President’s veto of pension reform bills “only administrative obstacle”, says manager of KB pension fund

The fate of one of the Czech government’s key reforms – an overhaul of the country’s pension system – is uncertain. The bulk of the reform legislation had already been approved and come into effect which means that in January 2013 people will have the right to set up individual pension accounts. But President Václav Klaus this week vetoed two bills necessary for the implementation of the new system. So what does Mr Klaus’ veto mean for the future of the pension reform and where does it leave the emerging private pension funds? These are some of the questions I put to Pavel Jirák, the managing director of the Komerční banka pension fund, and a board member of the Czech Association of Pension Funds.

Pavel Jirák

“Of course, it’s not very pleasant for us. We were all surprised by what he did because last year, he just did not sign the legislation [but did not veto it either]. That means that the legislation has come into effect and the pension reform will start at the beginning of next year.

“The fact that these two bills, related to the system’s second and third pillars, have been vetoed, that’s just an administrative obstacle. We hope that the veto will either yet be overridden by Parliament – it may happen because the lower house overrode a veto by the Senate – or if not, we think there are ways of processing the reform through regulations by the Finance Ministry.”

So do you believe the lower house will vote to override the president’s veto despite the somewhat shaky political situation within the coalition?

“We still believe. On the other hand, you are right that the situation has been difficult, particularly over the last few weeks. But [the pension reform] is one of the priorities of the current government so for instance I personally cannot imagine the reform will not go ahead because it’s closely linked to the very existence of the government.”

There has been an exchange of arguments, let’s say, between the president and the prime minister about the reasons behind the veto. Some observers say the motivation was purely political. But Mr Klaus gave several reasons why he rejected the bills and they do sound reasonable: a lack of political consensus on the reform, the fact that its effect on the state budget is uncertain, among others. What do you think of the president’s point of view?

“I think that his concern about political consensus is justified. He is right because the pension system and its reform should be dealt with in the long run which means that an agreement of the key political parties is important.

“On the other hand, it is obvious that over the past two years, the government has made a lot of effort in order to reach a consensus with the opposition, mainly the Social Democrats and the trade unions. The actual shape of the reform has been adjusted to the requirements of the opposition. So I think the government has gone to the limits of how the reform should look like.

“But Mr Klaus already mentioned his objections to the pension reform a year ago which was the time when he should have come up with his veto. Now, it doesn’t make any sense to veto the instrumental amendments to the main reform legislation.”

What do you think of the actual reform? It has been criticized from left and right; some critics say it makes no sense to make the second pillar – the private fund saving scheme – voluntary; the Social Democrats don’t like the second pillar at all and would instead like to maintain the current system. Do you think it’s a good reform?

“I would say that in this situation, anything is better than nothing. The system we have now is unsustainable. Due to the demographic trends and the aging of the population, people will not be able to live on just state pensions in the long run, and a reform is needed. The critics are right in that many features of the current reform are not perfect. But as I said, anything is better than nothing.”

Václav Klaus, photo: archive of the Czech Government

Do you the government has done a good job in explaining to the public what is happening?

“I would say that the main negative thing about the whole reform is that it has not been properly explained by the government. I’m quite confident that if the reform is explained, it would better accepted by the people. There is not educational campaign, no explanations, and pension funds now have to assume this role and educate people about it. So the main problem on the side of the government is definitely a lack of education campaigns.”

How great or little interest do you expect from the public in joining the private saving scheme? A recent survey by the Median agency for Czech Radio suggested some 30 percent of people are considering getting involved in one way or another. Can you confirm such numbers?

“Our own analysis of the numbers of potential clients shows that roughly 15 percent of the population will join the second pillar which means between 700,000 and 750,000 people. In the third pillar, there are already 4.7 million people taking part so we are close to the edge here. So I think 30 percent in the second pillar is quite an optimistic view.”

Will the system work with just 15 percent of the people?

“From our perspective, it will be feasible. But if you are asking whether the overall pension system in the Czech Republic will work with just 750,000 people involved, it won’t solve the problems of the current system where we expect a 50-billion-crown deficit this year.”

The opposition Social Democrats have vowed to dismantle the new system provided they get to form the next government. Are you ready for any structural changes that might come?

Photo: European Commission

“It’s difficult to say. The neighbouring countries had already introduced pension reforms which were later changed, as we saw in Hungary and Slovakia for example. So we have to be prepared for certain political risk and we are working on our IT systems and so on for a possibility of parametrical changes. If it comes, we will be able to incorporate it into our systems. But if it happens, it will destroy the confidence of the people in the system, and their willingness to take part in the private saving system would be severely damages.”

I noticed your website is in Czech only. Why aren’t you approaching potential English- or Russian-speaking clients who are entitled to pensions in the Czech Republic?

“The supplementary pension system – the third pillar – is aimed mainly at Czechs and foreigners with permanent residence in the country and the numbers of foreigners in the system are quite low. So we have been focusing primarily on Czech nationals. In the future, we might enlarge our scope on foreigners as well but for now, we target Czechs and permanent residents.”