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What role should commercial insurance
companies play in the pension reform
Presumptions contained in the draft of
phase II of the pension reform that will
also be surely reflected in phase III, significantly
reinforce the role of (life) insurance
companies in the supplementary pension
insurance system with state contribution.
Contrary to the current practice, the life insurance
companies should ensure the entire
phase of annuities’ payment (today it
is ensured by pension funds). This model,
when annuities are administered and paid
by life insurance companies, is also to be
applied after the implementation of pillar II.
At present, people are saving very small
amounts for pensions. The Ministry of
Finance wants to motivate citizens by increasing
tax deductions. Is this a correct
method by which people could achieve adequate
savings for old age
In voluntary systems it is up to every individual
to decide whether his savings are
adequate. Hence, the amount of future savings
depends primarily on our decision on
how much we are ready to put aside for old
age, and lower by it our current living standard.
Efficient motivation which leads to increasing
savings without or with minimal
impact on public budgets can undoubtedly
strengthen the role of supplementary systems.
This can also alleviate the decrease
in income when an individual retires.
Today, most people do not even earn the
average wage in the Czech Republic. Is
there a solution for them to maintain their
existing standard of living
The possibility to maintain the standard of
living upon termination of economic activity
and retirement is only marginally related
to the income one has achieved during the
economic activity. But most citizens do
not, in principle, achieve the average wage.
Whether we will keep the standard of living
upon retirement depends on the distribution
of our income for economic activity and savings.
For example, higher savings lowers the
standard of living during economic activity
and increases it when the savings are consumed
during non-active years, and the opposite.
The duration of the economic activity
and non-activity also plays an important role.
The above mentioned indicates that the ability
to maintain the standard of living we had
when we were economically active through
to the period of inactivity depends primarily
on decision-making of individuals. Of course,
the pension system organized by the state,
that mandatorily limits consumption during
economic activity by payments of insurance
premiums for pension insurance and thus
creates a certain part of income for economically
inactive citizens, plays a major role in
this.
Not all citizens are able to do their jobs until
the age of 65. What early retirement options
will they have
The idea that a person must do “his or her”
vocation until retirement age is distorted.
The type of work can be changed throughout
one’s working life for many reasons.
And few types of jobs can be described as
“mandatorily life-long.”
Nevertheless, the amendment to the Pension
Insurance Act (sometimes also called
phase I of the pension reform) also contains
extension of the “early retirement period,”
during which one can effectively apply for
“a permanently decreased early retirement
pension.” It, however, works in a parametric
way: the percentage decrease of the
pension – today it totals 0.9% of the pension
calculation base for every missing 90
days (from the date the described type of
the old age pension was granted to the set
retirement age) – remains at this level for
the first 720 calendar days. After this period,
this “negative rate” rises to 1.5% of the
calculation base for every missing 90 days.
Foto: ČAP
Tomáš Síkora, Executive
Director of the Czech
Insurance Association
What parameters should a good pension
financing system in the Czech Republic
have
The approved phase I of the pension reform
which is certainly the basic precondition of
a more significant change in the pension
financing. It can, however, be considered
only as the necessary base for acquiring
sufficient resources for pension financing
of today’s middle age generation. But it
does not solve in a decisive way the problem
of adequate pensions for the present
young generation. The government must
find a suitable source for pension financing.
It is no revolutionary information, that introduction
of the so-called mandatorily voluntary
opt-out of part of the payments from
the state pillar of the pension system into
financial products administered by institutional
commercial administrators could significantly
decrease the future deficit between
wages and pensions. This system works
well in many EU countries and brings citizens
especially better appreciation of financial
means designed for pension financing.
If, however, we wish to equalize pensions
between average wages and payments of
people with average income and of people
with higher income, there should be changes
not only in the case of employees, but
also in the payments of self-employed persons,
who on average now contribute to the
system about 1,900 Czech crowns monthly.
On the contrary, the monthly contribution of
employees totals circa 5,200 Czech crowns.
But the difference in pensions paid is negligible.
Shouldn’t phase III* of the pension reform
precede phase II**
From my point of view, the second phase of
the pension reform is just a technical change,
although a very complex one. Although
the property of the pension funds will be
separated from its administrators, and participants
in the savings’ system will have the
opportunity to select investment portfolios
with varying risk, which increases the likeli-
Insurance Digest Pojistný obzor 3/2008 45