1. Old-age pension system situation in Poland Michał Polakowski, PhD

2. Basic structure of old-age pensions system in Poland 2 schemes: salaried workers, farmers Structure of the salaried workers scheme Financing and organizational principle 1st tier NDC Mandatory Financing and organizational principle 2nd tier Funded Mandatory Financing and organizational principle 3rd tier Funded Voluntary Retirement age men/women 65/60 Return guarantees 2nd pillar Internal sector return rate Contribution19,52%: 12,22% 1st pillar, 7,30% 2nd pillar

3. Old-age pension in Poland- assumptions of the 1999 reform transparent Make the retirement system transparent more fair Make the retirement system more fair more efficient Make the retirement system more efficient financially stable Make the retirement system financially stable

4. Old-age pension in Poland- assumptions of the 1999 reform economic growth Induce the economic growth saving Increase the level of saving work legally Encourage Poles to work legally freedom of choice Increase the freedom of choice privatisation Speed up the process of privatisation

5. 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

6. Old-age pensions in Poland- early performance 20% h igher 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

7. 2nd pillar-Number of accounts

8. Deviations 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

9. 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

10. 2nd pillar distortions: oligopoly?

11. 2nd pillar during the economic slowdown-assets

12. Post-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

13. Financing transition

14. Problems with financing the transition Plan: To finance the transition from cuts in the first pillar

15. Problems 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

16. Problems with financing the transition

17. Portfolio of OFEs

18. Share of OFEs in financing public deficit

19. Public 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

20. 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

21. Reform discussions Ministry of Labour Ministry of Labour: – poor performance of the 2nd pillar? Similar to treasury bills Ministry of Finance Ministry 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)

22. Old-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

23. Old-age pensions-current changes

24. 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

25. Old-age pensions in Poland- 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

26. Old-age pensions in Poland- further steps? Reduction of branch privileges Extension of retirement age Reform of the farmers’ scheme Reduce the poverty of pensioners: 40% of future pensioners will have minimum pensions!