New Pension System in Poland - How to Classify in Accordance with SNA 93 and ESA 95 Krzysztof Pater Undersecretary of State Ministry of Economy, Labour and Social Policy

2 Why the Polish case is so important? The „new” Polish pension system has been created following the Word Bank recommendations More than 10 millions people are covered by the system Poland is a good example for many countries how to reform the pension system Poland is not a sole case in the word – every year new countries adopt the „three pillars” Word Bank model

Ministry of Economy, Labour and Social Policy 3 Main objectives of the contemporary pension reforms Providing fiscal sustainability: short-term fiscal balance long-term financial viability incentives to pay contributions Creating economic externalities: labour market effects financial market effects saving and capital stock effects

Ministry of Economy, Labour and Social Policy 4 Mandatory Pension System The structure of the Polish pension system Social Insurance Fund (FUS) mandatory, public and administered by the public institution, individual accounts PAYG part Open Pension Funds (OFEs) mandatory, public but administered by private institutions, individual accounts Funded part Funded voluntary, administered privately, individual accounts Employee Pension Plans (PPE) Funded voluntary, administered privately, individual accounts Individual Retirement Accounts (IKE)

Ministry of Economy, Labour and Social Policy 5 OFE as a part of the Sub-sector: Social security funds (S.1314) - definition... (...) units whose principal activity is to assure social benefits and which fulfil each of the following two criteria:  certain groups of the population are obliged by law or by regulation to participate in the scheme or to pay contributions;  general government is responsible for the management of the institution in respect of the settlement or approval of the contributions independently on its role as supervisory body or employer. usually no direct link between the amount of the contribution paid by an individual and the risk to which that individual is exposed.

Ministry of Economy, Labour and Social Policy 6 Definition given in System of National Accounts 1993 (§ 4.130) Social security funds are social insurance schemes covering the community as a whole or large sections of the community that are imposed and controlled by the government units.

Ministry of Economy, Labour and Social Policy 7 1 criterion: certain groups of the population are obliged by law or by regulation to participate in the scheme or to pay contributions  participation (both PAYG and funded components) is obligatory  in the case of not choosing the OFE, insured person is assigned to a fund by administrative decision made by ZUS  participants have the right to choose an OFE, but do not the system (former or new) and to give up the transfer of contributions to OFE

Ministry of Economy, Labour and Social Policy 8 2 criterion: general government is responsible for the management of the institution in respect of the settlement or approval of the contributions (...) General government:  determines rate of contributions and is responsible for their collection,  regulates the legal basis of the system,  has an influence (through the supervisory office) on a current activity of the OFEs,  bears final risk of the OFEs’ investment activities,  guarantees minimum level of a pension benefit from both obligatory components (FUS + OFE)

Ministry of Economy, Labour and Social Policy 9 The principle: no direct link between the amount of the contribution paid by an individual and the risk to which that individual is exposed  The OFE do not carry any element of insurance against risks  the system pay the same contribution (by percentage) regardless of the chosen fund, age, sex etc. etc.  All risks of the system will be taken by one public institution (Pension Agency) during the period of payment  Future payments of pension benefits shall have forms strictly defined in the system

Ministry of Economy, Labour and Social Policy 10 OFEs cannot be a part of Sub-sector “Insurance corporations and pension funds (S.125)” because system do not fulfil following criteria from ESA 95 and from SNA 93: “Sub-sector S.125 consists of all financial corporations (...) which are principally engaged in financial intermediation as the consequence of the pooling of risks.”/ only in ESA 95/. “pension funds can be described as institutions which insure group risk related to social risk and needs of the insured persons”. “ all these types of risks could be insured equally by life insurance corporations as well as by pension funds.” “pension funds are restricted (by law) to specified groups of employees and self-employed.”.

Ministry of Economy, Labour and Social Policy 11 Summary Only possible classification of OFEs, according to ESA`95 and SNA 93 is in the sub-sector Social Security Funds (S.1314 in ESA 95) in the General Government Sector OFE are an essential part of the social security system created for more effective investment aimed at assuring at least minimum pension Polish social security system has not been privatised Participation of private institutions in mandatory, public pension systems is the future for all countries

Ministry of Economy, Labour and Social Policy 12 Future treatment of public pension schemes What decisions should be taken firstly – on global or European level? Is it really justified to treat all schemes which do not correspond to even one condition automatically as private sector? Is it the good way to „penalise” the countries making deep social security reforms by interpretations of statistical standards

Ministry of Economy, Labour and Social Policy 13 Ongoing work in EUROSTAT on pension schemes There is large difference between defined benefit and defined contribution schemes definitions widely understood and the wording used by ESA 95 Three criteria: imposed, controlled and financed are not treated equally Some schemes described widely don’t exist, up to now, in the word and it is unlikely that they will exist the future

Ministry of Economy, Labour and Social Policy 14 EUROSTAT initial proposal decision tree on pension schemes - questions 2 and 7 question 2 : scheme is not a social security scheme (with reservations of q. 8) if benefits depends of assets performance question 7 : funded part of mixed scheme is excluded from social security sector (again with reservations of q. 8)

Ministry of Economy, Labour and Social Policy 15 EUROSTAT initial proposal decision tree on pension schemes - question 8 Has government granted a specific guarantee to a scheme not classified as social security and this guarantee is very likely to be recurrently called in short or medium term according to a consensus opinion given by independent experts? If YES than scheme must be reclassified as social security from the call of guarantee onwards

Ministry of Economy, Labour and Social Policy 16 EUROSTAT initial proposal - summary „bad schemes” classified as social security and „good schemes” classified as private pension funds The proposal drive to misleading results:  Schemes implemented in accordance with the Word Bank and EU (Laeken 2001) recommendations are widely treated as the part of social security system,  according to EUROSTAT standards they would be treated as private institutions the necessary reforms of current pension systems would be more difficult as macroeconomic factors would be deteriorated

Thank you for your attention Krzysztof Pater Undersecretary of State Ministry of Economy, Labour and Social Policy