* May boost listings at Prague bourse in longer-term
* Economists say participation target too optimistic
* Large part of the funds expected to be invested abroad
* Looser regulation could free up savings investments
By Jan Korselt
PRAGUE, March 11 (Reuters) - Czech pension reform could
support domestic capital markets in the long run thanks to
looser regulation and new money inflows, but the plan is too
modest to make any sizeable impact in the next few years.
The changes will fail to funnel large amounts of cash to
stock and bond markets in the way that Poland's pension overhaul
kick-started its bourse over a decade ago.
Economists say the government's target of getting half the
workforce to participate in the new scheme -- which will allow
taxpayers to shift part of their contributions into personal
accounts -- is too optimistic.
"The parameters of the new private savings, as they have
been configured, certainly will not mean any dramatic change for
the domestic financial markets," said Pavel Sobisek, chief
economist for UniCredit Bank in Prague.
Under the government scenario, participation of 50-60
percent of the 5 million strong workforce would inject over 35
billion crowns ($2 billion) a year into bonds and equities.
But economists said many variables are still unknown, and
the increase in funds could amount to only 10 to 20 billion
crowns in the first few years after the system starts in 2013.
Much of that may also go to foreign assets, meaning a boost
to domestic trading volumes of only a few percentage points.
The proposed reform gives the option of diverting 3
percentage points from a 28 percent social tax away from the
pay-as-you-go system and into private pension funds, provided
the joiners add another 2 percent from their own salary.
Analysts say the out-of-pocket expense will curb membership
and limit the chance of Czech markets emulating those of Poland,
where private pension savers have invested more than 200 billion
zlotys ($69.69 billion) over the past ten years.
"Polish funds are really an important element of how the
markets behave," said Lubomir Vystavel, director of equity
markets at ING in Prague. "Unfortunately, the Czech government
will not get this kind of scenario."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ > For TAKE A LOOK on other pension stories []
> For FACTBOX on pension reform points []
> For INTERVIEW on regulatory changes []
> For latest on pension reform []
> Graphics on the demographics http://r.reuters.com/qat28r
> Graphics on pension spending http://r.reuters.com/pat28r
> Graphics on pension fund assets http://r.reuters.com/jad38r
> Graphics on Czech pension assets http://r.reuters.com/den48r
> Graphics on pension fund returns http://r.reuters.com/gup48r
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SMALL STEP
Under the Polish system, nearly all pension assets must be
invested at home. Retirement funds there hold about a quarter of
treasury papers and a tenth of stock market capitalisation.
By comparison, the Czech government's plan requires only a
third of funds to go to national assets over foreign
investments.
The Czech stock market currently has only 15 actively traded
stocks and has seen few new listings in the past decade given
the lack of interest from firms looking to raise capital and
investors who want to diversify.
According to Erste Bank, a 50 percent public participation
in the Czech pension scheme would create an annual inflow of 35
billion crowns.
If 30-50 percent, or 10.5-17.5 billion crowns, went to Czech
equities, as modelled by Erste, it would mean an increase of
only 2.7-4.5 percent in the Prague bourse's annual trading
volume of 390 billion crowns.
A 20 percent participation in the scheme would reap 14
billion crowns per year. A 30-50 percent allocation of that into
Czech equities would add 1.1-1.8 percent to trading volumes.
It is however highly likely the inflows would be even
smaller, because a sizeable part of the funds could go into
foreign stocks.
"An additional 5 billion crowns in Czech stock market would
equal just five trading sessions in (Czech blue chip utility)
CEZ," said a senior Prague broker, who declined to be named in
accordance with company policy.
"Honestly, I think we wouldn't notice that."
For the 530 billion-crown-a-year bond market, the outlook is
similarly bleak in terms of boosting liquidity, although a hike
in value-added tax to fund the reform will help reduce state
issuance, and that could potentially push down yields.
RIGHT DIRECTION
One unknown factor is the government's plan, yet to be
fleshed out, to loosen rules relating to risk for investments
held in pension funds already operating independently of the
government's planned reform.
These funds have 4.6 million investors and savings of 216
billion crowns -- equivalent to 6 percent of GDP. They are
highly regulated, required to break even each year and generally
earn negligible returns.
But they could get the green light to divert savings from
their coffers to stocks and private equity funds if the plan
goes through, although it is not yet clear how much savers would
opt for such investments.
And over the longer term, stable inflows from the reform
plan could help enliven activity at the 1.39 trillion crown
Prague bourse, analysts said.
"These changes are of a longer-term nature. Nobody expects
us -- the Czech market -- to change overnight. But it is good to
start somewhere and this is certainly a step in the direction
that the market needs," ING's Vystavel said.
(Editing by Sophie Walker)
