New Czech Saving for Retirement Product 3 Months After its Launch

During the first quarter following the start of pension reform, 22,375 people entered into the so-called second pillar in the Czech Republic. While 4,624 people decided to enter the second pillar in January, the interest grew to 8,880 people in February. In March, interest remained at the February level with 8,871 clients.

Pavel JirakWith 2,500 contracts, KB Penzijní společnost is third among Czech pension companies. Its market share was approximately 11% as of 31 March 2013.

While across the republic overall interest in entering the second pillar is only slightly higher among men (accounting for 53% of all concluded contracts), at KB Penzijní společnost the male predominance is truly pronounced (74% of contracts are with men vs. 26% with women).

The age structure of those interested in the second pillar is also noteworthy. Although experts and information campaigns had recommended entry more to younger clients before the start of the reforms, so far individuals in the 35–44 age category have shown the greatest interest to save within the second pillar at KB Penzijní společnost. Their proportion is 38%. To date, persons older than 35 have concluded 63% of all contracts at KB Penzijní společnost.

The dynamic savings option has thus far attracted the greatest interest in the Czech market, drawing 59% of clients.

“Considering that we at KB Penzijní společnost prefer to offer a life cycle savings strategy that combines dynamic, balanced and conservative funds, I can state that most participants are selecting precisely this life cycle savings strategy,” remarked Pavel Jirák, Chairman of the Board of Directors and CEO of KB Penzijní společnost.
The greatest enticement for clients to enter the second pillar is the possibility of shifting a part of the usual pension insurance contributions to their own individual accounts. This constitutes a different system of state support than for supplemental pension savings and pension insurance in the third pillar. While in the third pillar the state sends its contributions to an individual’s account, in this case the individuals obtain the contribution by themselves sending 3 percentage points less in payments to the state while saving it in their own accounts. To take a simplified example of a Czech citizen with an average monthly wage of CZK 20,000 (800 €), in the second pillar he or she receives CZK 600 (24 €) from the state each month (and must save CZK 400 – 16 € from his or her own funds each month). He or she thus receives from the state CZK 7,200 (288 €) per year, while in the third pillar of pension savings it is only possible to obtain a maximum of CZK 2,760 (110 €) per year in the form of state contributions.

The start-up process takes at least two months from the date a contract is signed until the time the employer starts sending money to the second pillar participant’s private pension account. The first payroll contributions therefore reached the pension companies in April. Thus far, participants in the second pillar have only a few tens of thousands of crowns in their private accounts.

Interested individuals older than 35 can enter the system only until the end of June 2013, and the pension funds therefore expect the number of clients to increase markedly as the ending date approaches.

It is no secret that the political opposition is not very sympathetic towards the second pillar and therefore is complicating the launch of the entire project. Various representatives of the Czech Social Democratic Party (the strongest opposition party in the Czech Republic) have already for some time been assuring the media that if they win the election they will abolish the second pillar. Even if we consider the hypothetical variant that today’s opposition would indeed abolish the second pillar, its participants could actually still come out ahead. In case of cancellation, those funds saved would be transferred to the third pillar, which the current opposition supports.

After the start of reform in the third pillar, supplemental pension savings had been added to the existing system of pension insurance with state contribution that has been operating since 1994. More than five million people now save in the third pillar. Last year alone, 550,000 people concluded contracts and thus over 70% of the employable population now participates in this saving. The number of people saving for retirement even though they have already retired is also growing. When all the contracts concluded by people over 60 years of age are added together, they sum to more than 1.2 million. These calculations are based on the latest statistics for 2012 provided by the Association of Pension Funds of the Czech Republic (APF CR). Many people thus reach retirement age but, rather than to begin collecting their money, they continue saving while receiving the state contribution. It is interesting that almost 30,000 people over 85 years of age are now saving in this manner.

Money saved in the second pillar is subject to inheritance, and, because in the third pillar one can even designate authorised persons to receive those funds, it is possible for people to save for their children or grandchildren in this way. This also offers a good way for senior citizens to save money for a rainy day. At their age, they probably have already fulfilled all the conditions to receive a regular pension, and they can treat these savings as emergency funds, since saving in the third pillar is one of the safest ways of accumulating money while earning interest on it.

Since the start of the year, 3,500 clients started to save in KB Penzijní společnost’s new participation funds, which earned it third ranking among pension companies and a market share exceeding 18%.

The greatest attraction of participation funds is early pension drawing, which is reflected in the age composition of participants in the third pillar at KB Penzijní společnost (one of the two strongest groups is in the 55–64 age group).

While primarily younger people should enter into second pillar pension funds, more mature individuals are interested in participation funds. The highest proportion (38%) is in the 35–44 age group. This is due especially to the option for early pension drawing. It is particularly for this reason that people in the 55–64 age group contribute the largest amounts (at CZK 840 – 33 € per month) to supplemental pension savings.