Risk Management and Regulation of Defined Contribution Scheme in the Czech Republic

Ji Krl Director of Social Insurance Department MLSA, Czech Republic

ISSA Seminar for Social Security Actuaries and Statisticians :Actuarial Aspects of Pension ReformMoscow, July 4, 2002

I. Basic Information

T1

Basic information (1)

19901995200020011989

Population (in thousands)10,36410,32110,26710,270

GDP (in billion CZK)626.21,381.01,959.62,146.0

Economic. Active (in thousands)5,3515,0124,664

Pensioners (in thousands)2,4222,5022,5682,584

Average life expectancy - Men67.669.771.772.1G5

Average life expectancy - Women75.476.678.478.5G575.4

Average Wage (in CZK monthly)3,2868,17513,49014,642

ratio P/P23.3724.2425.0125.16G3

GDP 1990=100100221313343G4

Wage 1990=100100249411446G4

T2

The replacement rates of population above 65

(Compared with population aged 18 to 64 in the same income decile)

Percentages, mid 90 sa

CanadaFinlandGermanyItalyJapanNetherlandsSwedenUnitedUnited

KingdomStates

Decile 1b1481011021287283897680

Decile 21078390927377846978

Decile 3947884867574816677

Decile 4877582817772806478

Decile 5857380787774796478

Decile 6867279767877796581

Decile 7867278768180796783

Decile 8867279778482837294

Decile 9877381778780796783

Decile 10967579759482837294

a) Disposable income of the retirement-age population in decileX divided by the disposable income of the working age population decile X.

b) Decile is based on each population income

Source : Calculations from OECD questionare on distribution of household incomes (1999); OECD, 2001 : table 22

CanadaFinlandGermanyItalyJapanNetherlandsSwedenUnit. KingdomUnit.States

Decile 1

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

Decile 10

G1

10364242223.3693554612

10321250224.2418370313

10267256825.0121749294

10270258425.1606621227

&A

Page &P

Populatin

Pensioners

Ratio

year

in thousands

percentage

Population and Pensioners

G2

100100

248.7827145466220.536569786

410.5295191722312.9351644842

445.5873402313342.7020121367

Average wage

GDP

year

percentage 1990=100

Development of GDP and average wage1990 = 100%

G3

67.675.4

69.776.6

71.778.4

72.178.5

Men

Women

year

number of years

Average life expectancy

Gf4

1481079487858686868796

101837875737272727375

102908482807978798179

128928681787676777775

72737577777881848794

83777472747780828082

89848180797979837983

76696664646567726772

80787778788183948394

Decile 1

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

The replacement rates of population above 65

G5

1481011021287283897680

1078390927377846978

947884867574816677

877582817772806478

857380787774796478

867279767877796581

867278768180796783

867279778482837294

877381778780796783

967579759482837294

Canada

Finland

Germany

Italy

Japan

Netherlands

Sweden

United Kingdom

United States

in %

The replacement rates of population above 65

G6

1021018983

90838477

84788174

82758072

80737974

79727977

78727980

79728382

81737980

79758382

Germany

Finland

Sweden

Netrerlands

Replacement rates of population above 65

G7

148807672128

10778697392

9477667586

8778647781

8578647778

8681657876

8683678176

8694728477

8783678777

9694729475

Canada

United States

United Kingdom

Japan

Italy

Replacement rates of population above 65

G8

100100100

98.6105.982.2

117.3103.393.6

121.9103.394

Average wage

GDP

Pensions

year

year 1990 = 100%

Real value of GDP average wage and pensions

G9

75.468.1

76.669.7

78.572.1

Women

Men

year

numege of years

Average life expectancy

Graf10

10364242223.3693554612

10321250224.2418370313

10267256825.0121749294

10247268726.2223089685

10244286327.9480671613

10200314230.8039215686

10098327632.4420677362

9927337934.0384809106

9691347935.8992879992

&A

Page &P

Population

Pensioners

Ratio

year

in thousands

percentage

Population and pensioners (1)

Data

1989199019911992199319941995199619971998199920002001

Index N 31100110.2167.1189.4226.2251.1277.1303.1333.1377.8386.3405.4429.9

index spot cen 31l100109.7171.8190.9230.6253.6276.7301.1326.7361.7369.3383.7401.1

Vypoten N100.00151.63171.87205.26227.86251.45275.05302.27342.83350.54367.88390.11

Vypoten SC100.00156.61174.02210.21231.18252.23274.48297.81329.72336.65349.77365.63

spot. ceny S100156.6174.1210.3231.3252.5274.7297.9329.7336.7349.9

Mzdy32863792464458176894817296761069111693126661349014642

Dchody1598173121762413273430593578421348405367572459626352

1000.8290237410.81107660360.76946777470.77556337330.82203126760.88489155290.92502880270.90438670290.94332087160.93625199040.9406489411

