Pension reform and private pension funds in Poland: Goals and Facts.

IISP Seminar, Moscow25.11.2002Piotr Kurowski

Institute of Labour and Social Studies (IPiSS)

04/19/23 P. Kurowski - IPiSS 2

Plan of the presentation:

I. Selected macroeconomic indicators for Poland

II. Main features of the old pension systemIII. New pension system profile IV. Implementation and resultsV. Remaining Issues to be solved Conclusions

04/19/23 P. Kurowski - IPiSS 3

I. Selected macroeconomic indicators

-11,6

6,5

-7,0

12,2

2,6

14,3

3,8

16,4

5,2

16,0

7,0

14,9

6,1

13,2

6,9

10,3

4,8

10,4

4,1

13,1

4,0

15,1

2,0

17,4

-15

-10

-5

0

5

10

15

20

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

GDP real growth Unemployment rate

04/19/23 P. Kurowski - IPiSS 4

Selected economic indicators in Poland (ctd.)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Inflation (CPI Index) 43,0 35,3 32,2 27,8 19,9 14,9 11,8 7,3 10,1 5,6

GDP per capita (USD) 2 197 2 234 2 399 3 085 3 483 3 511 4 066 3 987 4 108 4 653

Average wage (USD) 215,3 220,2 234,4 289,8 323,8 323,7 354,8 430,2 442,6 503,6

Exchange rate (1 USD) 1,36 1,81 2,27 2,42 2,70 3,28 3,49 3,97 4,35 4,09

Capitalisation of Shares / GDP

0,3 3,7 3,5 3,9 6,6 9,6 13,1 20,0 19,0 14,3

Number of listed companies

16 22 44 65 83 143 198 221 123 89

04/19/23 P. Kurowski - IPiSS 5

II. Main features of the pension system before the reform

Public pay-as-you-go system Administered by Social Insurance Institution

(ZUS) Coverage: Workers, self-employed, other groups Type: Defined benefit Redistributive formulae of pension benefit Social contribution (45% of gross wage) paid by

employer Special systems: farmers (KRUS), military

service, judges and procecutors

04/19/23 P. Kurowski - IPiSS 6

Demographic and system dependency

38,843,9

47,651,1 51,9 51,3 52,3

54,456,4 54,5 55,3 55,7

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

System Dependency: Pensioners / ContributorsDemographic dependency: (65+ yrs old) / (18 - 64 yrs old)

04/19/23 P. Kurowski - IPiSS 7

Generous replacement rates of pension benefits

55%53%55%57%59%59%60%60%59%59%

61,8%59,9%62,3%

65,0%67,0%67,8%69,2%69,1%71,5%72,5%

0%

20%

40%

60%

80%

100%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Old-age, disability and family pensions Old-age pensions

Average pensionin USD

1994 1995 1996 1997 1998 1999 2000 2001

162 200 219 216 231 225 220 259

04/19/23 P. Kurowski - IPiSS 8

Expenditure of public pensions as a % of GDP

One of the most expensive pension systems in CCE Countries

8,6%

12,6%

14,6% 14,2%

15,8% 15,6% 15,2% 14,6%14,1% 14,1%

13,5%

0%

5%

10%

15%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

04/19/23 P. Kurowski - IPiSS 9

III. Formation of the programme of pension reform

Debates since the start of transition Different concepts of pension reform Engagement of international financial institutions Political consensus in area of pension reform The Governmental Plenipotentiary Office since

1997 Interest and co-operation of financial institutions Public support for changes in pension system Working out the legal framework

04/19/23 P. Kurowski - IPiSS 10

New pension system in Poland (i)

1. First pillar: Operating as public pay-as-you-go system Administered by Social Insurance Institution

(ZUS) Personal social insurance accounts in ZUS Type: Defined contribution with the new

pension formulae (P = Accrued capital of insured/ Life expectancy coefficient)

Non-contributory periods not accepted

04/19/23 P. Kurowski - IPiSS 11

New pension system in Poland (ii)

2. Second pillar: Open pension funds (OFE) operating on funded

method Managed by pension societies (PTE) Individual accounts for participants Recruitment of members through registered

agents3. Third pillar: Voluntary occupational pension programmes Organised by employers Social contribution incentives

04/19/23 P. Kurowski - IPiSS 12

New pension system in Poland (iii)

4. Participation in new pension system: Obligatory for people up to 30 years of age Voluntary for people from 31 to 50 years of age5. Division of social contribution (36,59% of salary): 12,22% - pension contribution to the first pillar (ZUS) 7,3% - contribution to pension funds in the second

pillar 13,0% - for disability pensions (ZUS) 2,45% - for sickness insurance (ZUS) 1,62% - accident insurance (ZUS)

04/19/23 P. Kurowski - IPiSS 13

IV. Implementation and results

Participants of pension funds Pension funds (OFE):

assets market structure investments Rates of return

Performance of pension societies (PTE) Institutional changes: pension supervision

04/19/23 P. Kurowski - IPiSS 14

Participants of pension funds

Predicted number of members of pension funds: 8 millions (60% of insured workers)

Real participation exceeded 10,6 million in 2001

10 888 10 805

10 490 10 637

10 752

10 509 10 416 10 369

10 281 10 123

9 973

9 666

9 000

10 000

11 000

XII 99 III 00 VI 00 IX 00 XII 00 III 01 VI 01 IX 01 XII 01 III 02 VI 02 IX 02

04/19/23 P. Kurowski - IPiSS 15

Age structure of participants

5,7

19,3

21,9

17,2

14,413,3

7,2

1,0

0

5

10

15

20

25

< 20 21-25 26-30 31-35 36-40 41-45 46-50 > 50

04/19/23 P. Kurowski - IPiSS 16

Pension funds: number and assets

1999 2000 2001 2002(Oct.)

