Private Pension Insurance in the Czech Republic The Decumulation Phase

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

2. Pension System in the Czech Republic 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 e-mail: stepanka.pollnerova@mpsv.cz, www.mpsv.cz

3. Supplementary Pension Insurance with a State Contribution Ministry of Labour and Social Affairs, Department of Social Insurance e-mail: stepanka.pollnerova@mpsv.cz, www.mpsv.cz

4. 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% Ministry of Labour and Social Affairs, Department of Social Insurance e-mail: stepanka.pollnerova@mpsv.cz, www.mpsv.cz

5. 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 e-mail: stepanka.pollnerova@mpsv.cz, www.mpsv.cz

6. Termination Settlement and Lump-SumPayment 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 e-mail: stepanka.pollnerova@mpsv.cz, www.mpsv.cz

7. 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. Ministry of Labour and Social Affairs, Department of Social Insurance e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

8. 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 e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

9. 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 e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

10. 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 e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

11. 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 e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

12. Demand for Benefits (benefits paid out since 1994) Ministry of Labour and Social Affairs, Department of Social Insurance e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

13. 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. Ministry of Labour and Social Affairs, Department of Social Insurance e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

14. 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 e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

15. Thank you for your attention. Ministry of Labour and Social Affairs, Department of Social Insurance e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

16. Annex1: State Contribution Ministry of Labour and Social Affairs, Department of Social Insurance e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz

17. Annex2: 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 12 000 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 Ministry of Labour and Social Affairs, Department of Social Insurance e-mail:stepanka.pollnerova@mpsv.cz, www.mpsv.cz