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)

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 11/18/2018 P. Kurowski - IPiSS

I. Selected macroeconomic indicators 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

Demographic and system dependency 11/18/2018 P. Kurowski - IPiSS

Generous replacement rates of pension benefits Average pension in USD 1994 1995 1996 1997 1998 1999 2000 2001 162 200 219 216 231 225 220 259 11/18/2018 P. Kurowski - IPiSS

Expenditure of public pensions as a % of GDP One of the most expensive pension systems in CCE Countries 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

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) 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

Age structure of participants 11/18/2018 P. Kurowski - IPiSS

Pension funds: number and assets 1999 2000 2001 2002 (Oct.) Number of pension funds 21 17 16 Pension assets (bln PLN) 2,2 9,9 19,4 29,2 Pension assets / GDP 0,5% 1,8% 3,3% - Share of members in three biggest funds 56,6% 56,1% 55,7% 55,5% 11/18/2018 P. Kurowski - IPiSS

Pension funds: market structure (Sept. 2002) 11/18/2018 P. Kurowski - IPiSS

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% 11/18/2018 P. Kurowski - IPiSS

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 68,2 Equities 30,9 33,6 27,4 28,0 30,3 28,9 25,5 T-bills 9,3 1,5 7,5 2,6 5,0 2,3 1,8 Bank deposits 2,5 3,0 2,8 3,4 2,9 Other 1,2 1,1 0,5 0,8 1,6 11/18/2018 P. Kurowski - IPiSS

Rates of return for 24 months (29-09-2000 - 30-09-2002) 11/18/2018 P. Kurowski - IPiSS

Transfers between funds Period (quarters) IV q 1999 I-II q 2000 III-IV q 2000 2001 III-IV q 2001 2002 Number of participants 32.075 101.337 32.733 53.843 131.902 173.697 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 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

Pension Societies: the scope of costs 11/18/2018 P. Kurowski - IPiSS

Pension societies: structure of costs in 1999 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS

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. 11/18/2018 P. Kurowski - IPiSS

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 11/18/2018 P. Kurowski - IPiSS