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
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
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
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
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
• 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