Download - Private Pension Insurance in the Czech Republic The Decumulation Phase Seminar on Private Pension Provision, Tallinn, 6.-7. 9. 2007 Štěpánka Pollnerová

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

Download - Private Pension Insurance in the Czech Republic The Decumulation Phase Seminar on Private Pension Provision, Tallinn, 6.-7. 9. 2007 Štěpánka Pollnerová

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