Dchody10082.981.176.977.582.288.592.590.494.193.694.0

HDP100.088.499.5100.1102.2105.9104.399.099.0100.5103.3103.3

Mzdy73.781.284.290.798.5107.2109.2107.9114.5117.3

73.781.284.290.898.6107.3109.2107.9114.5117.4121.9

1990199520002001

mzda10098.6117.3121.9potno ke spotebitelskm cenm renm

HDP100105.9103.3103.3uit defltor daje z 31 (jokl

Dchody100.082.293.694.0potno pes N stejn s Petrm

Doba doit198919952001

Men68.169.772.1

Women75.476.678.5

199019952000200520102015202020252030

Population (in thousands)10,36410,32110,26710,24710,24410,20010,0989,9279,691

Pensioners (in thousands)2,4222,5022,5682,6872,8633,1423,2763,3793,479

Ratio23.3724.2425.0126.2227.9530.8032.4434.0435.90

List1

T1

Basic information (1)

19901995200020011989

Population (in thousands)10,36410,32110,26710,270

GDP (in billion CZK)626.21,381.01,959.62,146.0

Economic. Active (in thousands)5,3515,0124,664

Pensioners (in thousands)2,4222,5022,5682,584

Average life expectancy - Men67.669.771.772.1G5

Average life expectancy - Women75.476.678.478.5G575.4

Average Wage (in CZK monthly)3,2868,17513,49014,642

ratio P/P23.3724.2425.0125.16G3

GDP 1990=100100221313343G4

Wage 1990=100100249411446G4

T2

The replacement rates of population above 65

(Compared with population aged 18 to 64 in the same income decile)

Percentages, mid 90 sa

CanadaFinlandGermanyItalyJapanNetherlandsSwedenUnitedUnited

KingdomStates

Decile 1b1481011021287283897680

Decile 21078390927377846978

Decile 3947884867574816677

Decile 4877582817772806478

Decile 5857380787774796478

Decile 6867279767877796581

Decile 7867278768180796783

Decile 8867279778482837294

Decile 9877381778780796783

Decile 10967579759482837294

a) Disposable income of the retirement-age population in decileX divided by the disposable income of the working age population decile X.

b) Decile is based on each population income

Source : Calculations from OECD questionare on distribution of household incomes (1999); OECD, 2001 : table 22

CanadaFinlandGermanyItalyJapanNetherlandsSwedenUnit. KingdomUnit.States

Decile 1

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

Decile 10

G1

10364242223.3693554612

10321250224.2418370313

10267256825.0121749294

10270258425.1606621227

&A

Page &P

Populatin

Pensioners

Ratio

year

in thousands

percentage

Population and Pensioners

G2

100100

248.7827145466220.536569786

410.5295191722312.9351644842

445.5873402313342.7020121367

Average wage

GDP

year

percentage 1990=100

Development of GDP and average wage1990 = 100%

G3

67.675.4

69.776.6

71.778.4

72.178.5

Men

Women

year

number of years

Average life expectancy

Gf4

1481079487858686868796

101837875737272727375

102908482807978798179

128928681787676777775

72737577777881848794

83777472747780828082

89848180797979837983

76696664646567726772

80787778788183948394

Decile 1

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

The replacement rates of population above 65

G5

1481011021287283897680

1078390927377846978

947884867574816677

877582817772806478

857380787774796478

867279767877796581

867278768180796783

867279778482837294

877381778780796783

967579759482837294

Canada

Finland

Germany

Italy

Japan

Netherlands

Sweden

United Kingdom

United States

in %

The replacement rates of population above 65

G6

1021018983

90838477

84788174

82758072

80737974

79727977

78727980

79728382

81737980

79758382

Germany

Finland

Sweden

Netrerlands

Replacement rates of population above 65

G7

148807672128

10778697392

9477667586

8778647781

8578647778

8681657876

8683678176

8694728477

8783678777

9694729475

Canada

United States

United Kingdom

Japan

Italy

Replacement rates of population above 65

G8

100100100

98.6105.982.2

117.3103.393.6

121.9103.394

Average wage

GDP

Pensions

year

year 1990 = 100%

Real value of GDP average wage and pensions

G9

75.468.1

76.669.7

78.572.1

Women

Men

year

numege of years

Average life expectancy (2)

Graf10

10364242223.3693554612

10321250224.2418370313

10267256825.0121749294

10247268726.2223089685

10244286327.9480671613

10200314230.8039215686

10098327632.4420677362

9927337934.0384809106

9691347935.8992879992

&A

Page &P

Population

Pensioners

Ratio

year

in thousands

percentage

Population and pensioners

Data

1989199019911992199319941995199619971998199920002001

Index N 31100110.2167.1189.4226.2251.1277.1303.1333.1377.8386.3405.4429.9

index spot cen 31l100109.7171.8190.9230.6253.6276.7301.1326.7361.7369.3383.7401.1

Vypoten N100.00151.63171.87205.26227.86251.45275.05302.27342.83350.54367.88390.11

Vypoten SC100.00156.61174.02210.21231.18252.23274.48297.81329.72336.65349.77365.63

spot. ceny S100156.6174.1210.3231.3252.5274.7297.9329.7336.7349.9

Mzdy32863792464458176894817296761069111693126661349014642

Dchody1598173121762413273430593578421348405367572459626352

1000.8290237410.81107660360.76946777470.77556337330.82203126760.88489155290.92502880270.90438670290.94332087160.93625199040.9406489411

