Pension fund leader in the Czech Republic

Czechs and the Czech pension system are at a crossroads. The economic health of the national pension system has been on the decline in recent years and promises to worsen in years to come. Choices must be made and steps must be taken to divert serious threats looming in the future.

The root of the problem is that the population is ageing and there will not be enough funds available in the foreseeable future, as a shrinking working population supports a growing number of pensioners. The problem is compounded by the unlikelihood of future pension levels keeping pace with increased cost of living. The outgrowth in economic terms is that pension account deficits in the state budget, in recent years hovering at around one percent of GDP, are growing at an inverse ratio to the negative demographic development causing the problem. By 2050, the deficit may reach four percent of GDP and the accumulated debt of the pension system could reach up to 50 percent of GDP. By 2065, accumulated debt may well balloon to 100 percent of GDP. The upshot is that Czechs must no longer expect retirement to be as their parents and grandparents have known it – on the contrary, many could end up below the poverty level.

Most of Europe is currently grappling with pension system problems and state budget deficits, and countries are experiencing varying degrees of success in the struggle. The Czech Republic has an even tougher fight ahead of it, and not just because it is one of the only EU countries yet to carry out pension reform. Its present pension system is not diversified and 94 percent of monies are from the state PAYG system. A fundamental problem is the absence of the second pillar of the pension system: the fund pillar, present in western Europe in the form of occupational pension funds, and in most countries of central and eastern Europe in the form of mandatory pension funds.

The current government, however, has a unique chance to reform the pension system, ensuring its fiscal sustainability and increasing its diversification. Reform must take into account both the positive and negative experiences of other European countries. Preparation for pension reform is therefore a key challenge for Czech pension funds.

The importance of a supplementary pension system
Czechs must face up to the challenges of the future, make choices and act. There are at present several means of saving for retirement, foremost among them investment in voluntary defined contribution pension funds towards retirement savings – what is called the third pillar of the pension system. By the end of Q3 2010, Czech pension funds had more than 4.5 million participants, a number representing roughly 70 percent of the working population. State contribution is one of the main reasons for the high level of participation and diminishes problems posed to the system by low monthly participant contribution, which is less than two percent of monthly earnings. There exists, however, opportunity to save for the future by investing in the third pillar – an opportunity that must not be missed. By saving with pension funds such as Penzijní fond Komerční banky (PFKB), Czechs are able to take positive action towards their future.

PFKB solution
PFKB, winner of the World Finance award for Pension Fund of the Year 2011 – Czech Republic, offers modern, transparent service with an innovative and proactive approach to client care: using information technologies to allow clients to access online information and enjoy easier communication.

“It has to be said that for PFKB employees and management it was quite an honour to win the award,” says Pavel Jirák, CEO of PFKB. “We take it as a great appreciation of our work – and a future obligation. We have to keep up the good work and always keep the reasons for winning the award in mind.

“Our almost 500,000 participants have, first of all, the financial certainty that comes with investing with a strong shareholder: Komerční Banka (KB), part of the international financial group Société Générale,” he says. “Secondly, we have tradition. PFKB has been active on the market since the system was begun in 1994.

Thirdly, we have a conservative investment strategy, always followed when investing our clients’ money.  We place emphasis on minimising investment risk: PFKB invests mainly in low-risk Czech government bonds, investment grade corporate bonds and term deposits.

“We apply mostly passive management to our portfolio and a minor part of the portfolio is managed actively. In doing so, we are able to provide a secure and stable source of income for participants. At the same time, we meet the legal objective of a yearly positive return and a sufficient level of capital. I should also add that we strictly control costs.”

Client care
“We have made it easier to meet client needs by processing requests faster and more effectively thanks to our distribution channels, made possible by the implementation of a new, robust and secure IT tool,” says Mr Jirák.

“Our web pages – – have been completely restructured and they now offer a wider range of better quality information to our clients. Participants are able to both make changes to, and close contracts via the internet. Information accessible to clients will include details about portfolio investment. We are focused on increasing transparency.

“We have expanded our loyalty programme for beneficiaries of VIP cards and discount cards supplemented by accident insurance. Our clients are also able to take advantage of discounts at several health and recreation resorts. And, for the third consecutive year we offer the tax optimisation programme to our clients, allowing them make the best use of state subsidy and tax reliefs.

“We have worked with KB to raise participant contributions through a new initiative set to be put into effect in the spring of 2011: one percent of the money spent by participants with KB credit cards will be deposited into PFKB accounts. Our supplementary pension insurance will be an integral part of the long-term savings and investment packages offered by KB.”

Thanks to client trust and its business and investment strategy, PFKB was able to weather the period of financial crisis and come up shining with positive performance results. Mr Jirák speaks openly about steps taken to avert crisis in PFKB.

“In 2008 and 2009 we managed to profit and even increase the value of participants’ funds – this at a time when most pension funds were experiencing the negative effects of the crisis,” he says. “Obviously a lot of measures had to be undertaken, especially in investment. We sold, for example, our real estate portfolio and we drastically reduced the volume of shares in our portfolio before share value dropped in October 2008.

Consequently, we began to put into effect both portfolio and asset and liability risk management. I believe we acted correctly, and client trust shows that our participants believe we did, too. Trust is manifest in the growth of the volume of assets under management, which over the past six years has doubled and reached almost €1.2bn at the end of Q3 2010.”

PFKB is well-prepared to meet the challenges posed by threats to the Czech pension system, if its past record is any indication of its future potential. Each year it has proved able within its portfolio to meet its obligations towards its clients and even periods of difficult struggle have ended with success. PFKB is the only Czech pension fund to have a Moody’s rating, and its rating is the highest level attainable by a pension fund in the Czech Republic. PFKB strives to offer solutions on all levels to ensure better retirement: the company is reacting to the needs of current and future clients to offer interesting and secure investment possibilities, and its employees are playing an active role in the preparation of pension reform.

The continuous integration of PFKB in Société Générale contributes to improving results in winning new clients and client care. Priority is also given to enhancing cooperation with the leading specialists of Amundi, one of the largest asset managers in Europe and the asset manager of PFKB. A vision is needed to be prepared for what tomorrow brings. At the crossroads where Czechs and the Czech pension system find themselves today, the choice is clear: PFKB offers solutions and is ready to lead the way.

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