The aim of pension reform is to motivate Czech citizens to assume greater responsibility for the quality of their life in retirement. At this moment retired individuals are 95% dependent on the government pension system, which is highly sensitive to demographic changes and economic fluctuations. According to statistics provided by the Ministry of Labour and Social Affairs, 4 workers previously contributed to a single pensioner. Today this figure has dropped to 2.5 workers and in 30 years the number of pensioners and individuals of working age will be almost the same. In the future the level of pensions as a percentage of the average wage will almost certainly drop.
2012 – The Year of Active Ageing
According to a study conducted at Masaryk University in Brno, the average age of a resident of the Czech Republic will increase from the current 40 years to 48-50. The number of people over the age of 55 will grow from 3 million to more than 4 million. Experts project that more than 50% of this population will be dependent on the state, which is double the current figure. The employment rate in the 55-64 age group is 47% today. Efforts should be made in the future to increase employment in this age group. Finland could serve as a role model in this regard, as it is one of the most active EU Member States in addressing employment for the aging population. The flexible retirement age is 63-68 years, with the decision left up to the employee. The state, however, provides financial benefits to those who work longer. For example, people who remain at work until the age of 68 receive a pension that is approximately 22.5% higher than they would receive at the age of 63. In order to take into consideration all of the aspects of employing people over the age of 50, experts suggest promoting among Czech employers a management system that factors in the age of employees. Such a plan would be in line with the strategy of the EU, which declared 2012 “the year of active ageing” with the aim of creating better opportunities and work conditions for older employees and their utilisation in the workforce, combating the social exclusion of older individuals by bolstering their active inclusion in society and supporting healthy ageing.
The government approved the introduction of “pre-pension” payments beginning 1 January 2013 to be made from money saved in newly created participant accounts in the 3rd pillar. Pension insurance company will send the pre-pension rent either in the form of an old-age monthly pension for a specific period to the participant or in the form of a lump-sum premium to the life insurance company, who will then pay participant a monthly annuity. Pre-pension rents will be available at the earliest 5 years prior to retirement age. In order to qualify, the individual’s monthly salary must be at least 30% of the average monthly wage – currently just under EUR 300. Employers will still be able to contribute to their employees’ supplementary retirement savings from which the pre-pension rent will be drawn. The amount of these contributions will be the subject of collective agreements or internal company rules. The period of time an individual receives pre-pension payments will not be included in the decisive period for calculating their old-age pension, as it doesn’t impact its amount. The recipient’s health insurance should be covered by the state.
Savings for adequate financial security
Experts estimate that a pensioner should have financial resources available equalling three-quarters of their last net income. “The drop in income upon retirement is truly dramatic for individuals that rely only on their standard state pension. For citizens earning the average wage, this means a drop of more than 50%. The creation of private financial sources for retirement must become standard practice for anyone interested in enjoying a dignified pension with adequate financial security,” says Pavel Jirák, chairman of the board and executive director of the Penzijní fond Komerční banky.
Calculating how much and how long to save for retirement is not a simple matter. Long-term data available for this calculation such as average wage, average inflation and other economic figures can only be used with a limited degree of probability. In order for anyone to at least form an impression of what his income in retirement age might look like, how much he should save each month and whether it makes sense to enter the newly offered 2nd pillar, the Penzijní fond Komerční banky has prepared an online calculator at www.pfkb.cz with simulated illustration of all three pillars that will be available for retirement savings as of January 2013.
|Number of Supplementary Pension Insurance Participants||4,707,425.00|
|Number of Participants with Employer´s Contribution||1,304,463.00|
|Participant´s Average Monthly Contribution||CZK 440.94 (€ 17.64)|
|Average Monthly State Contribution||CZK 106.22 (€ 4.25)|
According to experts, a person retiring today should have half a million crowns in savings (EUR 20,000), a person who is now 60 should plan on having three-quarters of a million crowns (EUR 30,000), a person who is now 50 should plan on having a million crowns (EUR 40,000), a person who is now 30 should plan on having a million and a half crowns (EUR 60,000) and a person who is now 25 should plan on having around 1.78 million crowns (more than EUR 71,000). The current average balance on supplementary pension insurance accounts is very low – approximately CZK 50,000 (EUR 2,000). This is primarily the result of the low average monthly contributions of pension fund participants – around CZK 440 (just under EUR 18). Beginning in January, the minimum monthly deposit necessary to receive a contribution from the state for supplementary pension insurance in the the 3rd pillar will increase from CZK 100 (EUR 4) to CZK 300 (EUR 12); the state contribution will range from CZK 90 (EUR 3.6) to CZK 230 (EUR 9.2). Hopefully this will motivate participants to increase their own contributions.
All nine pension funds that offer supplemental pension insurance have applied for a license to adapt to the new conditions; several of these funds have also applied to the Czech National Bank for a license that would allow them to take part in the 2nd pillar. These formal steps must be accompanied by intensive preparations “inside” the individual funds. At the Penzijní fond Komerční banky we are changing processes and procedures, modifying computer systems, training employees throughout the entire Komerční banka group, negotiating with external partners and regularly informing existing supplemental insurance participants about the planned changes. We are preparing a public information campaign to correct the current low awareness of pension reform.
Pension reform is still recovering from poor promotion by the state and the threat by the left to completely cancel or substantially change the 2nd pillar in the event of their victory at the polls. This would naturally have a negative impact on efforts to convince the public to assume responsibility for their quality of life in retirement.