional household expenditure related to participation in the second pillar will not have a major negative impact on household consumption, since the participants will mostly be persons with higher income, who can cover this additional expenditure by changing the structure of their savings. At the same time, the forecast assumes no increase in consumption as a result of the higher disposable income caused by the decline in social security contributions. Overall, therefore, the impact of the pension reform on household consumption is assumed to be neutral.