Old-age pension system situation Old-age pension system situation in Polandin Poland

Michał Polakowski, PhD

Basic structure of old-age pensions Basic structure of old-age pensions system in Polandsystem in Poland

• 2 schemes: salaried workers, farmers• Structure of the salaried workers scheme

Financing and organizational Financing and organizational principle 1st tier principle 1st tier

NDC Mandatory

Financing and organizational Financing and organizational principle 2nd tier principle 2nd tier

Funded Mandatory

Financing and organizational Financing and organizational principle 3rd tier principle 3rd tier

Funded Voluntary

Retirement age men/women Retirement age men/women 65/60

Return guarantees Return guarantees 2nd pillar2nd pillar Internal sector return rate

Contribution Contribution 19,52%: 12,22% 1st pillar, 7,30% 2nd pillar

Old-age pension in Poland-Old-age pension in Poland-assumptions of the 1999 reformassumptions of the 1999 reform

• Make the retirement system transparenttransparent• Make the retirement system more fairmore fair• Make the retirement system more efficientmore efficient• Make the retirement system financially stablefinancially stable

Old-age pension in Poland-Old-age pension in Poland-assumptions of the 1999 reformassumptions of the 1999 reform

• Induce the economic growtheconomic growth• Increase the level of savingsaving• Encourage Poles to work legallywork legally• Increase the freedom of choicefreedom of choice• Speed up the process of privatisationprivatisation

2nd pillar organisation

• Private pension funds (OFE)• Run by Pension Fund Society (PTE), joint-stock

company• No regulation on annuities companies so far• Savings can be partially inherited• Mandatory for individuals born after 1968,

voluntary for 1949-1967 cohorts

Old-age pensions in Poland-Old-age pensions in Poland-early performanceearly performance

• 20% higher than expected inflow of members• Extensive marketing in the second pillar• ‘Dead accounts’• Problems with IT system-identification of

contributions• Unregulated distribution fees: 5.8%-10% of

contributions

2nd pillar-Number of accounts2nd pillar-Number of accounts

Deviations from the 1999 reformDeviations from the 1999 reform

• Preferential treatment for ‘uniform’ groups and miners

• Prolonged early retirement• Teachers • Reduction of the disability scheme contribution• Additional costs: approx 20% of pension spending• Small interest in the voluntary saving• Weak regulation of the 2nd pillar

Behaviour of the 2nd pillar companies

• Internal rate of return for the sector• Loss-costs imposed on PTEs• Risk-aversion, maximal charges• Similar investment strategies• High concentration• Extensive canvassing in the secondary market-

up to 50% of costs

2nd pillar distortions: oligopoly?2nd pillar distortions: oligopoly?

2nd pillar during the economic 2nd pillar during the economic slowdown-assetsslowdown-assets

Post-crisis reactionsPost-crisis reactions

• 2008: the slowdown consumed the 1999-2007 gains

• At the same time, PTEs yielded high gains• 1st wave of regulation in June 2009• Decrease of a transfer charge from 7% to 3.5%• Ceiling on the management fee of PTEs

Financing transition

Problems with financing the Problems with financing the transitiontransition

• Plan: To finance the transition from cuts in the first pillar

Problems with financing the transitionProblems with financing the transition

• …and privatisation• Since 2001 (except for 2004) privatisation did not

reach the plan• Only • State has to fill the gap by issuing treasury bonds• The main buyer of bonds: OFEs• The cumulated cost of rolling the debt: approx. 70bln

PLN, approx 40% of contributions transferred

Problems with financing the Problems with financing the transitiontransition

Portfolio of OFEsPortfolio of OFEs

Share of OFEs in financing public deficit

Public finances-Maastricht criteriaPublic finances-Maastricht criteria• Public debt close to 55% of Poland’s gross domestic

product-which triggers saving measures. The EU limit: 60%

• Value of contributions transferred to the 2nd pillar equal to approx 1/3 of the public debt

• Deficit: 7.9% GDP (EU requirement 3%)• The current system adds 2.5 percentage points to

Poland’s deficit • It increases public debt by an annual 2 percentage

points

Public debt-social policy implications

• Public debt 55% • no wage increases in public sector• Pensions indexed by the increase of inflation

only• Debt incured by transfers to 2nd pillar crowds

out other social policy needs

Reform discussionsReform discussions

• Ministry of LabourMinistry of Labour: – poor performance of the 2nd pillar? Similar to

treasury bills

• Ministry of FinanceMinistry of Finance: – ease the pressure by 15% of GDP in 2011–2020

• Strategic alliance Strategic alliance • (‘decrase the role of unpredictable funded scheme’) • (decrease the pressure of 2nd pillar)

Old-age pensions-current changesOld-age pensions-current changes

• Less contribution to OFE: from 7.3 to 2.3 of gross salary (to be increased to 3.5 in 2017)

• The remaing contribution: noted on sub-accounts in ZUS

• The savings from the sub-account can be inherited• The contributions collected in sub-accounts will be

indexed according to the growth of nominal GDP

Old-age pensions-current changesOld-age pensions-current changes

Old-age pensions-current changesOld-age pensions-current changes

• More incentives for voluntary saving-tax deduction up to 4%

• Change of investment limits: up to 62% in shares until 2020. Ultimately: 90%

• From 2012 no canvassing in the primary and secondary market

Old-age pensions in Poland-Old-age pensions in Poland-further steps?further steps?

Related to functioning of 2nd pillar• Creation of sub-funds• Introduction of an external benchmark for

PTEs• Decreasing the distribution fee• Linking management fee with the results of

OFEs• Change the investment limits

Old-age pensions in Poland-Old-age pensions in Poland-further steps?further steps?

• Reduction of branch privileges• Extension of retirement age• Reform of the farmers’ scheme• Reduce the poverty of pensioners: 40% of

future pensioners will have minimum pensions!