New pensions calculation

In Tax News No. 7/2011, we briefly informed you that the President did not sign what is known as small pension reform, which was to reduce the limits for calculating pensions and increase the retirement age. The President’s veto, however, was subsequently voted down by the Chamber of Deputies and the amendment was adopted and published under No. 220/2011, Coll.

The newly adopted amendment to the Pension Insurance Act introduced changes in determining the calculation base, which is crucial for calculating old-age and disability pensions, and also brought other changes aimed at ensuring that the pension system is financially sustainable in the future.

Calculation Base

The existing base for calculating pensions is based on two reduction limits (“RL”). Since 1 January 2001, the first RL and the second RL amounted to CZK 11,000 and CZK 28,200, respectively. To determine the calculation base, the average monthly assessment base of the insured shall be applied as follows: in full up to the first RL; 30% of the amount above the first RL up to the second RL; and 10% of the amount exceeding the second RL.

From 30 September 2011 until the end of 2014, three reduction limits shall be applied when determining the calculation base. The sums of the reduction limits applicable from 30 September 2011 shall amount to CZK 10,886, CZK 28,699 and CZK 98,960 for the first, second and third RLs, respectively. The average monthly assessment base of the insured for determining the calculation base shall then be applied as follows: in full up to the first RL; 29% of the amount above the first RL up to the second RL; 13% of the amount above the second RL up to the third RL; and 8% of the amount exceeding the third RL. From 2012 through 2014, the above-stated percentages applicable to the assessment base which exceed the first RL shall be reduced.

Starting in 2015, a different and assumed to be final regulation shall apply, namely there shall be only two reduction limits. From the average assessment base of the insured, the following shall be applied: 100% of the amount above the first RL up to the second RL; 26% of the amount above the first RL up to the second RL; and the amount exceeding the second RL shall not be taken into account.

The amounts of the reduction limits shall follow from the average wage as of 30 September 2011. The average wage shall be published by the Ministry of Labour and Social Affairs in its official decree.

In comparison with the current regulation, the new regulation reduces the assessment base, which in turn reduces the amounts of pensions for insureds with monthly income (i.e. assessment bases for the payment of insurance contributions) between approximately CZK 11,000 and CZK 34,000. For persons with income amounting up to CZK 11,000, pensions shall not be reduced by the new legal regulation. In the case of persons with income amounting to more than CZK 34,000, however, pensions shall be increased in comparison with the current regulation, which is in compliance with a requirement of the Constitutional Court following its request that the relation between the insurance contribution paid and the amount of the pension be strengthened.

Other specific changes

• Starting in 2012, the basic pension shall be assessed in the amount of 9% of the average wage. In each calendar year, such fixed amount shall change depending on the amount of the average wage published by the official decree of the Ministry of Labour and Social Affairs. To date, the basic pension assessment was determined by law as a fixed amount.
• The rate at which the retirement age shall increase is being accelerated until the retirement age of men and women is fully unified (67 years). Thereafter, it is planned that the retirement age will be gradually increased without a specific age limit having been determined. A summary of the retirement age for insureds born between 1936 and 1977 constitutes an annex to the amendment.
• The decisive period from which the pension assessment base is ascertained, which is currently 30 years, has been gradually increased. The period from the year following the year when the insured reaches 18 years of age until the year preceding the year when the pension was recognized shall now constitute the decisive period.
• Newly, the percentage of the early retirement pension assessment has been set.
• Starting in 2012, in cases where an executive of a private limited company is simultaneously a participant of such company, he/she shall participate only once in the pension insurance scheme applicable to such activities. To date, such activities were assessed separately to establish participation in the insurance scheme.