The planned 'Better Pension' reform of the Czech third pillar may have an opposite effect to the one planned by the state due to the "enormous reduction" in income for system administrators, the Association of Pension Companies of the Czech Republic (APS ČR) has warned.

The Czech government submitted a bill to parliament last week (24 September) to amend the Supplementary Pension Savings Act, proposing a wide-ranging overhaul of the country’s third-pillar pension system.

The package includes measures to encourage pension saving from childhood, introduce a life-cycle investment strategy, reduce fees charged by pension companies and gradually wind down the country’s legacy transformed funds, which have been closed to new entrants since 2013.

The association argued that, instead of the expected increase in participants from the reform, there is a risk of losing up to a million people within three years, a deterioration in portfolio diversification, and an outflow of capital from the Czech Republic.

In particular, APS ČR opposed the proposal to reduce fees charged by pension companies, which it has also been consistent in opposing in the past.

Although it said it understands the need to reduce fees compared to the current situation, it proposed two adjustments to the planned reform to “ensure that the reform remains sustainable and functional in the long term”.

APS ČR proposed allowing the costs of underlying assets to be charged to the funds and maintaining the appreciation bonus at a reduced amount, applying only to the yield above inflation.

These proposals, APS ČR said, adjust the parameters of the “otherwise good reform”, which it believes will preserve the long-term functionality of the pillar and still mean significantly lower fees for clients.

According to the current reform setup, from 2027 onwards, the only income of pension companies would be the management fee, capped at 0.5 per cent of the volume of funds under management.

The average total cost of supplementary pension savings (DPS) was 1 per cent in 2025 (0.4 per cent distribution and marketing, 0.21 per cent asset management and 0.39 per cent administration and other costs).

The association argued that such a low ceiling does not provide sufficient room to cover the costs associated with acquiring new clients and purchasing a wide range of investment instruments.

APS ČR pointed out that although the Ministry of Finance forecast expects that, due to cheaper pension savings, 600,000 new participants will join the scheme, the reality is the exact opposite: a decline of up to one million clients, as early as 2029.

“With a management fee of 0.5 per cent, it would take approximately 37 years to recoup the cost of acquiring a single new client (which amounts to around CZK 3,000), which makes no economic sense,” APS ČR said.

“Distribution and marketing costs are the first areas where pension companies will make cuts, as they do not affect the day-to-day running of the companies. However, even in the medium term, these cuts will have a negative impact on the development of the pension pillar.”

Adding to this, APS ČR president, Radek Moc, argued that a cheaper pension scheme alone will not attract new people into the system; instead, he said pension companies need to actively reach out to people and explain the importance of long-term investment.

“If pension companies are left with no financial scope for customer acquisition and marketing, the number of people in the system will start to decline significantly, and the product will not reach those who need pension savings the most,” he cautioned.

The association suggested that the distribution cost problem could be solved by auto-enrolment but warned it would need to be “genuine enrolment, not merely the employer’s obligation to provide information about the pension scheme, as has been discussed in recent weeks”. APS ČR supports auto-enrolment with an opt-out option.

The association also warned that even a complete cut in distribution and marketing costs will still not be enough for pension companies to at least break even under the new system. Instead, it said costs relating to the underlying assets will have to be reduced.

Under the current and planned framework, these costs must be covered by pension companies, which APS ČR said meant companies will be forced to purchase only the cheapest exchange-traded funds (ETFs).

Despite DPS funds currently having a diverse portfolio with an average cost of underlying assets of 0.18 per cent, APS ČR explained that, due to the reform starting next year, they will have to switch to low-cost versions of the S&P 500 index to bring these costs as close to zero as possible.

“This change will result in extreme investment concentration in just a handful of companies – in other words, insufficient diversification – and may also have a negative impact on the funds’ performance,” APS ČR said.

Moc emphasised that the cheapest investment does not necessarily mean the highest return for the client, and said that what matters is how much the participant retains after costs.

“If we restrict pension companies to buying only the cheapest US indices, we will deprive clients of the potential offered by more profitable sectors and, at the same time, completely halt the inflow of pension capital into Czech infrastructure and the domestic economy,” Moc said.

“The Supplementary Pension Savings Act is amended on average more than once a year. The Czech pension system does not deserve hastily cobbled-together changes that will require further amendments.

“The measures we are proposing will significantly reduce fees for people, preserve two other key elements of the reform – the life-cycle strategy and greater support for young people – whilst at the same time not undermining the economy of the entire system.”

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