1. Annuities in Poland Current state of discussions Agnieszka Chłoń-Domińczak Ministry of Labour and Social Policy Tallin, October 12, 2006

2. Outline of the presentation The pension system in Poland Prospects of future annuity market Principles of annuity payments Possible organisational structure

3. Mandatory Social Security System New system architecture NDC PAYG mandatory, administered by the public institution, individual accounts First Tier Open Pension Funds Funded mandatory, administered by private institutions, individual accounts Second Tier Savings and additional insurance Funded voluntary, administered privately, individual accounts Third Tier

4. 7 Years of the System 21 funds started their activity in 1999 4 biggest funds attracted 65% of clients Total number of enrolments in 1999 – around 10 million Two age groups: Born in 1969 and later – second pillar mandatory Born between 1949 and 1968 – second pillar voluntary About 64% of voluntary age group 30-50 joined the new system in 1999

5. Market overview Presently 15 funds exist after M&As 4 biggest funds have 72% of assets under management Total number of members 12.2 million Total assets under management – PLN 102 billion (around $34 b) Major amendment to the Pension Funds Act came into force in October 2003; key changes introduced in April 2004: New terms for rate of return comparison New principles of the ZUS lottery Decrease of fees

6. Market players in numbers Source: KNUiFE

7. Investment performance of Open Pension Funds AVERAGE UNIT PRICE OF THE EXISTING FUNDS 5 7 9 11 13 15 17 19 21 23 25 01/0008/0003/0110/0105/0212/0207/0302/0409/0404/0511/0506/06

8. Future annuity market Pension funds 10 million participants in the first year Simple investment product with stable flow of contributions Relatively quick break- even Possiblity to change provider Annuities Gradual flow of participants, low numbers at the beginning Gradually raising flow of contributions and complex product Long-term outlook for higher profits No option to change provider

9. Prerequisites Developed insurance market Availability of annuity products Availability of long-term bonds at least as a benchmark inflation-indexed?

10. Projections of market development New pensioners Premium value

11. Principles of annuity payments Life-time payments Security Equal status of men and women Protection of purchasing power Competition Simplicity and transparency Low costs Immune to political interventions

12. Annuities - first 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

13. Annuities - first approach controversies Political issues: Too expensive Gender specific tables are unfair Professional issues: the fee system does not allow for efficient functioning better solution: fee deducted from reserves combined with fee deducted from benefit payments companies should be allowed to use their own life tables products are not defined fully (usually no maximum values)

14. Annuities - alternative options Competitive solutions: Specialised companies Life insurance companies Group savings institutions Quasi-market solutions: Tender: one winner, one cohort Tender: multiple products, multiple winners, one cohort Extending products of open pensin funds Non-market solutions: One public annuity company

15. Conclusions There is no best solution Careful design in necessary Economies of scale Competition Not only legislation, but the market must be ready Where are we right now? Not very far from 1999 When do we have to be ready by 2009