Written by: Tomáš Prouza & Petr Vykoukal (www.penize.cz)
Photo: Kurt Vinion
In spite of more money and new clients flowing in last year, there is increasing talk about market saturation for state-supported financial products. Now only the formally dormant mutual funds can look forward to significant growth.
FOR NOW, CZECHS ARE a bit averse to invest their money other than in banks. At least some statistical data bear this out. While Czech households have nearly CZK 600 billion in term deposits, of which CZK 133 billion are in building savings accounts, deposits and investments in other products lag considerably. The total value of all life insurance is only a bit in excess of CZK 80 billion, and at the end of last year CZK 54 billion were in pension funds and only CZK 42 billion in mutual funds. This means that bank deposits represent over two-thirds of Czech household assets, while in developed Europe they account for substantially less. In conservative Germany, for example, bank deposits account for approximately 40% of total assets. So one might think that alternatives to bank deposits have a bright future in the Czech Republic. But it’s not so clear-cut.
Deposits will grow instead of clients
Products that the state is somehow supporting are currently doing the best. Without massive state support, building savings and supplementary pension insurance would have no chance at being in such widespread use. Building savings banks currently report about 4.5 million clients, but there is still room for growth, according to Hans-Dieter Funke, chairman of the board of Českomoravská stavební spořitelna. “I estimate the potential for the Czech building savings market at approximately five to six million clients,” Funke optimistically claims. If current growth continues, his estimate should come true in a year. The banks will then fight mainly overso-called subsequent contracts – contracts with clients completing thefive-year savings cycle.
Pension funds are also approaching the saturation point. Last year they closed contracts with over 2.5 million clients. According to Jakub Dusílek, the director of the ABN AMRO Pension Fund, the market potential is 10% to 15% higher. At that point the pension funds will have the chance to convince their clients to add to their savings. Current payments average only CZK 366 per month, or CZK 458 including the state subsidy. “Most clients could pay more, but unfortunately their main motivation for supplementary pension insurance is generally not concerns for poverty in old age, rather an effort to take advantage of the state contribution. People are just becoming aware that they will have to play a greater role in insuring their old age,” Dusílek explains.
The sole product that has state support but also shows room for significant growth is life insurance. In this case state support is not offered in the form of money, but rather as tax relief for those who buy policies that will pay off when they retire. Insurers have seized this opportunity, so life insurance policy payments grew year-on-year by nearly 25%, to CZK 28.4 billion. This is formidable growth, but according to Ladislav Bartoníček, vice-chairman of the Czech Insurers’ Association, that is far from the end. Further growth of 10% to 15% is expected for this year.
Greater chances where the state isn’t involved
Although mutual funds could recently envy the state support their competitors enjoyed, they have the potential to soon become the best-selling personal finance product. However, they face a long haul. Administrators have managed to convince investors that they need notfear fraud or other malfeasance. According to Jiří Brabec, the head ofthe ŽB-Trust investment company, the problem today is that despite all of the attention paid to investment horizon (the recommended period for investments in funds), Czechs expect quick returns, and when they don’t see them, they tend to leave their money in the banks. In spite of this, he predicts a bright future. “There is great growth potential, as in this country investments in funds per citizen are one tenth those in Portugal, and even far lower than in other countries,” Brabec says. “However, this growth will not take place immediately, as people’s thinking and deep-rooted habits are changing only slowly.”
Consultants: service counts
Clients buy most personal finance products through consultants and sales networks. However, their services often differ wildly in terms of quality. Sales networks usually offer only one product of each type, while consultants try to represent more competitors and provide additional services to their clients – to choose the best variants for them. Robert Hekš, the director of Investhouse, which offers investment consulting, estimates that more than half of all personal finance products are sold through consultants and sales networks.
Consultants’ clients can currently be divided into two groups. One group, which knows next to nothing about money management, comes for consultations once and makes single investments. The other group, which is far more attractive, comprises people who have money and are well-informed but are most interested in service. This group usually involves busy entrepreneurs and successful managers. These people become long-term clients and represent substantial revenue sources for consultants. “Fortunately, the number of such clients has been rising lately,” says Hekš.
Although there are many consultants on the market today, there is still room for more. However, according to Hekš, this room will be filled mainly by firms offering high quality service. Furthermore, he sees the survival of independent consulting firms as being contingent upon mutual fund sales, because trying to compete with insurance and building savings networks is highly problematic due to differences between commissions.
|Saving for a rainy day
There’s no doubt that in 20 or 30 years state-paid pensions will no longer suffice for more than paying rent, utilities, and bread and water. If you want a different lifestyle, you have to start putting money aside. The sooner the better.For now, pension funds draw only marginal interest, and they’re often seen only as “investments for retirement”. But thanks to state support, it makes sense to start thinking about supplementary pension insurance while you’re in your twenties. It’s an ideal product that forces you to save smaller sums, true, but over a longer term, so when you retire you should have saved a respectable amount. The contribution of the state and sometimes of the employer, who can contribute to his employees’ supplementary insurance, will help you get there. A pension fund client (monthly, quarterly, yearly) deposits his payments (at least CZK 100 – no upper limit) regularly. The fund invests this money, along with each client’s state contribution, and increases its value on an ongoing basis, and 85-95% of the fund’s profit is added once a year to the client’s account, and 5% of the profit goes to the reserve fund. Most funds increase in value by about one or two percent more than term deposits do.
