Private Pension Insurance in the Czech Republic The Decumulation Phase Seminar on Private Pension...

Private Pension Insurance in the Czech Republic

The Decumulation Phase

Seminar on Private Pension Provision, Tallinn, 6.-7. 9. 2007

Štěpánka Pollnerová

Pension System in the Czech Republic

e-mail: [email protected], www.mpsv.czMinistry of Labour and Social Affairs, Department of Social Insurance

Mandatory state PAYG scheme

Private voluntary individual schemes• Supplementary Pension Insurance with a State Contribution• Old-age products offered by commercial insurance companies


Supplementary Pension Insurance with a State Contribution

Basic Information

• Introduced in 1994

• Voluntary pension scheme, FF, DC plans

• State support: tax relief and state contribution

• Basic data•Number of pension funds……….. ………….…...................11•Number of participants.………….........…3.8 mil. (73% of EA) •Average contribution ……………………436 CZK (2% of AW)•Average state contribution…….......…104 CZK (0.5% of AW)•Employers contributions .. …………...cca 30% of participants •Pension funds assets…………………….…..…...…4.6% GDP•Average real rate of return……….……………………. ……1%


Types of Benefits

• Termination settlement

• Lump-sum payment

• Pensions Old-age pension Invalidity pension Early retirement pension Survivors‘ pension

In the contract, it is always necessary to arrange for the provision of the old-age pension.

Pension funds provide all benefits.


Termination Settlementand Lump-Sum Payment

Termination settlement Entitlement conditions: at least 12 months of contributionsnominal value of state contributions is returned to the state

Lump-sum paymentEntitlement conditions: Lump sum payment is possible instead of annuity:conditions for entitlement to a pension must be met


Pensions (1)*

Old age pension

• Lifetime annuity

• Entitlement conditions: • insurance period of at least 60 months (max. 120 months)• age of at least 60 years

Early retirement pension

• Lifetime annuity, contributions for an early retirement pension must not be higher than contributions for an old-age pension

• Entitlement conditions: insurance period of at least 15 years

*Situation since 2004.

e-mail:[email protected], www.mpsv.czMinistry of Labour and Social Affairs, Department of Social Insurance

Pensions (2)*

Invalidity pension

• Lifetime annuity, DB pension plan allowed by law but not offered by pension funds

• Entitlement conditions• insurance period of at least 36 months (max. 60 months)• full invalidity pension from the basic state pension scheme is awarded


Pensions (3)*

Survivors’ pension

• Payout of a financial amount for a period determined by the pension plan;

• Entitlement conditions:• death of the participant anda) insurance period of at least 36 months (max. 60 months)b) deceased participant collected lifetime pension with the subsequent provision of a survivor’s pension

Calculation of annuities is based on actuarial principles, no special requirements are set by law (life tables, indexation etc.)


Pensions (4)*

Payout schemes offered by pension funds:

• Lifetime pension for the participant

• Lifetime pension with guaranteed payment over a specific period

• Lifetime pension with an extended payment period

• Lifetime pension with an increasing level (by a given percentage)

• Lifetime pension with a given amount in case of death

• Lifetime pension for participant and beneficiary (/with guaranteed payment over a specific period)

• Variable lifetime pension for participant and beneficiary (/with guaranteed payment over a specific period)


Tax Treatment of Benefits

Benefits are subject to a withholding tax. The tax base is reduced by amount of paid sum of contributions and state contributions.

Termination settlement

25% including employers’ contributions (nominal value of state contributions is returned to the state)

Lump-sum payment

15% including employers’ contributions

Pensions

15% (all contributions excluded)


Demand for Benefits (benefits paid out since 1994)


Other3.1%

Survivors' pensions

0.8%

Lump sumpayments

70.8%

Termination settlements

24.7%

Pensions 0.6%

Level of Benefits


Example 1: 60 years old men with 12 years of contributions, average participant’s contribution of 500 CZK* (with state contribution of 150 CZK), nominal rate of return 6%.

Lump sum: cca 120 000 CZK (5.6 times average monthly wage)

Old-age pension: cca 3% of average monthly wage

Example 2: 60 years old men with 30 years of contributions, average participant’s contribution of 500 CZK* (with state contribution of 150 CZK), nominal rate of return 4%.

Old-age pension: cca 5% of average monthly wage

* Participants pay flat rate contributions rather than a percentage of wage.

Main Achievements and Challenges

+ High participation

+ Increasing participation of employers

- Low contributions of participants with declining real value- Low participation of younger workers- Short term savings

- Low effectiveness of state support

- Low returns of PF assets


Thank you for your attention.


Annex 1: State Contribution


Participant‘s contribution State contribution

100 CZK – 199 CZK 50 CZK + 40% of the amount over 100 CZK




500 CZK and more 150 CZK

Annex 2: Tax relief


participant who pays more than CZK 6 000 a year can deduct the contributions exceeding CZK 6000 from his tax base, up to a maximum of CZK 12 000employer can include contribution paid on behalf of an employee in costs, up to 3% of the employee‘s assessment basis for SSemployee is exempt from income tax on the contribution paid by the employer, up to 5% of his assessment basis for SS

Private Pension Insurance in the Czech Republic The Decumulation Phase Seminar on Private Pension...

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