The Polish Pension Reform of 1999

1
The Polish Pension Reform of 1999

• Agnieszka Chlon-Dominczak
• Ministry of Labour and Social Policy
• Poland
• Ljubljana, November 4th, 2002

2
Pension systemCharacteristics

• Expenditure - c.a. 15 of GDP (including farmers
  and armed forces), until 1999 based fully on PAYG
  principles
• High contribution rate - 45 of salary
• Budget subsidies to Social Insurance Fund
• Common early retirement privileges
• Attempts to change some parameters of the system
  - overruled by Constitutional Tribunal
• Ageing population
• increasing life expectancies
• lower fertility

3
Pension systemProjections for the future - no
reform

• Pension expenditure would increase
• from 11 of GDP in 2000
• to 17.3 in 2050
• By the same time, the number of pensioners would
  double
• from 7 million in 2000 to almost 15 million in
  2050, of which
• more than 10 million old-age pensioners
• Total pension deficit would exceed 7 of GDP
• Based on Social Budget Model, the Gdansk
  Institute for Market Economics

4
Stages of the pension reform
5
New systemArchitecture
Mandatory Social Security System
6
New system Age groups affected
7
First TierNotional Defined Capital

• Individual accounts for all insured
• Accumulation of contributions during the entire
  period of work
• Notional capital indexed by the 75 of the wage
  fund growth

8
First Tier Pensions
Employment
NDC indexed sum of contribiutions
Self-employment
Unemployment
Maternity and child-care
Army service
First Tier Pensionlifetime government guarantee

Average Life Expectancy at the retirement age
9
New systemTransition to the new system -
replacement rates
80
70
60
of last salary
50
40
30
20
1949
1954
1959
1964
1969
1974
year of birth
Tiers III
Only tier I
10
First TierImplementation difficulties

• Lack of administrative preparation
• Difficulties in implementing the new IT system
• Decrease in contribution collection rate
• Problems with transfers to pension funds and
  sickness funds
• Problems with proper identification of insured
  and contribution payers

11
Second tier administrative structure
12
Second TierPension funds operations

• 16 funds operating on the market
• five mergers and acquisitions completed
• 10.5 million participants
• 63 of people 31-50 joined pension funds
• Highly concentrated
• 64 of members in four biggest funds
• 74 of assets in four biggest funds
• Total assets PLN 27,5 bn (USD 7 bn) by
  September 2002
• Investment structure
• around 60 of assets in government bonds
• around 30 of assets in equity

13
Second TierAssets of pension funds, 2001
Source UNFE
14
Second TierOpen pension funds investments
Source UNFE
15
Second TierPerformance of pension funds
Source IGTE
16
Pension promise in funded tierFirst approach

• Specialised annuity companies
• Licensed and supervised by Second Pillar
  Supervisor
• Fees
• lump-sum fee up to 7 of accumulated capital
• additional fee in case of higher returns
• Gender-specific life tables
• Products
• single annuity
• single annuity with guarantee period
• joint annuity
• joint annuity with guarantee period

17
Long-term outlookOutflow to funded tier vs.
deficit/surplus in PAYG
Source Gdansk Institute for Market Economics,
Social Budget Model
18
Long-term outlookTransition deficit sources of
financing
Source Gdansk Institute for Market Economics,
Social Budget Model
19
Long-term outlookRevenues, expenditures and
assets of pension funds
Source Gdansk Institute for Market Economics,
Social Budget Model
20
Conclusions and lessons

• The pension reform of 1999 followed lengthy
  debate
• many small changes to the system in 1990s
• however, system still financially unsustainable
• The 1999 reform
• stabilises the system financially, though
• level of benefits is quite low
• increased pressure on disability scheme
• Initial experience
• administrative difficulties
• not completed legislation
• several amendments
• high costs of pension funds
• deteriorating public support