If you want the state contribution and be able to deposit the money you’ve put in from your tax base, you have to close a contract for at least five years before reaching the age of sixty. In this case the state contributes both directly and indirectly, as a tax deduction. If you save CZK 100-500 per month,the state will give you CZK 150 at most (on payments of CZK 500 or more per month). Any saved sum over CZK 500 can be deducted from your tax base, up to a maximum of CZK 12,000 per year (so the ideal monthly sum is CZK 1,500 – there is the maximum state contribution of CZK 150 on CZK 500 and the remaining CZK 1,000 is the monthly maximum for the tax deduction).
The assets saved can be paid off either in a single payment or as installments as long as you live, when the pension fund pays out a certain sum each month. If you need the money before you reach 60, you can request a so-called severance payment, which is the amount saved plus its added value, but without the state contribution, which rather markedly reduces your return.
|Better than a fund?
Building savings have become mainly an attractive way to enlarge your savings – and despite the cut in interest rates, it’s one of the best ways to invest.After term deposits, building savings is the second most frequently used method for saving in this country – and for a good reason. The building savings system is well known; you put your money into a building savings bank account for at least five years, and the bank increases its value at an interest rate that is set in advance and the state adds support that is also set in advance. Interest at building savings banks is now in the 3-4% range (among other things, this depends on whether you use your account only for saving or if you apply for a loan), and the state adds 25% of the sum deposited (but only for deposits up to CZK 1,500, with a state contribution of CZK 375).
You can deposit as much as you want, from CZK 100 per month. To receive the maximum value for your savings, the ideal is to pay CZK 1,500, where the state contribution reaches its maximum, while depositing higher sums is appropriate only if you want to take out a larger loan. Besides the regular monthly payments, you can choose other frequencies, or the total sum can be made in a single payment at year’s end.
Many people think that a building savings contract can be closed for only five years, after which a new contract must be closed. But that’s not true. Those five years are just the minimum period you have to save to qualify for state support. You can deposit money for a longer period and take it out when you need it, so you needn’t spend anything for a new contract. Remember, building savings banks are very inflexible, and they pay out your money only several months after you request it.
The basic conditions for the activities of building savings banks are set forth by law, so all six banks of this type on the Czech market offer what is essentially the same product. They differ in the fees for closing contracts and other services, as well as in the quality and extent of their consulting services and their availability; varying conditions also apply for taking out bridge loans. Finally, it’s very important to know under what conditions you can close out your account early if you need to do so, under which conditions you can choose your target sum, and how monthly or yearly deposits affect loan applications.
|Investment against the inevitable
Capital and investment life insurance are simple ways to insure yourself against the risk of death and simultaneously save a part of your premiums for your retirement.Capital life insurance came into being at a time when, besides traditional risk life insurance, long-term forms of savings were coming into use, thanks to which people began setting aside savings for their retirement. And because long-term administration of assets is relatively demanding and still profitable, most insurers began offering capital life insurance. Recently, a more sophisticated variant has appeared – investment insurance, in which you can choose how your money should be handled and where the insurer should invest it.
Premiums are divided into three parts. The first goes to insurance coverage against death (or injury with permanent consequences). The second part goes to the insured party’s savings account, where its value grows continually, and the third part is used to cover administrative fees that the insurer charges the client for its services. When the life insurance policy is closed, a single sum and a single period of time are set. The sum is the insurance coverage (the sum paid out in the event of the insured party’s demise), which serves as the base for the anticipated target sum (roughly the amount of money paid out at the end of the insurance period). The term of the duration of the insurance is stipulated, usually until 50-65 years of age.If the insured party reaches the stipulated age, the insurer pays him the insured sum plus annually added shares of the insurer’s profit from managing the money deposited.
Capital or investment insurance are relatively good ways to provide for your family against your death and get at least some of the money you’ve put in back if you live until the end of the insurance period. Of course it’s also important for the money not to just lie in the account for years, but for its value to steadily increase. Insurers usually offer inflation clauses (according to which the premium and the insured sum are increased so as to prevent devaluation due to inflation in the previous year) and the option of increasing the insured sum even without reviews of the insured party’s state of health. You can also save money – under certain conditions (primarily the duration of the contract prior to age 60) you can deduct your premiums, up to CZK 18,000, from your tax base.