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Pension reform in the Czech Republic

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pavel jirak

Pension reform in the Czech Republic. The responsibility for the standard of living in the retirement age is being passed from the state onto the citizens.

Pavel Jirák Chairman of the Board of Directors and CEO of the Penzijní fond Komerční banky (PF KB) which won the 2012 Czech Pension Fund Award provides some details about the situation of the reform.

pavel jirak

The Czech Republic’s crucial problem stems from the relatively unique combination of a rapidly aging population and the fact that the state provides for virtually 100% of pensions. This system is unsustainable in the long run and is unfavorable to all of the country’s population under 40 men and women alike. Unless we commence a reform our pension system would collapse in a short time. The state would have to consume increasing parts of the country’s GDP to fund pensions and would gradually find itself in the middle of a severe intergenerational conflict. The main aim of the reform is to make the population use multiple diverse sources for their pensions and stop relying on a single source, i.e. the state.

The Czech Republic’s state pensions are on average equal to approximately one half of the money earned whereas pensions in Austria, Denmark or Hungary reach three quarters.

The average salary in the Czech Republic reached approximately €973 before taxation, or €760 after taxation at the end of last year. Roughly one third of the population reached the average wage. The average pension reached €422. Men received on average €468 and women €383. Unlike pensioners in other countries an overwhelming majority of Czech pensioners rely solely on the state pension.
graphgbfr

The chart shows that regarding the relation between pension and salary Iceland and Greece whose population enjoy nearly 97% of the average earnings are at the top. However Greece found itself on the brink of bankruptcy and has to make drastic cuts that will affect the standard of living. Italy and other countries have also come up with strict saving measures.

On the other hand Great Britain has the lowest average state pension in relation to average earnings. Most of the pensioners’ income is provided by its optional part – the state pensions by the pay and many different insurance schemes. In this way the basic pension which is determined according to prices and which is equal to roughly €512 per individual rises to the average of some €1,241 per month.

2012 and Czech pension reforms

“The small pension reform” that came into effect on 1 October 2011 contains a significant change of the retirement age. People born after 1965 will be allowed to retire after they reach the age of 65. The pace at which the retirement age increases will also accelerate to six months per year in the case of women and two months per year with men.

“The grand pension reform” is different from the small one in that it will allow people to take some of the money from the current pension system to newly formed pension companies and save money in private pension funds. The Czech Republic’s pension system will newly feature 3 pillars. The key changes will become effective on 1 January 2013. The PF KB has been preparing for the reform for several months.

All nine domestic pension funds view the reform as a challenge and most are planning to participate in pillars II and III of the new pension system: i.e. to set up pension companies and to transform existing funds.

We have already contacted the Czech National Bank with our request for a licence enabling the PF KB to operate in both pillars of the pension system as well as an application for permission to provide supplementary pension insurance through our transformed fund, stated Pavel Jirák. We have detailed each step required to carry on the necessary changes in pension funds as well as the commercial offer for participants who newly enter the system.

The pension savings system will newly consist of three pillars. What will become of the existing pension funds and how do they fit into the new system?

The existing state pension system is the pillar I; the pillar II includes the newly formed  pension saving in pension companies while the pillar III represents additional pension insurance with state contribution created by transforming the existing one.

The pillar II of the pension system will have the form of opt-out. By entering the pillar II participants grant their consent to transfer three per cent of the existing social insurance payment from the pillar I to a pension company on condition that they also add two per cent of their gross salary. It means that the employer will remit five per cent to pension companies on behalf of the employee. The pension company will invest these resources in order to create another source which will be used for funding a lifelong pension or twenty years’ pension after the employee retires. The decision to enter the pillar II will be optional and will be suitable especially for young people whose earnings exceed the average. People over 35 years of age have to make this decision within the first 6 months of 2013. Entering the pillar II will mainly favour self-employed persons and entrepreneurs, who will be allowed to remit nearly half of their pension insurance to private accounts. Self-employed persons remit 6.5 per cent of their income to pension insurance now.

The participants of the pillar III will enjoy an increase of the state’s allowance while the tax deductions and the possibility to claim a contribution from the employer will remain as they are now. Other benefits such as one-off payment when one reaches the retirement age will also remain in place. This is why I consider the pillar III to be one of the most attractive financial products on the market.

