Czech Government Cuts State Support for Retirement Savings

The Czech government has approved a new law that will eliminate state support for citizens who save for retirement in the private sector. Those who have already started saving in the so-called third pillar of the pension system, which includes private pension funds, will no longer receive monthly state contributions of up to CZK 340 (about $15). According to the Ministry of Finance, the change will affect approximately 750,000 out of 4.36 million account holders. However, pension funds say the number of affected individuals is expected to be even higher.

The government’s decision has been met with opposition from pension funds, who worry that the policy change will cause an outflow of deposits. Due to low long-term returns on pension funds, seniors may lose interest in saving without the state’s contribution. Opposition parties have also voiced concerns about the changes to the third pillar of the pension system.

The Ministry of Finance argues that the state support for the third pillar loses meaning and efficiency when the saver receives an old-age pension. The third pillar then serves as a short-term savings product with state support, which is not the purpose of the system. The government has also approved new retirement savings options and contribution adjustments.

As part of the new law, the government will raise the mandatory monthly deposit amount to CZK 500 ($22), up from CZK 300 ($13). This change will make it difficult for low-income pension savers, young people, and single mothers to save. The government also plans to extend the minimum required savings period for entitlement to state aid from five to ten years.

Pension funds are allowed to create a new type of fund in the supplementary pension system, called an alternative participant fund, an alternative to existing participant funds with dynamic investment strategies. Due to established limits, existing participant funds cannot invest in private capital, real estate, start-ups, or infrastructure. The new alternative participant fund will have a more flexible fee policy and investment strategy, allowing dynamic investments with higher potential returns.

The proposed law also includes measures to increase incentives for people to switch from transformed to participant pension funds, which offer higher returns but with higher risk. Currently, it is impossible to participate in both types of funds established before and after 2013, reducing motivation to switch.

The novel law aims to allow participants to remain in the transformed fund while contributing to the participant fund, which is expected to increase motivation to switch to participant funds. The state aid will be provided only for deposits into one type of fund.

The changes in the law will be discussed in the Chamber of Deputies.