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Pension reform draft on the table

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The second stage of the pension reform has been completed. If approved by the government, the Czechs will have a new system of pension savings by early next year.

According to the proposal, newly established pension companies will be allowed to offer more risky investments with potentially higher revenues than what the existing pension funds can generate now. The so-called black null rule, which means the funds must end in the black every year, will be halted. “People will take responsibility for their investments. Those who want to take a risk, will have the chance to do so, and those who prefer safe investments will be able to choose conservative funds,” Deputy Finance Minister Klára Hájková told E15.

The government is due to discuss the draft bill by end of January. Up until now pension funds have been restricted by the black null rule in their investment possibilities. The existing pension funds should not be terminated all at once, but they will no longer be permitted to accept new clients. They will only manage the assets of those not interested in joining the new system. The Finance Ministry will also tighten the terms for retirement benefit pay-outs. Under the current system, people are eligible to receive the maximum of CZK 150 in state benefits on CZK 500 investment, while the new system raises the investment limit by CZK 200. The contributors will be entitled to receive the minimum state benefit of CZK 50 on minimum investment of CZK 300 and not CZK 100 as it is now.

The new system will introduce a number of new regulations, which will have the biggest impact on pension savings providers. The current system entitles all advisors and brokers to sell supplementary pension insurance but the new system will restrict this option to only those businesses holding a licence from the Czech National Bank.

The system of retirement savings payments is also to change. Only life insurance providers will be allowed to provide life pensions payments. A strong regulation in the new system of pension savings will mostly affect the companies specialising in sales of financial products. Up until now the companies have sold up to 90% of all supplementary pension insurance products. However, thousands of their employees and collaborators are not holders of the central bank licence.

According to Hájková, the plan is to reduce the regulation rules of the system in the future. “The system we have created is unique in the world. Since it is new and we have no experience, we wanted to maximise the security measures,” she said. The new law will enable companies to claim higher tax deductions if they use them to contribute to their employees’ pension. Companies can currently deduct CZK 24,000 annually for every single contribution; this should change to CZK 36,000 as of 2010.

Around 4 million Czechs pay for pension insurance with an average monthly contribution of CZK 450. Pension funds in the Czech Republic manage around CZK 180 billion.

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