Private Pension Insurance in the Czech Republic The Decumulation Phase Seminar on Private Pension Provision, Tallinn, Štěpánka Pollnerová

Pension System in the Czech Republic Ministry 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

Ministry of Labour and Social Affairs, Department of Social Insurance 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……….. ………….… 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% Ministry of Labour and Social Affairs, Department of Social Insurance

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. Ministry of Labour and Social Affairs, Department of Social Insurance

Termination Settlement and Lump-Sum Payment Termination settlement Entitlement conditions: at least 12 months of contributions nominal value of state contributions is returned to the state Lump-sum payment Entitlement conditions: Lump sum payment is possible instead of annuity: conditions for entitlement to a pension must be met Ministry of Labour and Social Affairs, Department of Social Insurance

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 Ministry 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 Ministry of Labour and Social Affairs, Department of Social Insurance

Pensions (3)* Survivors’ pension Payout of a financial amount for a period determined by the pension plan; Entitlement conditions: death of the participant and a) 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.) Ministry of Labour and Social Affairs, Department of Social Insurance

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) Ministry of Labour and Social Affairs, Department of Social Insurance

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) Ministry of Labour and Social Affairs, Department of Social Insurance

Demand for Benefits (benefits paid out since 1994) Ministry of Labour and Social Affairs, Department of Social Insurance

Level of Benefits Ministry of Labour and Social Affairs, Department of Social Insurance 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 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 Ministry of Labour and Social Affairs, Department of Social Insurance

Thank you for your attention. Ministry of Labour and Social Affairs, Department of Social Insurance

Annex 1: State Contribution Ministry of Labour and Social Affairs, Department of Social Insurance Participant‘s contributionState contribution 100 CZK – 199 CZK50 CZK + 40% of the amount over 100 CZK 200 CZK – 299 CZK90 CZK + 30% of the amount over 200 CZK 300 CZK – 399 CZK120 CZK + 20% of the amount over 300 CZK 400 CZK – 499 CZK140 CZK + 10% of the amount over 400 CZK 500 CZK and more150 CZK

Annex 2: Tax relief Ministry of Labour and Social Affairs, Department of Social Insurance participant who pays more than CZK a year can deduct the contributions exceeding CZK 6000 from his tax base, up to a maximum of CZK employer can include contribution paid on behalf of an employee in costs, up to 3% of the employee‘s assessment basis for SS employee is exempt from income tax on the contribution paid by the employer, up to 5% of his assessment basis for SS