- Hans Weber
- November 29, 2023
Government Approves Law Ending State Support for Private Retirement Savings in Czech Republic
The Czech government has given its approval to a new law that will terminate state support for citizens saving for retirement in the private sector. Under the law, individuals who have already begun saving in the third pillar of the pension system, which includes private pension funds, will no longer receive monthly state contributions of up to CZK 340 (approximately $15). The Ministry of Finance estimates that around 750,000 out of the 4.36 million account holders will be affected by this change, although pension funds believe the number of impacted individuals will be even higher.
Pension funds have expressed concerns about the policy shift, fearing that the withdrawal of state contributions will lead to a decline in deposits. Given the low long-term returns on pension funds, retirees may lose interest in saving without the state’s support. Opposition parties have also raised objections to the modifications to the third pillar of the pension system.
The Ministry of Finance argues that state support for the third pillar loses its significance and effectiveness when the saver begins receiving an old-age pension. At that point, the third pillar serves as a short-term savings product with state aid, which is not the intended purpose of the system. The government has also sanctioned new retirement savings options and adjustments to contributions.
As part of the new law, the government will raise the mandatory monthly deposit amount from CZK 300 ($13) to CZK 500 ($22). This change is expected to create difficulties for low-income pension savers, young people, and single mothers in their saving efforts. Furthermore, the government plans to extend the minimum required savings period for eligibility to receive state aid from five to ten years.
Under the proposed law, pension funds will have the opportunity to establish a new type of fund called an alternative participant fund within the supplementary pension system. These funds will serve as an alternative to existing participant funds and will allow for dynamic investment strategies, including investments in private capital, real estate, start-ups, and infrastructure. The new alternative participant funds will have more flexible fee policies and investment strategies, potentially offering higher returns.
The law also includes measures to incentivize individuals to switch from transformed funds to participant pension funds, which offer higher returns but also come with higher risks. Currently, it is not possible to participate in both types of funds, which reduces motivation for switching. The proposed law aims to allow participants to remain in the transformed fund while contributing to the participant fund, thus increasing the motivation to transition. State aid will only be provided for deposits made into one type of fund.
The changes introduced by the law will now be deliberated in the Chamber of Deputies.
Article by Prague Forum