Pension reform and private pension funds in Poland: Goals and Facts.

1. Pension reform and private pension funds in Poland: Goals and Facts. IISP Seminar, Moscow 25.11.2002 Piotr Kurowski Institute of Labour and Social Studies (IPiSS)

2. Plan of the presentation: I. Selected macroeconomic indicators for Poland II. Main features of the old pension system III. New pension system profile IV. Implementation and results V. Remaining Issues to be solved Conclusions P. Kurowski - IPiSS

3. I. Selected macroeconomic indicators P. Kurowski - IPiSS

4. Selected economic indicators in Poland (ctd.) P. Kurowski - IPiSS

5. II. Main features of the pension system before the reform • Public pay-as-you-go system • Administered by Social Insurance Institution (ZUS) • Coverage: Workers, self-employed, other groups • Type: Defined benefit • Redistributive formulae of pension benefit • Social contribution (45% of gross wage) paid by employer • Special systems: farmers (KRUS), military service, judges and procecutors P. Kurowski - IPiSS

6. Demographic and system dependency P. Kurowski - IPiSS

7. Generous replacement rates of pension benefits P. Kurowski - IPiSS

8. Expenditure of public pensions as a % of GDP • One of the most expensive pension systems in CCE Countries P. Kurowski - IPiSS

9. III. Formation of the programme of pension reform • Debates since the start of transition • Different concepts of pension reform • Engagement of international financial institutions • Political consensus in area of pension reform • The Governmental Plenipotentiary Office since 1997 • Interest and co-operation of financial institutions • Public support for changes in pension system • Working out the legal framework P. Kurowski - IPiSS

10. New pension system in Poland (i) 1. First pillar: • Operating as public pay-as-you-go system • Administered by Social Insurance Institution (ZUS) • Personal social insurance accounts in ZUS • Type: Defined contribution with the new pension formulae (P = Accrued capital of insured/ Life expectancy coefficient) • Non-contributory periods not accepted P. Kurowski - IPiSS

11. New pension system in Poland (ii) 2. Second pillar: • Open pension funds (OFE) operating on funded method • Managed by pension societies (PTE) • Individual accounts for participants • Recruitment of members through registered agents 3. Third pillar: • Voluntary occupational pension programmes • Organised by employers • Social contribution incentives P. Kurowski - IPiSS

12. New pension system in Poland (iii) 4. Participation in new pension system: • Obligatory for people up to 30 years of age • Voluntary for people from 31 to 50 years of age 5. Division of social contribution (36,59% of salary): • 12,22% - pension contribution to the first pillar (ZUS) • 7,3% - contribution to pension funds in the second pillar • 13,0% - for disability pensions (ZUS) • 2,45% - for sickness insurance (ZUS) • 1,62% - accident insurance (ZUS) P. Kurowski - IPiSS

13. IV. Implementation and results • Participants of pension funds • Pension funds (OFE): • assets • market structure • investments • Rates of return • Performance of pension societies (PTE) • Institutional changes: pension supervision P. Kurowski - IPiSS

14. Participants of pension funds • Predicted number of members of pension funds: 8 millions (60% of insured workers) • Real participation exceeded 10,6 million in 2001 P. Kurowski - IPiSS

15. Age structure of participants P. Kurowski - IPiSS

16. Pension funds: number and assets P. Kurowski - IPiSS

17. Pension funds: market structure (Sept. 2002) P. Kurowski - IPiSS

18. No limits for government bonds Shares in companies listed in stock exchange – 40% Shares in bank deposits and securities – 20% Open-end investment funds units – 15% Publicly traded municipal bonds – 15% Shares in National Investment Funds – 10% Other entities’ bonds – 5% Investments abroad – 5% Pension funds: selected investment limits P. Kurowski - IPiSS

19. Pension funds: Structure of investment P. Kurowski - IPiSS

20. Rates of return for 24 months (29-09-2000 - 30-09-2002) P. Kurowski - IPiSS

21. Transfers between funds • Transfer payoffs between pension funds in the second pillar are realised every 3 months (last days of February, May, August and November) • Increasing number of members switching funds (ca 1,6% of participants) • Losers: the biggest pension funds P. Kurowski - IPiSS

22. Pension management societies: revenues • Entrance fee: Commission from the contributions • Determined according to length of membership • Min. rate: 6,5% Max. rate: 10% Average: 8,5% • Management fee (max. limit 0,05% of assets’ value per month) • Exit fee (in case of switching pension fund) • Other revenues P. Kurowski - IPiSS

23. Pension Societies: the scope of costs P. Kurowski - IPiSS

24. Pension societies: structure of costs in 1999 P. Kurowski - IPiSS

25. Pension Societies: Profits and losses (in m PLN) In 20015 pension societies revealed profits, 12 concluded with losses. In subsequent periods profits should appear in whole system P. Kurowski - IPiSS

26. Institutional changes in Supervision • In September 2001, new government announced consolidation of the supervisory institutions. Supervisory Office over Pension Funds (UNFE) was to be consolidated with Supervisory Office over Insurance Companies (PUNU). • The proposed concept was determined mainly by political factors. Private pension funds accepted this step since they were generally critical to prior UNFE activities. • Among specialists dominant opinion was either to leave UNFE as a special supervisory institution or to consolidate it with Securities Commission (KPW). • In April 2002 UNFE was merged with PUNU. P. Kurowski - IPiSS

27. VI. Remaining Issues to be solved • Individual records in first pillar (ZUS) • Delays in timely transferring contributions from ZUS to pension funds • Different approaches in accounting system of pension funds (lack of comparability) • 18,3% of accounts in pension funds are dead ones (2 069 881 in September 2002) • Delay in legal regulations of bridging pensions and annuity companies P. Kurowski - IPiSS