The transformation will especially mean a separation of the participants’ property from the shareholders’ property and hence more transparent management also. The PF KB will become a pension company which will manage 4 funds for the pillar II and 5 funds for the pillar III. The funds will differ in the height of the risk. The riskier the investment the higher the expected profit but also the higher volatility or the less certainty of the fund’s profitability in the given year. As the participants’ retirement approaches the savings are automatically transferred to less risky and finally to safe funds. The reform will bring several advantages to current participants in pension funds as well as to those who will enter the system by the end of November this year. The transformed funds will retain their current guarantee of non-negative profit each year. At the same time they will be allowed to decide to opt for the new funds of the pillar III at any time.

What makes the PF KB attractive for clients?
PF KB informed the public about the pension reform openly and its parameters in the course of last year and continues in this effort. I dare say that all our participants have been offered a chance to become familiar with the reform if they wished to do so. We have also published a number of articles and interviews for the country’s broader public; we provide information on special phone lines and at the offices of subsidiaries comprising the Komerční banka Group. Our website (www.pfkb.cz) contains a special section dealing with the pension reform with some practical sample questions and answers. Our intensive information campaign will continue this year so information about the pension reform can reach each responsible citizen who does not wish to make light of their provisions for retirement. We believe that the fact that there is sufficient information and maximum openness on our part is our existing and future participants’ crucial advantage. Other benefits include advantageous offers of recreational and spa stays in the Czech Republic for our clients. I should not forget to mention the foreign awards that we have won. In addition to the prize awarded by the GBAF, the World Finance magazine announced the PF KB the “Best pension fund of the year in the Czech Republic” also. We´ve got both these prizes for the second year in a row, says Pavel Jirák happily. Repeated awards from expert juries prove that the PF KB is the right partner for entering the system of additional pension savings.

Investing

COVID-19 creates long and winding road for startups seeking investment

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COVID-19 creates long and winding road for startups seeking investment 1

By Jayne Chan, Head of StartmeupHK, Invest Hong Kong

Countless technology and other companies describe themselves as innovators, disruptors or game changers, or maybe all three, and sometimes that’s true. But none have had quite the disruptive force of COVID-19 which has flipped work and life habits upside down and sucked so much oxygen out of the global economy. The impact will be lasting: many of those new habits are here to stay.

Yet, while a recalibration of lifestyles and business processes is perhaps overdue – and to be embraced given it’s happening anyway – the change presents huge challenges for startups and new businesses that were on a growth trajectory prior to the pandemic. Few would deny that opportunities exist amid the disruption, but the challenge right now is to survive the crisis intact.

The global economy this year will see its biggest contraction in decades. The World Bank projects global gross domestic product to fall by 5.2% this year,[1] with advanced economies shrinking 7% and emerging economies 2.5%. It forecast East Asia and the Pacific to grow just 0.5% this year, down from 5.9% last year. These forecasts assume the markets will return to somewhere near normality during the second half of the year.

Despite all the economic murk and gloom, there are signs that a post-COVID bounce is likely. The World Bank predicts economic growth of 6.6% in East Asia and the Pacific in 2021.

Some business sectors fare better

Looking around, it’s reasonable to anticipate a relatively speedy recovery. In a few business sectors, such as healthcare and telemedicine, e-commerce, fintech, home delivery and food retail sectors, there are companies that have fared better. In some instances, the situation has been transformational in a positive way.

In fintech, for example, global investment actually rose year-on-year in the first half of 2020, according to Accenture,[2] up 3.8% to US$23.1 billion from US$22.3 billion, albeit with the help of COVID-related government loans in some markets. Asia-Pacific saw a sharp rise driven by China and Australia. In the first half, China’s fintech market grew 177% year-on-year to US$2.3 billion, while Australia’s grew 189% to US$1.2 billion.

Resilience is clear to see, but businesses face huge challenges. From a startup perspective, within weeks of the COVID-19 outbreak, many companies went from being solid-growth enterprises, possibly looking to raise money, to ones simply trying to stay afloat.

