Public pension restructuring: The Czech Pension Reform

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Public pension restructuring The Czech Pension
Reform

• Jirí Král
• Director of Social Insurance Department
• MLSA, Czech Republic
• Ljubljana, November 4, 2002

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Content

• I. Basic Information
• II. History of the Reform
• III. Current Problems of the I.Pillar
• IV. Description and Problems of the III.Pillar
• V. Reform Targets

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I. Basic Information
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Real value of GDP, average wage and pensions
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Average life expectancy
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Population and pensioners
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Basic Information

• I.pillar
• (mandatory, DB, PAYG, uniform for all EA,
  Old-age I Surv.)
• Contribution Rate 26
• Compliance 98,4
• Number of pensioners 2 584 000
• Replacement Ratio 43,4
• Expenditures 9,1 of GDP
• Flat rate (1/5) Earnings related (4/5)
• 30 years assesment base indexed by average wage
• Benefits adjusted according to prices partly
  wages

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Basic Information

• Private pensions
• (voluntary, FF, DC plans only, state
  contribution tax incentives)
• Number of pension funds 13
• Number of participants 2 500 000
• Average contribution 340 CZK
• Pension fund assets 2.6 of GDP
• Average real rate of return lt 1

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Basic Information

• Life insurance
• Number of insurance companies gt 30
• Number of participants (contracts)
• Life insurance 6 200 000
• Pension insurance with tax incentives 2 100 000
• Assets 100 billion CZK
• Average annual contribution 3600 CZK

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II. The History of the Czech Pension
ReformCountry of Non-reform ?
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The History of the Reform (1)

• 1990 92
• Abolishment of preferences in I. Pillar.
• Reform of institutional framework.
• 1993
• Introduction of pension insurance contributions
  (I.pillar).
• 1994
• Introduction of the voluntary supplementary
  scheme with state subsidy.

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The History of the Reform (2)

• 1995
• Pension Insurance Act
• change in conditions of benefits, increasing of
  assesment base, change in benefit formula,
  retirement ages, restrictions in invalidity, EU
  harmonisation, etc.
• 1997
• Tightening up pension indexation and reduction in
  non contributory period.

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The History of the Reform(3)

• 1999
• Amendment of Supplementary scheme higher
  security of assets and introduction of tax
  incentives.
• 2000
• Establishment of pension reform commitee in the
  Parliament.
• The draft of the Social Insurance Agency law
  (rejected by the Parliament on 31.10.2001).

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The History of the Reform(4)

• 2001
• The Governmental concept of the continuation of
  pension reform (4/2001).
• Changes in early and deferred pensions
  (1.7.2001).
• Amendment of the Supplementary scheme law (the
  draft was returned in 10/2001 to the Government).
• Occupational Pension Scheme Law (rejected by the
  Parliament in 11/2001).
• Result of the Parliament committee activity 5
  parties with 5 opinions.

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Next Steps (5)

• 2002
• Joint Memorandum for Barcelona EU Summit.
• Annual adjustment of pensions (prices and wages).
• Priorities of the new Government
• 1. In PAYG Scheme
• - More equity
• - Separation from the state budget
• 2. More security and choices in private
  arrangements

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III. Current Problems of the I.pillar
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New Factors after 1995

• The economic recession
• decrease of GDP in real terms in 1997 - 1999
• The level of unemployment
• increase from 4 in 1996 to 9 in 1999
• The demographic development
• permanent, not short-term as it was expected in
  the first half of 90-ties, changes in fertility
  and mortality after 1990

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Weaknesses of the I. Pillar Scheme

• Real value of pensions is still under value in
  1989
• Low diferenciation (low equivalence)
• Increasing in dependency ratio due to aging
• Large extent of non-contributory periods
• Only one source financing (only contributions)
• Self-employed
• Quality of the administrator (CSSA)

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Development of the Replacement Rate (1989-2001)
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Replacement Rate in relation to earning
For pensions after 1996
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The Development of Pensions Revenues and
Expenditures I.pillar
) estimate
Source MF
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Ratio of Old-Age Pension Expenditures to GDP
(1997, in )
Source OECD, Annual report 2000-2001,
Switzerland.
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Demographic Development (1950 - 2050)
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Specific Factors influencing the Czech Pension
Reform

• Tradition and relatively high level of the social
  security administration
• The preparness in 1990 decessive role of local
  experts
• The leading role of MLSA
• The low dept of the country and limited influence
  of international financial institutions
• The failures of almost all segments of financial
  markets
• Quick privatisation and its problems
• Unclear position of political parties and the
  fact that pension reform has not become the
  political priority
• The development of democracy

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IV. Description and Problems of the III.pillar
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status as at December 31, 2001
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Average Real Rate of Return in 1995 2001
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Weaknesses of the Supplementary Scheme

• Not in full compliance with EU legislation
• Rational occupational pension scheme doesnt
  exist
• Insufficient safety of assets
• Insufficient economic transparency due to
  inconsistent separation of pension funds and
  shareholders assets
• 5. High administrative cost especially due to
  the
• individual character of the system
• 6. Short-time character of the scheme

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V. The Reform Targets
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The Reform Targets (1)(Concept approved by the
Government 2.4.2001)

• Trustful system
• Protection of pensioners standard of living
• Development of the best tradition of the Czech
  social insurance
• intergeneration solidarity (pay as you go)
• suitable intrageneration solidarity

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The Reform Targets (2)

• Strenghtening of individual responsibility
• Effective and rational administration
• Financial sustainability
• Following of the EU standards and policies
• Creating of the flexible system enabling further
  development

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Principles which are Not the Priority Targets

• To privatise the basic pension scheme
• To increase the national savings
• To improve financial and capital markets

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Target Design of the Pension Scheme
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Thank you for your attention