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Risk Management and Regulation of Defined Contribution Scheme in the Czech Republic

Risk Management and Regulation of Defined Contribution Scheme in the Czech Republic. Ji ří Kr á l Director of Social Insurance Department MLSA, Czech Republic ISSA Seminar for Social Security Actuaries and Statisticians : Actuarial Aspects of Pension Reform Moscow, July 4 , 2002.

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Risk Management and Regulation of Defined Contribution Scheme in the Czech Republic

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  1. Risk Management and Regulation of Defined Contribution Scheme in the Czech Republic Jiří Král Director of Social Insurance Department MLSA, Czech Republic ISSA Seminar for Social Security Actuaries and Statisticians : Actuarial Aspects of Pension Reform Moscow, July 4, 2002

  2. I. Basic Information

  3. The History of the Czech Pension Reform – Country of Non-reform ? (3) 1992 - Abolishment of preferences in I. pillar 1994 - Introduction of the voluntary supplementary scheme with state subsidy 1995 - Pension Insurance Act (change in conditions of benefits, increasing of assesment base, change in benefit formula, retirement ages, restrictions in invalidity, EU harmonisation, etc.) 1999 - Amendment of Supplementary scheme (higher security of assets and introduction of tax incentives) 2000 - Tax incentives for life insurance (old-age types of products)

  4. Basic Information (4) I.pillar (mandatory, state budget, PAYG, uniform for all EA, DB, Old-age + I + Surv., state administration) • Contribution Rate 26 % • Compliance 96 - 99 % • Number of pensioners 2 585 000 • Replacement Ratio 43 % • Expenditures 9.4 % of GDP • Flat rate (1/5) + Earnings related (4/5) • 30 years assesment base indexed by average wage • Benefits adjusted according to prices + partly wages

  5. Basic Information (5) Private pensions (voluntary, FF, DC plans only, state contribution + tax incentives, state supervision) • Number of pension funds 14 • Number of participants 2 500 000 • Average contribution 340 CZK • Pension fund assets 2.6 % of GDP • Average real rate of return < 1 %

  6. Basic Information (6) Life insurance • Number of insurance companies > 30 • Number of participants (contracts) • Life insurance 6 200 000 • Pension insurance with tax incentives 2 100 000 • Assets 100 billion CZK • Average annual contribution 3600 CZK

  7. II. Description of the Private Pension Scheme

  8. status as at December 31, 2001

  9. Average Real Rate of Return of Pension Funds in 1995 – 2000

  10. III. Regulation and Consumer Protection

  11. Legal Status of Pension Funds • Pension fund is a legal entity (joint-stock company) • Minimum registered capital - 50 million CZK • Licensing : MF in agreement with MLSA and SC • Status and pension plan - an integral part of the license • Status includes : aims and objectives of investment policy, management principles, method of distribution of profit, custodian bank, method of publishing reports • Distribution of profit : at least 5% into the reserve fund, max.10% according to the shareholders

  12. Consumer Protection • Special law and specialisation of pension funds • Licensing, including pension plan approval • Investment rules • State supervision (Ministry of Finance and Securities Commission) • Custodian bank, auditing, annual reporting • Code of good practice of the APF • Only DC type of plans • Easy change of PF and possibility of lump sum payment instead of annuity

  13. Investment Rules • Maximal total nominal value of securities issued by 1 issuer < 20%. • Maximal value of cash deposited with one bank < 10% fund‘s assets. • Only state bonds and state-guaranteed bonds, mortgage certificates, bonds issued by Czech National Bank and other banks, corporate bonds which are traded on the stock exchange, bank-guaranteed or bank issued municipal bonds. • Maximal value of shares accepted for trading on the stock exchange < 25% assets. • Only bonds issued by OECD member states or by central banks of OECD member states. • Maximal value of 1 piece of movables that constitute a safe-deposit guarantee for financial means < 5% assets. • Maximal value of 1 piece of real estate < 5% assets.

  14. Pension Plan must include • The types of pensions; • the conditions for entitlement to benefits and their payment; • the method of calculation the benefits; • the reasons for contract´s cancellation; • the rules for contribution´s payment; • therules for deferment of or interruption in contribution´s payment and changes in the amount of contribution´s payment; • the rules and methods of payment of contributions and the procedures affecting non-remittance or late or incorrect remittance; • the conditions for acceptance of financial means from supplementary pension insurance with another pension fund and the adjustment of entitlement on the basis of such acceptance; • the principles according to which the beneficiaries including pension recipients participate in the distribution of pension fund's revenues.

  15. IV. Weaknesses of the Scheme • 1. Not in full compliance with EU legislation. • 2. Rational occupational pension scheme doesn´t exist. • 3. Insufficient safety of assets. • 4. Insufficient economic transparency due to inconsistent separation of pension funds and shareholder´s assets. • 5. High administrative cost especially due to the individual character of the systém. • 6. Short-time character of the scheme.

  16. Thank you for your attention

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