PRAGUE, Czech Republic -- New rules for Czech pension funds will trigger fund flows into international bonds and for the first time will allow local companies to make tax-free contributions into employee pension plans.
As a result, market participants expect the estimated E6 billion ($6.48 billion) in assets under management in the Czech investment market to increase as much as three fold over the next five years.
ABN Amro Bank NV, Amsterdam, recently bought Czech money manager Atlantik Portfolio Management AS, Brno, in anticipation of a pickup in demand for investment management services.
But recently introduced tighter funding requirements for pension plans might force smaller pension vendors to consolidate or seek financial assistance from international banks, said Lubomira Paclikova, international consultant for Watson Wyatt in Brussels.
Approved by the Czech parliament in July to boost the existing funded domestic pension system, the new rules come into effect in January and are designed to encourage the growth of private sector participation in pension provision.
Under the new rules, Czech pension plans:
* May invest no more than 25% in domestic equities;
* Are barred from investing in international equity;
* May invest unlimited funds in domestic government, municipal and corporate bonds;
* May invest unlimited funds in bonds issued by governments that are part of the Organization for Economic Cooperation and Development; and
* Have to meet a minimum capital requirement of 50 million Czech crowns ($1.47 million) compared with the current 20 million crowns.
Domestic savings rates are expected to increase as the following incentives come into effect:
* Tax exemptions on employee contributions of up to 12,000 Czech crowns a year.
* Tax exemption on employer contributions to staff of up to 3% of the overall wage bill. Previously there had been no tax benefits on employer contributions.
* State matching of 25% of the individual's contribution throughout the whole period the individual contributes. Previously the state subsidy was at a higher rate for the first two years of contributions and reduced after that.
In an attempt to encourage long-term savings, the minimum savings period was increased to five years from three years. Savers will only be allowed to draw benefits after pensionable age or at age 60, compared with 50 years previously.
"This is one of the most generous systems I know of in the world," said Iain Batty partner for Cameroon McKenna, London, and head of the law firm's international pension fund group.
The Czech government plans also to allow for occupational pension schemes, but it could take some time to draw up the necessary legislation, said Mr. Batty.
Now, pensions are sold individually to Czech citizens as defined contribution plans by roughly 25 plan providers, which include international insurers such as Winterthur Insurance, Vienna; Allianz AG, Munich; and Assicurazioni Generali Spa., Trieste. Contributions by the state and employers are paid directly into the individual pension plan.
Although insurance-linked savings represent only 2.9% of Czech gross domestic product there is likely to be a strong flow of business away from insurance products and into pension plans, said Ms. Paclikova.
There are 1.7 million people in the voluntary Czech pension system representing one-third of the labor market. The average monthly contribution per head is low as to date there have been few incentives to get individuals saving, she said. At the end of 1998 the average monthly contribution to personal pension plans was $10.
The new rules have sparked criticism from life insurers as insurance-linked savings plans will not be subject to the same generous tax benefits when the new rules apply. Insurers would like tax breaks on contributions to insurance plans similar to those for pensions, said Tomac Machanec, chairman of the board of pension funds for Allianz Zivnobanka Pension Fund, Prague, and a member of the board of the Association of Pension Funds for the Czech Republic.
At the end of 1998 only 8.5% of employers in the Czech Republic contributed to staff pensions, according to a recent survey by Watson Wyatt. The survey also found almost one-third of employers, and multinational companies in particular, would consider contributing to staff plans once tax benefits were introduced, Ms. Paclikova said.
But domestic employers might be reluctant to contribute to staff pension plans as economic growth in the country is relatively slow and many companies are unsure whether they can afford the additional cost, said Mr. Machanec.
He expects pension-linked savings to represent between 20% and 30% of GDP within the next 15 years, compared with the current level of less than 2% of GDP.
Jaromir Odstrcil, human resources manager for CS Cabot Czech Republic, Valasske Mezirici, welcomed the new tax breaks and said they could save his company up to $40 000 a year in pension provision for its work force of 122.
CS Cabot is unusual in the Czech Republic as it makes regular contributions to staff defined contribution plans. The company began contributions to staff pension plans three months ago, shortly before the government passed the new law. The total contribution by staff is 3.2% of salary, of which 70% is paid by the company.
British American Tobacco Czech Republic, Prague, does not yet plan to launch a pension plan for its staff but may reconsider in two to three years -- once the legal framework has been tried and tested, said Csaba Stoltz, human resources manager.
As pension contributions have not been tax deductible in the past, the company has shied away from making provision for its staff. "I introduced a staff pension scheme for our operations in Hungary but the situation here in the Czech Republic is very different," he said. Insured savings plans dominate the Czech market and it might be difficult to sell the benefits of saving for a pension, he said.
Other multinationals such as ICI have made pension provisions for their Czech staff, but administer the plans from the United Kingdom. Once the legislative environment is settled they plan to implement domestic programs in the Czech Republic, said Ms. Paclikova.