Govt agrees on aims of pension reform, seeks wider consensus in parliament

The government has agreed on the main aims of the pension system reform, although on a very general level. The new system should be more efficient, equitable and financially sustainable. It should react to the changing needs of the society and individuals, increase savings rate and guarantee future pensioners a sufficient income.

Although the government outlined a reform plan some time ago, leaders of political parties represented in Parliament have recently agreed to discuss the issue thoroughly within their parties before dealing with it in the Lower House. The reform is seen as crucial for consolidation of Czech public finances. Both the government and the opposition see it as a task of primary importance which requires broad support across the political spectrum. After the individual parties discuss the basic principles of the new pension system, party leaders will meet again to find a generally acceptable model.

Prime Minister Vladimir Spidla believes a new system could be introduced before the end of his election term, which means within two years.

The ruling coalition has proposed introducing the Swedish model of notional accounts. However, the main opposition Civic Democrats view it as a step backwards. In their opinion, the virtual accounts only conserve the current situation when working people finance the pensions of the retired.

The governing coalition would like to submit the basic principles of the pension reform by mid-2004. Specific legislation is to be drafted in the first half of 2005.

Economic experts agree that it is a difficult and lengthy task to reform the pension system. Earlier, I discussed the issue with analyst Vladimir Pikora from the Prague branch of Volksbank.

"The Czech Republic needs a pension reform - that is an urgent need. However, no government is strong enough to change this system substantially. The government is trying to change now. However, these change are only tiny, cosmetic. We need a significant change of the system. The system should use also capital markets - something like the Slovaks introduced. We should be inspired by Slovakia. I consider their reform to be really substantial and we should learn from them. However, I do not think that the current government would be able to change the systems o much that we could speak about a real reform. What we have now and what we will probably have will be only tiny reform that will make the headlines but no real impact."

What would you suggest? A three-pillar system with the ongoing financing, capital funds and some additional voluntary insurance - is it the right model?

"Yes, I think so. That's probably the only solution we have now. There is always a question whether to use the capital markets, as the third pillar or not because it brings in some risks. On the other hand, it could bring gains, yields - otherwise, the government would be the main source of funding. That is probably unsustainable for the future as we can expect that the number of young people will decline as compared with the number of older people. So, I think this is probably the only solution we have now."

But there might be fears that what happened to small banks, credit unions, investment funds will happen to the pension funds and that may be why the government is hesitant to make such a big change...

"That's the risk I mentioned before, I understand the fear, it is true, this could happen. However, we have good regulation, good supervision that should prevent that from happening. What we should do is to limit the number of funds and make sure the funds are connected with strong, international banks with long experience and good reputation, so that the funds will be more experienced than during the privatisation when almost anyone could establish his own investment fund and then we saw the results. So, I think if these funds are really experienced, if they are run by people who have international experience, this should not happen. Also, our regulation and our supervision has improved and I expect that the cases we had will never happen again."

But is the capital market vital enough to enable that considered trading on the Czech capital market is not as developed as in other countries?

"It has been improving every day. As we join the EU and as we adopt the euro, we will be part of the single European market which is developed enough and I would not be afraid of it."