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Polish Pension Funds : best practice solutions 5 years after pension reform

Polish Pension Funds : best practice solutions 5 years after pension reform. Dr. Paweł Wojciechowski CEO PTE Allianz Polska SA. Presentation. Pension Reform in Eastern Europe, Experiences and Perspectives Kiev, Ukraine, May 27 - 28, 2004.

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Polish Pension Funds : best practice solutions 5 years after pension reform

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  1. Polish Pension Funds: best practice solutions 5 years after pension reform Dr. Paweł Wojciechowski CEO PTE Allianz Polska SA Presentation Pension Reform in Eastern Europe, Experiences and Perspectives Kiev, Ukraine, May 27- 28, 2004

  2. Poland introduced in 1999 one of the most comprehensive pension systems of all CEE countries *in September 2004 – III pillar Individual Retirement Account (IKE) scheme is introduced **also banking products are allowed in III pillar Individual Retirement Accounts

  3. Mandatory contribution is almost 20% of wages  will give about 40% replacement rate Pension I PILLAR Pension II PILLAR Pension – 19,52% Pension Social Insurance Premium: 35,94% to 38,83% of gross salary – depending on value of accident insurance premium ZUS (Social Insurance Institution) FUS (Social Insurance Fund) Annuity Disability - 13,00% OFE (Pension Fund) Entityto be established in the future Premium 7,30% Capital withdrawal Sickness – 2,45% Accident – 0,97% to 3,86% PTE (Pension Fund Society) Depository Bank

  4. Old-age Dependency Ratios Source: National Statistics, Eurostat, World Bank, Allianz Group Economic Department

  5. OFE Investment Resultsas of Dec. 31st 2003 Source: PAP

  6. OFE investment returns are above expectations  i.e. more than 5% of real yearly investment return Source: own, based on GUS data

  7. Share of first pillar in future pension will decrease  to increase replacement ratio from 40%to60%need to have well-functioning III pillar 2000 2020 Accumulated Capital in 20 years in I pillar: 554 PLN Contribution to II pillar: 100 PLN Contribution to I pillar: 167 PLN  2020 Accumulated Capital in 20 years in II pillar: 972 PLN Accumulated Capital in 20 years in II pillar: 972 PLN Accumulated Capital in 20 years in III pillar*: 557 PLN Accumulated Capital in 20 years in I pillar: 554 PLN Source: own calculations * from Sept. 2004

  8. Polish PF market will account for over 60 % of Assets under Management of CEE pension funds by 2010 II pillar AuM will reach 1/3 of Poland’s GDP in 2020 Source: own calculations

  9. Portfolio Structure (%) of OFE as of Dec. 31st 2003 Source: KNUiFE (Insurance and Pension Funds Supervisory Commission)

  10. OFE Investment Limits vs Depth of Capital Market small capital market will hinder investment returns, if 5% foreigninvestment limit is maintained Source: MoF, WSE * from 2004

  11. WSE is stagnant in the last 4 years  new IPOsexpected as the WSE stock index goes up WIG Source: KPWiG ( Polish SEC)

  12. System Guarantee – II pillar Poland Own Equity of Underperforming PF Own Equity of Underperforming PF Guarantee Fund 0,1% NAV of all PFs Guarantee Fund 0,1% NAV of all PFs Guarantee Fund 0,4% NAV of all PFs (except Underperforming PF)

  13. Financial Results of PTEs (mln PLN) how does public- private partnership work? Source: KNUiFE, Parkiet* acquired and consolidated funds

  14. Competitive Position - market share by NAV the market will continue consolidation Source: own, KNUiFE, * acquired and consolidated funds

  15. Conclusions • Poland introduced one of the most comprehensive pension systems in CEE countries in 1999 that follow best practices: multi-pillar, funded, ppp,DC, EET • With the introduction of Individual Retirement Account in 2004 hopefully the replacement rate will increase in 20 years from 40% to 60%; and 2/3 of futurepensions will come form II and III pillars • The AuM will grow rapidly providing new opportunities in Polish capital market; howeverif Polish capital market will not grow than the 5% foreign investment limit has to be liberalised • Minimum Guaranteed Rate of Return of II pillar Pension Funds hinders investment return in the long-run, and will have to be modified

  16. Further modernisation of pension system in Poland requires: • - liberalization of II pillar investment regulation • - introduction of annuity institution from mandatory II pillar • - increasing number of pension funds managed by PTE • - assuring equal retirement age for M (now 65) and W (now 60) • - inclusion of all employees in reformed pension system • - building trust in public-private partnership • Poland used best practices in reforming its pension system and reached desired features: adequacy, sustainability, portability,effectiveness

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