Czech parliament approves pension reform in victory for PM Necas

(Reuters) - The lower house of the Czech parliament on Wednesday cleared the way for pension reform to get underway next year, giving its final approval to legislation that will allow change, a victory for the country's unpopular and unstable government.

The lower house chose to ignore President Vaclav Klaus who had vetoed the reform bills in a vote that will in time permit Czechs to divert part of their social security payments to private pension accounts from state ones.

The plan has been criticized for being both too tame and too radical and the vote came hours after the lower house had approved a bill allowing the government to increase value-added and income taxes next year to raise revenue for the budget.

The two votes showed that the center-right government - which has been weakened by defections that have left it with just 99 out of 200 seats in the lower house - could still muster a majority after quelling a backbench rebellion.

The reform, discussed by successive governments but only adopted by Prime Minister Petr Necas's cabinet, aims to help people build up pension savings to mitigate against the risk of lower state pensions in future due to an ageing population.

In the short to medium term, the reform will reduce revenues for the state as people divert part of their social security contributions away from the budget.

The spirit of the reform runs counter to steps taken in recent years by governments in Hungary, Poland and Slovakia who have rolled back fund-based systems to plug budget holes.

Rating agencies have cautiously praised the proposed Czech reform but both private sector economists and opposition politicians have criticized it.

Klaus said he vetoed it because it came at a time of financial market uncertainty, lacked cross-party political acceptance, and was badly timed during economic turmoil in Europe.

Klaus, the founder of the center-right Civic Democrats now led by Necas, has repeatedly criticized government policies in the past few months in what political commentators have seen as an attack on the cabinet.

Critics say only a minority of Czechs would benefit from the plan that would divert 3 percent of their salary to private funds, complemented by a 2 percent contribution from the savers' net income.

The government has said it expects about half of adult Czechs to join the scheme, but analysts see only a 10-20 percent participation rate.

The center-left opposition Social Democrats have said they would change or cancel the plan if they win power in the next election, which is planned for 2014.

(Reporting by Jan Lopatka; Editing by Andrew Osborn)