Debtor books have grown massively as companies stop cash going out the door. Many well-run companies have customers who may not be cancelling, but they are also not paying as fast. For such companies, it becomes a cash issue rather than a fundamental underlying business one. The reality is that businesses are ensuring that every penny going out the door absolutely needs to – so payment terms get stretched. It’s understandable, but it’s problematic if everyone does it.

For startups seeking to work their way onto the fundraising ladder, the process typically starts with an initial pre-seed and/or seed round, which then moves on to Series A to B, C and onwards as needed. The funds usually come from angel investors, accelerators or venture capital firms, in return for an equity stake. Even at the best of times, pitching to get on the first rung of the ladder is perhaps the greatest challenge.

Bar for investment higher as company valuations drop

Advice for many prospects looking at fundraising, certainly during the first wave of COVID-19, was to do nothing except focus on survival. For investors, a business that weaves and navigates its way through the crisis, or even take advantage of the pandemic environment to flourish, is likely to resonate.

Even for those companies that have fared better in recent months, barring an utterly compelling reason to raise funds, now may not be the ideal time. It’s clear that the bar for investment has gone up and company valuations have come down, neither of which is a surprise given higher risk profiles at present.

For companies that are well known to investors, such as Grab, Lu.com, Airwallex or WeLab, fundraising is more manageable. And for slightly smaller but relatively new companies, there are plenty of examples of recent success attracting fresh investment, often through existing investors.

Jayne Chan

Jayne Chan

But for smaller, newer companies, not being able to do face-to-face pitches creates much more of a challenge – after all, most funds like a boots-on-the-ground physical interaction before putting money in, particularly if the sums are large.

Despite all that, for new businesses planning to seek funds down the line, there is no harm warming up investors. Having the right conversations now makes sense and would help a startup to hit the ground running when the pandemic abates. The conversations should include ones with government funding organisations. For an investor, matching government funding is attractive because of the higher startup success rate.

Pandemic drives consumers and businesses online

Thanks to the pandemic, people are now far more willing to go online for all manner of transactions. Working remotely from the office is now commonplace, with work hours more flexible.

This trend among consumers, healthcare professionals and office workers has become more entrenched – more retailers are going online, while companies rethink their office space needs. This extends to investors, many of whom initially sat on their hands expecting COVID-19 to quickly pass by. They quickly adapted when it became clear coronavirus was going nowhere fast.

Quantitative easing and low interest rate policies by central banks, along with a boom driven by the lockdown – appetite for online entertainment, financial services, communications, healthcare, shopping, etc. – spurred fresh demand for tech products, pushing share prices rising to record highs. This created an attractive environment for investors to seek fresh investment opportunities.

A consequence of widespread digitalisation is that software, e-commerce and, more broadly, digital startups have an advantage in the competition for funding. An ability to do business both face-to-face and remotely makes such businesses less vulnerable to other trade pitfalls and therefore more attractive for investors.

Conversely, it’s harder for hardware startups at a time when global trade is weakening. They have to consider whether production costs and the markets they promote will be affected by such issues as tariffs or people flow. This type of startup is likely to have access to fewer financing opportunities.

It may seem obvious, but it’s of paramount importance for startups seeking funding to be clear about what they are looking for from investors. Are they simply injecting capital as a passive investment hoping for a return, or are they looking to create synergies to help develop the business? Startups should consider what resources investors can bring to the business besides capital.

These are testing times. However, founders of startups need to stay positive and true to their mission and vision, and why they started the companies in the first place. After all, that’s their value proposition.

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COVID-19 and PCL property – a market on the rise?

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COVID-19 and PCL property – a market on the rise? 2

By Alpa Bhakta, CEO of Butterfield Mortgages Limited

Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.

Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.

Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.

However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.

Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.

However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.

Investors are flocking to PCL opportunities

The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.

Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.

Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.

So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.

Remote working and PCL

On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.

While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.

Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.

A busy few months

Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.

In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.

Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.

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An outlook on equities and bonds

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An outlook on equities and bonds 3

By Rupert Thompson, Chief Investment Officer at Kingswood

The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.

The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.

Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.

Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.

Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.

Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.

Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.

We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.

We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.

We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.

On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.

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