Errors in the system of defined-benefit pension funds in the Czech Republic

The Czech law on defined-benefit pension funds implies that the fund has the duty to guarantee the non-negative return for the fund's clients each year. The guarantee of principal as well as accrued returns not only has fundamental importance for choice of optimal investment strategy, but also for fund profitability from the point of view of the shareholders of the Rind managing companies. The guarantee can even threaten the existence of defined-benefit pension funds in the form in which they presently exist in the Czech Republic. This analysis provides an explanation of this flaw by using the option pricing theory. The analysis includes theoretical reasoning as to why, ceteris paribus, the Czech Republic's current system is not viable in the long term. This is backed by estimates of the potential returns and costs of the pension funds. The conclusion reached is that flaw can easily be addressed via new legislation, which would neither be expensive nor difficult.