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Pension Reform and Principles: Enhancing Financial Sustainability and Fairness

Explore key reforms and factors influencing the pension system in Poland, with a focus on financial sustainability, fairness, and stakeholder involvement. The study delves into the transition from defined benefit to defined contribution systems, aims to balance contributions and benefits more realistically, and addresses the impact of demographic trends on the system's performance. Gain insights into the complexities and implications of the 1999 reform, including cost breakdowns and recommendations for optimizing pension funds' investments and membership structures. Learn about the evolving strategies to ensure the system's stability and enhance retirement benefits.

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Pension Reform and Principles: Enhancing Financial Sustainability and Fairness

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  1. Polish pension system – principles and reforms Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  2. Pre 1999 pension system • easy pathways of early retirement • the amount of benefit not linked with contributions – defined benefit principle • growing numbers of beneficiaries causing pressure on public finances Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  3. Aims of the reform • improving financial sustainability of the system • introducing fairness by restoring realistic proportions between contributions and benefits • facilitating higher inflow of contributions to the system Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  4. Assumptions • increased coverage due to simplification of rules • higher economic growth due to increase of professional activity • higher future benefits expected due to involvement of financial institutions • shortfalls of funding in PAYG scheme to be covered by revenues from privatisation Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  5. 1999 Essential reform • switch from DB to DC • individualization • equalization of conditions • multipillar structure • involvement of private entities Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  6. Structuresince 1999 Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  7. Breakdown by age group of insured Membership in opfs for people born in: < 1949 – not possible 1949 – 1968 voluntary > 1968 mandatory distribution of mandatory contribution for opf members: 12,22% - PAYG 7,3% - opf Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  8. 2009 abolishing of earlyretirement • replaced by framework of bridging pensions for people working in arduous jobs • limited coverage in comparison with previous rules • expiring nature • additional source of financing Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  9. Phasing-out of earlyretirementfirst effects Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  10. Consequences of functioning of fundedpillar • growing burden for public finances as contributions transferred to opfs caused large shortfall of funds in PAYG scheme • vicious circle of government bond issues • performance of opfs highly influenced by financial crisis Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  11. 2009 abolishing of earlyretirement • replaced by framework of bridging pensions for people working in arduous jobs • limited coverage in comparison with previous rules • expiring nature • additional source of financing Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  12. 2012 raisingretirementage • started on 1.01.2013 • from the level of 60 years for women and 65 for men • increase 3 months per year • equal age of 67 will be achieved in 2020 for men and 2040 for women • expected increase of future benefits Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  13. 2013 Review of system’sfunctioning • In depth analysis of effectiveness of open pension funds and influence of 1999 reform on public finances • Key findings: • negative impact of functioning of opfs for level of future old-age pensions through excessive cost for public finances • low effectiveness of opfs investment activity • forecasted link between demographic situation and performance of opfs on financial markets • risk of „bad date” for retirement Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  14. Cost of 1999 reform • in years 1999 - 2012 cost of reform amounted to 11.59% of GDP (2012) • revenues from privatisation equaled to 5,26% of GDP (2012) • derivative costs of the debt amounts to 6,8% of GDP Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  15. Recommendations: • shifting the part of pension funds’ assets invested in government bonds to the PAYG scheme and redeeming them, contributing sub-accounts with respective amount • making membership in opf voluntary • setting up payouts from 2nd pillar by ZUS with gradual transfer of assets from opf Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  16. 2014 newframework for 2nd pillar • creation of framework for payouts from 2nd pillar (slider mechanism); • introduction of voluntary partcipation in opfs; • setting contribution to opf at 2.92% of grosswage; • transfer of old-age pension entitlements denominated in value of government bonds (51,5% of opfs’ assets) from opf to sub-account • execution of ECJ ruling on foreign investment limits for opfs Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  17. Results of „transfer window” • taking decision allowed between 1 April and 31 July 2014 • 16% of insured chose to continue contributing to opfs • next „transfer windows” scheduled for 2016 and then in 4 year intervals • as of the end of 2014 4% of new entrants to the general system decided to join some opf Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

  18. Thank you for your attention Social Protection Reform Project Component 1: Study Visit, Spain, Czech Republic and Poland, Oct.-Nov. 2015

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