Czech Government Prepares Pension Savings Reform: More for the Young, Less for the Funds

The Czech government is preparing to approve a sweeping reform of the pension savings system aimed at lowering fees charged by pension management companies and making savings more worthwhile for younger savers. According to Finance Minister Alena Schillerová, under the current rules, a person saving for 35 years could lose more than half of their final savings to fees — the reform is meant to cut these losses to less than a fifth.

According to Finance Ministry spokesman Filip Bégal, the current version of the bill differs little from the one presented in June, and the ministry expects it to be approved. Schillerová called the changes her “great labor of love,” stressing that their main goal is to encourage young people to start saving for retirement.

What Young Savers Will Get

People under 30 will receive a doubled state contribution — 40% of the amount they pay in. For children under 18, the minimum monthly deposit required to qualify for state support will drop to 100 crowns. In addition, savers under 36 will be able, after at least 10 years of saving, to withdraw up to a third of their contributions plus returns once, without penalty, regardless of the purpose of the withdrawal.

Another new feature will be the so-called life-cycle strategy: at a young age, funds will be invested more heavily in equities, and as savers approach retirement, their money will gradually shift to more conservative and safer instruments. For clients under 50, at least three-quarters of investments must go into an equity fund, with a maximum of 10% in an alternative fund. After age 50, savings will be gradually moved into more conservative funds.

The Fee Dispute

The reform also envisages phasing out the so-called transformed funds, which have been closed to new clients since 2013 — these are set to be wound down by December 31, 2036. “The real bombshell is that we’re dramatically cutting fees,” Schillerová said. Performance fees are to be scrapped for transformed, conservative, balanced and dynamic funds, and the maximum management fee will be capped at 0.5% per year. The alternative fund will remain an exception.

According to calculations by economists Filip Pertold and Lukáš Nádvorník of CERGE-EI — a joint research center of Charles University and the Czech Academy of Sciences — the current fee system can, over the long term, cost savers more than half of their final savings. After the reform, these losses should drop to less than a fifth, and over 35 years of saving, the final amount could increase by up to one million crowns.

The Association of Pension Companies disputes these calculations, arguing that the proposed 0.5% fee cap would not cover the cost of managing the funds. The Finance Ministry rejects this criticism. Schillerová is confident the bill, once approved by the government, will also pass through the Chamber of Deputies: “I believe no one will give in to lobbying pressure, and that together, regardless of political views, we will fight for the interests of our country’s citizens.”

How Fees Have Changed Over Time

Notably, while the current government is seeking to lower fees, parliament actually raised them back in 2015: the maximum fee for transformed funds rose from 0.6% to 0.8% per year. Given the volume of assets under management at the time, that amounted to roughly 660 million crowns in additional fees per year — and considerably more in subsequent years as fund assets grew. That change was pushed through the Chamber of Deputies via an amendment by ČSSD deputy Jaroslav Zavadil, whose party was then part of the ruling coalition with ANO and KDU-ČSL; the finance minister at the time was Andrej Babiš.

According to the Czech National Bank, as of the end of June, pension companies managed 332 billion crowns in transformed funds and more than 368 billion crowns in participation funds. Last year, the nine Czech pension companies collected roughly 8.2 billion crowns in total from management and performance fees on transformed and participation funds.

Source: novinky.cz