Dchody10082.981.176.977.582.288.592.590.494.193.694.0

HDP100.088.499.5100.1102.2105.9104.399.099.0100.5103.3103.3

Mzdy73.781.284.290.798.5107.2109.2107.9114.5117.3

73.781.284.290.898.6107.3109.2107.9114.5117.4121.9

1990199520002001

mzda10098.6117.3121.9potno ke spotebitelskm cenm renm

HDP100105.9103.3103.3uit defltor daje z 31 (jokl

Dchody100.082.293.694.0potno pes N stejn s Petrm

Doba doit198919952001

Men68.169.772.1

Women75.476.678.5

199019952000200520102015202020252030

Population (in thousands)10,36410,32110,26710,24710,24410,20010,0989,9279,691

Pensioners (in thousands)2,4222,5022,5682,6872,8633,1423,2763,3793,479

Ratio23.3724.2425.0126.2227.9530.8032.4434.0435.90

List1

The History of the Czech Pension Reform Country of Non-reform ? (3)1992 - Abolishment of preferences in I. pillar1994 - Introduction of the voluntary supplementary scheme with state subsidy1995 - Pension Insurance Act (change in conditions of benefits, increasing of assesment base, change in benefit formula, retirement ages, restrictions in invalidity, EU harmonisation, etc.)1999 - Amendment of Supplementary scheme (higher security of assets and introduction of tax incentives)2000 - Tax incentives for life insurance (old-age types of products)

Basic Information (4)I.pillar (mandatory, state budget, PAYG, uniform for all EA, DB, Old-age + I + Surv., state administration) Contribution Rate 26 %Compliance 96 - 99 %Number of pensioners 2 585 000Replacement Ratio 43 %Expenditures9.4 % of GDPFlat rate (1/5) + Earnings related (4/5)30 years assesment base indexed by average wageBenefits adjusted according to prices + partly wages

Basic Information (5)Private pensions (voluntary, FF, DC plans only, state contribution + tax incentives, state supervision)

Number of pension funds14Number of participants2 500 000Average contribution340 CZKPension fund assets2.6 % of GDPAverage real rate of return< 1 %

Basic Information (6)Life insurance

Number of insurance companies > 30Number of participants (contracts)Life insurance 6 200 000Pension insurance with tax incentives 2 100 000Assets 100 billion CZKAverage annual contribution3600 CZK

II. Description of the Private Pension Scheme

status as at December 31, 2001

Number of Participants

Pension Funds Investment Portfolio as at December 31, 2001

Average Real Rate of Return of Pension Funds in 1995 2000

III. Regulation and Consumer Protection

Legal Status of Pension Funds Pension fund is a legal entity (joint-stock company) Minimum registered capital - 50 million CZK Licensing : MF in agreement with MLSA and SC Status and pension plan - an integral part of the license Status includes : aims and objectives of investment policy, management principles, method of distribution of profit, custodian bank, method of publishing reports Distribution of profit : at least 5% into the reserve fund, max.10% according to the shareholders

Consumer Protection Special law and specialisation of pension funds Licensing, including pension plan approval Investment rules State supervision (Ministry of Finance and Securities Commission) Custodian bank, auditing, annual reporting Code of good practice of the APF Only DC type of plans Easy change of PF and possibility of lump sum payment instead of annuity

Investment RulesMaximal total nominal value of securities issued by 1 issuer < 20%. Maximal value of cash deposited with one bank < 10% funds assets.Only state bonds and state-guaranteed bonds, mortgage certificates, bonds issued by Czech National Bank and other banks, corporate bonds which are traded on the stock exchange, bank-guaranteed or bank issued municipal bonds.Maximal value of shares accepted for trading on the stock exchange < 25% assets.Only bonds issued by OECD member states or by central banks of OECD member states.Maximal value of 1 piece of movables that constitute a safe-deposit guarantee for financial means < 5% assets.Maximal value of 1 piece of real estate < 5% assets.

Pension Plan must includeThe types of pensions;the conditions for entitlement to benefits and their payment;the method of calculation the benefits;the reasons for contracts cancellation;the rules for contributions payment;the rules for deferment of or interruption in contributions payment and changes in the amount of contributions payment;the rules and methods of payment of contributions and the procedures affecting non-remittance or late or incorrect remittance;the conditions for acceptance of financial means from supplementary pension insurance with another pension fund and the adjustment of entitlement on the basis of such acceptance;the principles according to which the beneficiaries including pension recipients participate in the distribution of pension fund's revenues.

IV. Weaknesses of the Scheme1.Not in full compliance with EU legislation.

2.Rational occupational pension scheme doesnt exist.

3.Insufficient safety of assets.

4.Insufficient economic transparency due to inconsistent separation of pension funds and shareholders assets.

5.High administrative cost especially due to the individual character of the systm.

6.Short-time character of the scheme.

Thank you for your attention