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Current issues in the Polish pension fund market

Current issues in the Polish pension fund market. Dariusz Stańko Warsaw School of Economics. The Private Pensions Day, 5 th edition Sinaia, 27 th May 2010. Plan of the presentation. Pension system in Poland Polish pension funds market Current situation

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Current issues in the Polish pension fund market

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  1. Current issues in the Polish pension fund market Dariusz Stańko Warsaw School of Economics The Private Pensions Day, 5th editionSinaia, 27th May 2010

  2. Plan of the presentation Pension system in Poland Polish pension funds market Current situation Recent government proposals (mainly Ministry of Labour and Social Policy) Polish Chamber of Pension Funds (IGTE) actions Conclusions

  3. 1. Polish Pension System • new pension system introduced in 1999 (4 Reforms: pensions, health-care, administration, education) • main element of old-age protection framework: • covers 14 mln people • does not cover soldiers, prosecutors, miners, police etc. (non-contributory system) • does not cover farmers (Pension Fund in KRUS - The Agricultural Social Insurance Fund) • age brackets in 1999: • below 30 – mandatory pillars I and II • 30-50 – pillar I or split between I and II • over 50 – stay in the old system

  4. 1. Polish Pension System • 1 pillar: NDC PAYG managed by Social Insurance Institution (ZUS), mandatory, 12,22% gross wage • 2 pillar: DC FF managed by Pension Fund Societies (PTEs), mandatory, 7,3% gross wage • 3 pillar: DC FF, voluntary, some incentives • individual retirement accounts (IKEs) – life insurance with investment fund, bank account, investment fund or brokerage account • corporate pension plans (PPEs) – group life insurance with investment fund, corporate pension fund, investment fund or foreign provider

  5. 2. Polish Pension Funds marketas of end of Apr 2010 • 14 OFEs, rules similar to Romania • over 14,56 m members • AuM: 195,5 b PLN  47,4 bn euro

  6. 2. Polish Pension Funds market

  7. 2. Polish Pension Funds market

  8. 2. Polish Pension Funds Market • returns • since September 1999 until end of April 2010: • total nominal return: 195,0% • total real return: 106,4% • average nominal return: 10,68% p.a. • average real return: 7,03% p.a.

  9. 2. Polish Pension Funds Market Performance of OFE funds vs NDC system (ZUS) blue – indexation in ZUS (NDC system) red – market share weighted average of OFEs (FDC system) Source: Sołdek, Andrzej (2010). Jak OFE zarządza naszymi składkami [How OFE manage our contributions], PTE PZU S.A., presentation for the KPP conference of 4 February 2010, Warsaw.

  10. 2. Polish Pension Funds Market • up-front fee: 3,5% • before 2004 no legal ceilings, loyalty schemes • 2004: ceiling on 7% with gradual decrease towards 3,5% by 2014 • 2010: ceiling brought down to 3,5% (incl. ZUS – 0,8%) • management fee: month • switchover fee (in cash): • 160 PLN (if < 1 year), • 80 PLN (if <2 years but > 1 year), • 0 PLN (if > 2 years) plus max. 0,005% AuM (per month)

  11. 3. Current situation • public annoyance: financial crises losses in 2008 yet PTEs earned 586 m PLN in 2008 and 640 m PLN in 2009 as management fees • search for money (use of Demographic Reserve Fund) • political action towards reduction of contributions • KRUS (agricultural system) • Eurostat problem: classification of funded savings • questioning the sense of the pension reform: • „roulette of the capital market” (professor of the leading economic school) • „When I am to choose between the interests of 14 PTEs and the interests of 14 fund members, I shall choose the latter” (Minister of Labour and Social Policy) • „vagaries of the financial market” (Ministry of Labour and Social Policy, justification to the proposal of pension law amendment)

  12. 4. Government proposals • to cut the funded contribution from 7% to 3% • to allow OFE members aged 65 and above to withdraw pension savings in a lump sum or in instalments (up to 10 years): • full OFE account if pension entitlements accumulated in ZUS grant them 200% of minimal pension or • part of the OFE account; another part goes to ZUS to co-fund the above condition, the rest • to allow OFE members at 5 years to retirement to move part or all of their savings to ZUS • to create a ZUS-like state annuity provider • to make the OFE voluntary • to introduce the „Canadian” system • contribution 120 PLN  pension 1 200 PLN

  13. 5. IGTE actions • media and information campaign • telephone polls amongst the OFE members • 1/5 knows the issue, 43% „knows something” • 22% are for or „somehow for” reduction of the contribution, 59% are against or „strongly against” • 75% believe this is „a stick-up note” action of the government to get quick cash • 52% believe OFE are „rather” or „definitely” more efficient than ZUS • open letter to the Prime Minister • legal analyses (unconstitutionality of the proposals) • proposals of investment law improvements, multifunds system, external benchmark and high watermark fee system, improvement of acquisition system

  14. 6. Conclusions • increasing political risk to funded systems • Argentina (nationalization) • Slovakia (return guarantees, fee cuts, opt-outs, voluntary participation) • Poland (FRD case, fee cuts, current proposals) • fighting populism requires investing in pension education • media • population • message about demography should be made widely heard • better co-operation of pension associations? • Eurostat story will keep EU-12 from revealing their pension debts

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