Pension Funds Online

Pension System Design

The Czech Republic was one of the only Eastern European countries (together with Slovenia) not to have a compulsory supplementary pension pillar. As a result, its public pension system is supported by a 'third' pillar voluntary supplementary personal pension savings scheme, run on a defined contribution (DC) basis.

A major new structural reform to be introduced in 2013 will see a voluntary second tier created that employees are to be automatically enrolled into.

Public Pensions

The first pillar is a defined benefit (DB) pay-as-you go system covering employees and the self-employed. The scheme is administered by the Czech Social Security Administration (CSSZ). The system in its current form was introduced by the Pension Insurance Act, which came into force in 1996.

The contribution rate for the public pension system is 28%. Employers pay 21.5% of payroll, employees 6.5% of earnings. The self-employed pay the whole 28% of their earnings. From 2013 employees will be given the option of diverting 3% of their earnings from this contribution to new second-tier pension funds.

The scheme has two components: a flat-rate basic pension and an earnings-related part. The flat-rate part provides all entitled citizens with a basic pension. The earnings-related component has a strong redistributive character. The base on which pensions are assessed is 100% up to CZK 8,400 per month, 30% between CZK 8,400 and CZK 20,500, and 10% above this sum.

Private sector – the 'Third' pillar

The voluntary supplementary pension scheme is run by pension companies, which offer exclusively DC plans. The pension companies are joint stock companies, incorporated in the Czech Republic under the provisions of the Commercial Code. The purpose of pension companies is limited to the provision of supplementary pension insurance. Pension companies must be licensed by the Ministry of Finance, in agreement with the Ministry of Labour and Social Affairs and the Securities Commission. Members are allowed to choose between the state asset manager and private administrators.

Pension companies are not authorized to offer more than one pension plan. If participants have joined the system, they can switch pension funds as often as they like; there are no switching fees.

The minimum age at which payments can be received from a pension fund is 60, provided a minimum number of contributory years, which is regulated by each pension fund. If money is withdrawn from the account before this age, the state matching contributions have to be repaid and there is additional taxation. Generally, money can be withdrawn as a lump sum or in the form of regular installments.

The state matches employees' contributions depending on their level of contributions. For member contributions between CZK 100-199, the state adds CZK 50 plus 40% of the member contribution above CZK 100. If the pension plan member contributes between CZK 200 and 299, the allowance is CZK 90 plus 30% of the sum above CZK 200. The allowance gradually increases with the highest allowance (CZK 150) for members contributing more than CZK 500.

Employers can deduct their contributions from their tax base up to 3% of an employee's assessment base. Employer contributions of up to 5% of their wages are exempt from income tax for the employee.

Under the 2013 pension reform, existing supplementary pension funds are to be closed to new entrants. The providers can set up new funds in the new second tier pillar.

Additional sources:

The Organisation for Economic Co-operation and Development (OECD) - http://www.oecd.org