Economic expert: second pillar of government’s pension system can be made viable

Monday, July 1st, was the last day on which people over 35 could enter the so-called second pillar of the government’s pension insurance scheme, thereby putting part of their pension funds into private insurance companies. Despite a last-minute flurry of interest, the scheme has failed to meet expectations with less than 100,000 people taking advantage of it. So with the centre-right government on its way out, and the opposition threatening to scrap the second pillar - is this the beginning of the end of a reform that never really got off the ground? A question I put to Raiffeisenbank’s chief analyst, former finance minister Pavel Mertlik.

Photo: Barbora Němcová, Radio Prague International

“Not necessarily. I think there are two important points to make. First of all the main opposition party –the Social Democrats – want to dismantle this pillar and if their electoral victory is appropriately strong then this is a possibility. This means that what was withdrawn from the first pillar would be returned to the first pillar, so the opt-out would be recovered and as regards the private savings they would be channelled back to clients’ private accounts. But for that development you would need a certain degree of consensus in the lower house of Parliament and it is questionable whether that would be reached.

The second point is that the outgoing coalition government knows very well that the definition of the second pillar –as it now stands – is far from perfect and they want to make improvements. For example to prolong the possibility for people older than 35 to join up and to change many parameters of the system which made it so unattractive, in particular the fact that it does not allow people the possibility to switch back to the first pillar. I think this is very important, because joining the second pillar is an important decision and then there is no way out of it, even in a situation when the person loses their income or has significant changes to their life and work perspectives and so on.

Pavel Mertlík, photo: archive of Radio Prague

This may become a trap and this is what people are afraid of. It seems that the government now understands that. So, if the parameters are loosened, it may become more attractive and, if so, then I think the opposition could be more constructive with respect to the 2nd pillar’s further reorganization. “

Do you think that those proposed amendments are good enough to make it acceptable to the opposition?

“Not necessarily, but on the other hand, the opposition understands that if the idea of dismantling the scheme becomes unpopular, then finding some means of conserving it is important. I think that the reason why the opposition is so much against it is the opt-out, that means carving out money from the first pillar of the pension system, because what the second pillar actually means is that the inflow of contributions to the first pillar decreases and the gap here will broaden and that is what the opposition wants to change. But if there is a different scheme, in which the cost to the first pillar would not be so huge as in this case, it could be a good compromise.”

So if you were to assess it as a former finance minister – what would be the ideal solution? Amending it and leaving it in place?

Photo: Filip Jandourek

“I think leaving it and, importantly, changing the scheme in a way which will be more realistic in suiting the life-cycle of more people which is not uniform and can involve important changes in living conditions for which the scheme is not prepared. And the second point that needs to be made is that the most important problem of the Czech pension system is not the second pillar, but the first pillar which needs substantial reform and if the reform is done appropriately then I think that some kind of co-existence with a well-defined second pillar can be a win-win situation.”