Polish pension system – principles and reforms

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