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

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

• IISP Seminar, Moscow
• 25.11.2002
• Piotr Kurowski
• Institute of Labour and Social Studies (IPiSS)

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Plan of the presentation

• I. Selected macroeconomic indicators for Poland
• II. Main features of the old pension system
• III. New pension system profile
• IV. Implementation and results
• V. Remaining Issues to be solved
• Conclusions

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I. Selected macroeconomic indicators
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Selected economic indicators in Poland (ctd.)
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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

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Demographic and system dependency
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Generous replacement rates of pension benefits
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Expenditure of public pensions as a of GDP

• One of the most expensive pension systems in CCE
  Countries

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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

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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

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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 agents
• 3. Third pillar
• Voluntary occupational pension programmes
• Organised by employers
• Social contribution incentives

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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 age
• 5. 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)

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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

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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

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Age structure of participants
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Pension funds number and assets
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Pension funds market structure (Sept. 2002)
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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

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Pension funds Structure of investment
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Rates of return for 24 months (29-09-2000 -
30-09-2002)
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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

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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

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Pension Societies the scope of costs
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Pension societies structure of costs in 1999
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Pension Societies Profits and losses (in m PLN)
In 2001 5 pension societies revealed profits, 12
concluded with losses. In subsequent periods
profits should appear in whole system
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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.

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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