On a recent trip to Central Europe, we were struck how close together Czechia, Slovakia, Austria & Hungary were, with Vienna within an hour’s drive of the borders of all 4 countries. We saw fine medieval towns, beautiful rolling countryside, the grandeur of the capital cities, and, as evidence of its industrial capabilities, many car transporters working their way out from the car factories near Bratislava.
However, when it comes to pensions, Central Europe has certainly had less focus than the big pension markets of Western Europe. In our 30 years’ experience of working with multinationals, the number of questions and work on pensions in this area has been a lot lower than in other parts of the world.
Why is this? Many multinationals have a presence in this part of Central Europe. This has been driven by their strategic locations, skilled labour, economic liberalisation and European Union membership. Many automotive, technology & IT, life sciences, and manufacturing & engineering companies have set up subsidiaries, service centres or factories in this region. Global retails and hotel chains are present in the countries; and global consumer goods and food & beverage companies sell into the region.
The lower focus on pensions is perhaps due to the much higher demands of managing pensions in other countries, the relatively high state pension
However, it is a set of countries where there is now strong DC pension provision, with tax benefits making them viable for employee benefit propositions, and where it is recognised the state pension may not be sufficient, as in other countries, for workers especially for higher-paid employees.
- Overview of pension systems
2. Replacement rates
Replacement ratios from these four countries fare well compared with the OECD coverage. OECD data shows that, for a woman aged 22 on average earnings, the expected net pensions is as follows: Austria 87%, Hungary 74%, Slovakia 73%, Czechia 59%. These figures are for a woman entering the workforce at age 22; and take into account personal income taxes and social security contributions.
For employees on national average earnings, all four countries have systems where the expected pension at retirement (replacement rate) is better than in Germany, UK, Ireland and Poland. Austria has the highest pension levels, but still behind the replacement rate in Netherlands.
This shows that, overall, the state and mandatory pension systems are reasonably generous in the four countries, especially when compared to other larger European countries. However, it is worth noting:
- Czech Republic is not providing the same level of pensions as the three others. Out of the four countries, it is an outlier.
- Employees and managers earning well above national average earnings will find that their expected pensions, as a % of pay, will be lower; and will be looking for additional pension provision from their employer or through the voluntary pension system
3. A quick look at Slovakia’s auto-enrolment system
Slovakia has an auto-enrolment system, but it works in a different manner to other countries. Employees who choose to join it have part of their employer’s social security contributions (4% of pay) redirected to a DC plan. There is a corresponding reduction in the state DB pension. Participation became voluntary in 2013 for new entrants to the labour force and for workers younger than age 35. Effective May 2023, all individuals under age 40 are automatically enrolled with an option to opt out within two years.
Not all employees participate in mandatory or auto-enrolment pension systems. As in other countries, Slovakian employees can opt-out of the auto-enrolment system. In 2023, 50% employees had opted out, which is very similar to the levels in UK; but much better than in 2015 where around 65% had opted out.
4. Improving pensions in Czech Republic
The Czech Republic has a voluntary personal pension system. It has take-up rates of about 60% of the working-age population which, according to the OECD, has one of the highest levels of take-up rates in any OECD country.
Savings on a personal basis goes back a long way locally. As far back as 1994, the Czech Republic introduced a funded DC system, similar to Sweden, to sit on top of the pay-as-you-go state pension. After various major changes, it is now a voluntary system, but participants and their employees receive tax benefits on contributions, and the government also pays in contributions.
However, the system is not compulsory, and only 26% of individuals have employers paying contributions to pension plans on their behalf. There has been a small improvement since 2018 , but it still means three-out-of-four employers are not supporting their workers with pension provision
Part of the reason may be to the reasonable level of state benefits for average earners, and not seeing a need to help employees save more for retirement. However it may partially be due to widespread changes in the pensions system from 2013-2019. This may have encouraged distrust in the system, but the consequence is that many pension savers are older workers who were in the old system, very few employers pay pension contributions for employees, and relatively few younger workers participate. Employers could do more to help employees save more for their retirement.
Source: Ministry of Finance of the Czech Republic, Report on Financial Market Developments in 2023
The local Czech system has some compelling features which make it a viable employee benefit:
- Plans are tax effective. Lower earners and their employers receive tax deductions on contributions, tax-free investment roll-up, and tax-free benefits (if taken as an annuity or withdrawn over a period of more than 10 years).
- The state also pays matching contributions up to CZK 230 a month. In 2017, tax reliefs on employer contributions doubled to CZK 50,000 a year
However, it has also appeared at the bottom end of many international comparisons. Part of this is caused by the tendency for most people to invest in funds with very little equity exposure, Although equity funds are available, most Czech individuals are choosing funds with a high bond content or that provide a nil return guarantee and so invested very conservatively. For many Czech employees, not losing any capital is seen as more important than achieving high expected returns. The impact of this in recent years has been low, and negative, performing funds,
- Returns have also been bad. OECD figures show that the average returns on Czech pension funds have been one of the worst in the OECD, with negative real returns of almost 3% a year over the period 2014-22 – a period in which most pension funds around the world achieved positive returns
- Most investments are in government bonds, and it has, by far, the lowest proportion of investments held in equities – at around 5% compared to around 40-50%, on average, in other OCED countries (see Chart below)
Overall, the Czech Republic is a good example of a country where employers could do more to help employees with savings for retirement.
Government and industry changes in 2025 will hopefully trigger the interest with proposals to require employees in “demanding” professions to receive a 4% employer pension contribution and greater use of equity-based funds
A minority of companies are helping employees by contributing to personal plans, but more could be done – especially in workforces with higher numbers of higher paid people and for whom the state pension will not be as big compared to pre-retirement earnings.
Please contact Haines Global Pensions to discuss any of the topics in this newsletter in more detail or for help in reviewing pension provision for employees in Central Europe.