Number of pension funds 21 21 17 16Pension assets (bln PLN) 2,2 9,9 19,4 29,2Pension assets / GDP 0,5% 1,8% 3,3% -

Share of members in three biggest funds

56,6% 56,1% 55,7% 55,5%

04/19/23 P. Kurowski - IPiSS 17

Pension funds: market structure (Sept. 2002)

CU22,7%

Pocztylion4,1%

Other 9 pf21,5%

PZU16,3%

NN16,5%

Skarbiec3,5%

AIG7,7%

Sampo4,1%

Bankowy3,5%

04/19/23 P. Kurowski - IPiSS 18

Pension funds: selected investment limits

No limits for government bonds Shares in companies listed in stock exchange

– 40% Shares in bank deposits and securities – 20% Open-end investment funds units – 15% Publicly traded municipal bonds – 15% Shares in National Investment Funds – 10% Other entities’ bonds – 5% Investments abroad – 5%

04/19/23 P. Kurowski - IPiSS 19

Pension funds: Structure of investment

Instruments VI.00 XII.00 VI.01 XII.01 III.02 VI.02 IX.02

Bonds 56,0 61,4 61,5 65,8 60,1 64,4 68,2Equities 30,9 33,6 27,4 28,0 30,3 28,9 25,5T-bills 9,3 1,5 7,5 2,6 5,0 2,3 1,8Bank deposits 2,5 2,3 3,0 2,8 3,4 2,9 2,9

Other 1,2 1,1 0,5 0,8 1,2 1,2 1,6

04/19/23 P. Kurowski - IPiSS 20

Rates of return for 24 months (29-09-2000 - 30-09-2002)

28,428,3

24,9

23,124,0

11,6

0 5 10 15 20 25 30

Minimal rate of returnKredyt Bank

SkarbiecPocztylionDOM

AIGErgo

{EGO}BankowyCSL&P

PolsatPekaoZurich

AllianzAverage rate of return

CUPZUNN

Sampo

04/19/23 P. Kurowski - IPiSS 21

Transfers between funds

Transfer payoffs between pension funds in the second pillar are realised every 3 months (last days of February, May, August and November)

Increasing number of members switching funds (ca 1,6% of participants)

Losers: the biggest pension funds

Period (quarters) IV q1999

I-II q2000

III-IV q 2000

I-II q2001

III-IV q 2001

I-II q2002

Number of participants 32.075 101.337 32.733 53.843 131.902 173.697

04/19/23 P. Kurowski - IPiSS 22

Pension management societies: revenues

Entrance fee: Commission from the contributions Determined according to length of membership Min. rate: 6,5% Max. rate: 10% Average: 8,5%

Management fee (max. limit 0,05% of assets’ value per month)

Exit fee (in case of switching pension fund) Other revenues

04/19/23 P. Kurowski - IPiSS 23

Pension Societies: the scope of costs

0

25

50

75

100

1999 2000 2001 2002

Revenues of PTE/ Costs of PTE Costs of PTE / OFEs' contributions

04/19/23 P. Kurowski - IPiSS 24

Pension societies: structure of costs in 1999

Marketing30,3%

Systemic costs9,5%

Administration28,7%

Salespeople31,5%

04/19/23 P. Kurowski - IPiSS 25

Pension Societies: Profits and losses (in m PLN)

Profits / Losses 1999 2000 2001

Total - 1 771,2 - 683,21 - 281,5

CU -90,2 -54,9 + 43,5

NN -103,8 -32,1 +18,9

PZU - 143,9 - 85,5 - 46,0

PKO/Handlowy -90,1 31,0 -88,5

In 2001 5 pension societies revealed profits, 12 concluded with losses. In subsequent periods profits should appear in whole system

04/19/23 P. Kurowski - IPiSS 26

Institutional changes in Supervision In September 2001, new government announced

consolidation of the supervisory institutions. Supervisory Office over Pension Funds (UNFE) was to be consolidated with Supervisory Office over Insurance Companies (PUNU).

The proposed concept was determined mainly by political factors. Private pension funds accepted this step since they were generally critical to prior UNFE activities.

Among specialists dominant opinion was either to leave UNFE as a special supervisory institution or to consolidate it with Securities Commission (KPW).

In April 2002 UNFE was merged with PUNU.

04/19/23 P. Kurowski - IPiSS 27

VI. Remaining Issues to be solved

Individual records in first pillar (ZUS) Delays in timely transferring contributions from

ZUS to pension funds Different approaches in accounting system of

pension funds (lack of comparability) 18,3% of accounts in pension funds are dead ones

(2 069 881 in September 2002) Delay in legal regulations of bridging pensions and

annuity companies