1. Challenges for pension reforms in Eastern Europe Zbigniew Derdziuk President Social Insurance Institution (ZUS ) Montevideo, Uruguay, 19-20 March 2013

2. 2 EU countries in Eastern Europe Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia Challenges for pension reforms in Eastern Europe The object of study The subject of study Main reasons for reforms Current and future reforms Montevideo, Uruguay, 19-20 March 2013

3. 3  Weak capital markets after transitions in 90-s  Fast economic growth as result of EU pre and post accession  Introduction of the 2nd pillar coincided with period when the rates of return in global capital markets were high  Active public government social campaign  High number of people entering to the labour market and to the system born in 70-s and 80-s (baby boom) Challenges for pension reforms in Eastern Europe Introducing funded pension pillar - background Montevideo, Uruguay, 19-20 March 2013

4. 4 Main reasons of current reforms – rising life expectancy Challenges for pension reforms in Eastern Europe Source: European Commission, 2012 Ageing Report: past trends in life expectancy at birth (1960-2009); projection of life expectancy at birth (2010-2060)  retirement ages not adjusted to rising life expectancy  too many early retirements  low effective exit age Montevideo, Uruguay, 19-20 March 2013

5. 5  rising dependency ratio  low employment rate of older workers (55-64) Main reasons of current reforms – negative trends in population structure Source: European Commission, 2012 Ageing Report: decomposition of the population by age-groups (2010-2060) Challenges for pension reforms in Eastern Europe 2060 Montevideo, Uruguay, 19-20 March 2013

6. 6  pension schemes are not balanced  high burden of national budgets and PAYG systems Main reasons of current reforms – rising pension expenditure to GDP Source: European Commission, Fiscal Sustainability Report 2012; Increase in total budgetary expenditure, 2010-2060, % of GDP Challenges for pension reforms in Eastern Europe Montevideo, Uruguay, 19-20 March 2013

7. 7  Increase effective retirement age - link to life expectancy Bulgaria, Czech, Poland, Romania, Slovakia  Reduce early retirement Bulgaria, Czech, Poland  Increase of the minimal length of service Bulgaria  Benefit indexation – to consumer prices instead of to wages Romania, Slovakia  Increase employment rate of older workers Bulgaria, Lithuania, Slovenia Challenges for pension reforms in Eastern Europe EU recommendations for reforms Montevideo, Uruguay, 19-20 March 2013 Source: European Commission, White Paper on Pensions, 16th February 2012

8. 8  Increasing of the pension age (gradually) Bulgaria, Czech, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia  Reducing early retirement Czech, Poland, Romania  Increasing of the minimal length of service Bulgaria, Czech  Stricter pension calculation methods (elimination of inequalities) Hungary, Romania  Stricter indexation (price indexation) Czech, Estonia, Hungary, Latvia Challenges for pension reforms in Eastern Europe Latest reforms Montevideo, Uruguay, 19-20 March 2013 Source: European Commission, White Paper on Pensions, 16th February 2012

9. 9  Hungary 2010 – abolished funded pillar, pension assets were used to finance current expenses  Estonia 2009-2011 – temporary suspension of the transfers to the funded pillar to reduce PAYG deficit  Latvia 2009 – reduced contributions: from 8% to 2%, in 2012 increasing up to 6% Challenges for pension reforms in Eastern Europe Latest reforms – changes in funded pension pillar Montevideo, Uruguay, 19-20 March 2013 Source: European Commission, White Paper on Pensions, 16th February 2012

10. 10  Lithuania Reduced contributions: from 5.5% to 2% with the possibility of increasing them after crisis  Poland 2011 – reduced contributions: from 7.3% to 2.3%; the contribution rate to funded pillar will be increasing up to 3.5% in 2017  Czech 2013 – workers will be able to transfer 3 pps. of their mandatory pension insurance payments to private funds on the condition that they will add a further 2 pps. of contributions from their income Challenges for pension reforms in Eastern Europe Latest reforms – changes in funded pension pillar Montevideo, Uruguay, 19-20 March 2013 Source: European Commission, White Paper on Pensions, 16th February 2012

11. 11  Pension reforms in CEE countries are at early stage – there is no withdrawal phase yet – only contributory phase  Withdrawal phase is provided in Europe: i.a. Sweden and Denmark  Sweden is a good example in implementation withdrawal phase – three pension products with different risks distribution (inflation, longevity and investment risk) – withdrawal provided by a state institution - Pensionsmyndigheten (Swedish Pension Agency), which gives withdrawal sustainability and cost effective management Withdrawal phase – funded pension pillar Challenges for pension reforms in Eastern Europe Montevideo, Uruguay, 19-20 March 2013 Source: Heinz P. Rudolph, Anita M. Schwarz, Organizing Benefit Payments from Private Pension Funds in Poland, December 2012

12. 12  Pension reforms are constantly needed: - to keep sustainability pension systems - to minimise burden of national budgets - to keep balance and equitability between working and retired people (difficult situation on labour market vs. retirement privileges for retired)  Pension reforms have to be introduced basing - on accrual calculations - with economic projections in long- term perspective  Rising and equalisation retirement age need to be linked to the rising life expectancy and supported by labour market reforms  Reforms are subject to wrong and not reasonable changes since policymakers are afraid of taking not popular decisions (political risk) Conclusions Challenges for pension reforms in Eastern Europe Montevideo, Uruguay, 19-20 March 2013

13. Thank you for your attention Zbigniew Derdziuk President Social Insurance Institution ZUS Zbigniew.Derdziuk@zus.pl www.zus.pl