1. 1 Current issues in the Polish mandatory pension funds market Dariusz Stańko Warsaw School of Economics The Private Pensions Day, 5 th edition Sinaia, Romania, 27 th May 2010

2. 2 Plan of the presentation 1) Pension system in Poland 2) Polish pension funds market 3) Current situation 4) Recent government proposals (mainly Ministry of Labour and Social Policy) 5) Polish Chamber of Pension Funds (IGTE) actions 6) Conclusions

3. 3 1. Polish Pension System new pension system introduced in 1999 (4 Reforms: pensions, health-care, administration, education) new pension system introduced in 1999 (4 Reforms: pensions, health-care, administration, education) main element of old-age protection framework: main element of old-age protection framework: covers 14 mln people covers 14 mln people does not cover soldiers, prosecutors, miners, police etc. (non-contributory system) does not cover soldiers, prosecutors, miners, police etc. (non-contributory system) does not cover farmers (Pension Fund in KRUS - The Agricultural Social Insurance Fund) does not cover farmers (Pension Fund in KRUS - The Agricultural Social Insurance Fund) age brackets in 1999: age brackets in 1999: below 30 – mandatory pillars I and II below 30 – mandatory pillars I and II 30-50 – pillar I or split between I and II 30-50 – pillar I or split between I and II over 50 – stay in the old system over 50 – stay in the old system

4. 4 1. Polish Pension System 1 pillar: NDC PAYG managed by Social Insurance Institution (ZUS), mandatory, 12,22% gross wage 1 pillar: NDC PAYG managed by Social Insurance Institution (ZUS), mandatory, 12,22% gross wage 2 pillar: DC FF managed by Pension Fund Societies (PTEs), mandatory, 7,3% gross wage 2 pillar: DC FF managed by Pension Fund Societies (PTEs), mandatory, 7,3% gross wage 3 pillar: DC FF, voluntary, some incentives 3 pillar: DC FF, voluntary, some incentives individual retirement accounts (IKEs) – life insurance with investment fund, bank account, investment fund or brokerage account individual retirement accounts (IKEs) – life insurance with investment fund, bank account, investment fund or brokerage account corporate pension plans (PPEs) – group life insurance with investment fund, corporate pension fund, investment fund or foreign provider corporate pension plans (PPEs) – group life insurance with investment fund, corporate pension fund, investment fund or foreign provider

5. 5 2. Polish Pension Funds market as of end of Apr 2010 14 OFEs, rules similar to Romania 14 OFEs, rules similar to Romania over 14,56 m members over 14,56 m members AuM: 195,5 b PLN  47,4 bn euro AuM: 195,5 b PLN  47,4 bn euro

6. 6 2. Polish Pension Funds market

7. 7

8. 8 2. Polish Pension Funds Market returns returns since September 1999 until end of April 2010: since September 1999 until end of April 2010: total nominal return: 195,0% total nominal return: 195,0% total real return: 106,4% total real return: 106,4% average nominal return: 10,68% p.a. average nominal return: 10,68% p.a. average real return: 7,03% p.a. average real return: 7,03% p.a.

9. 9 2. Polish Pension Funds Market Source: Sołdek, Andrzej (2010). Jak OFE zarządza naszymi składkami [How OFE manage our contributions], PTE PZU S.A., presentation for the KPP conference of 4 February 2010, Warsaw. Performance of OFE funds vs NDC system (ZUS) blue – indexation in ZUS (NDC system) red – market share weighted average of OFEs (FDC system)

10. 10 2. Polish Pension Funds Market up-front fee: 3,5% up-front fee: 3,5% before 2004 no legal ceilings, loyalty schemes before 2004 no legal ceilings, loyalty schemes 2004: ceiling on 7% with gradual decrease towards 3,5% by 2014 2004: ceiling on 7% with gradual decrease towards 3,5% by 2014 2010: ceiling brought down to 3,5% (incl. ZUS – 0,8%) 2010: ceiling brought down to 3,5% (incl. ZUS – 0,8%) management fee: month management fee: month switchover fee (in cash): switchover fee (in cash): 160 PLN (if < 1 year), 160 PLN (if < 1 year), 80 PLN (if 1 year), 80 PLN (if 1 year), 0 PLN (if > 2 years) 0 PLN (if > 2 years) plus max. 0,005% AuM (per month)

11. 11 3. Current situation public annoyance: financial crises losses in 2008 yet PTEs earned 586 m PLN in 2008 and 640 m PLN in 2009 as management fees public annoyance: financial crises losses in 2008 yet PTEs earned 586 m PLN in 2008 and 640 m PLN in 2009 as management fees search for money (use of Demographic Reserve Fund) search for money (use of Demographic Reserve Fund) political action towards reduction of contributions political action towards reduction of contributions KRUS (agricultural system) KRUS (agricultural system) Eurostat problem: classification of funded savings Eurostat problem: classification of funded savings questioning the sense of the pension reform: questioning the sense of the pension reform:  „roulette of the capital market” (professor of the leading economic school)  „When I am to choose between the interests of 14 PTEs and the interests of 14 m fund members, I shall choose the latter” (Minister of Labour and Social Policy)  „vagaries of the financial market” (Ministry of Labour and Social Policy, justification to the proposal of pension law amendment)

12. 12 4. Government proposals to cut the funded contribution from 7% to 3% to cut the funded contribution from 7% to 3% to allow OFE members aged 65 and above to withdraw pension savings in a lump sum or in instalments (up to 10 years): to allow OFE members aged 65 and above to withdraw pension savings in a lump sum or in instalments (up to 10 years):  full OFE account if pension entitlements accumulated in ZUS grant them 200% of minimal pension or  part of the OFE account; another part goes to ZUS to co- fund the above condition, the rest to allow OFE members at 5 years to retirement to move part or all of their savings to ZUS to allow OFE members at 5 years to retirement to move part or all of their savings to ZUS to create a ZUS-like state annuity provider to create a ZUS-like state annuity provider to make the OFE voluntary to make the OFE voluntary to introduce the „Canadian” system to introduce the „Canadian” system contribution 120 PLN  pension 1 200 PLN contribution 120 PLN  pension 1 200 PLN

13. 13 5. IGTE actions media and information campaign media and information campaign telephone polls amongst the OFE members telephone polls amongst the OFE members telephone polls telephone polls  1/5 knows the issue, 43% „knows something”  22% are for or „somehow for” reduction of the contribution, 59% are against or „strongly against”  75% believe this is „a stick-up note” action of the government to get quick cash  52% believe OFE are „rather” or „definitely” more efficient than ZUS open letter to the Prime Minister open letter to the Prime Minister legal analyses (unconstitutionality of the proposals) legal analyses (unconstitutionality of the proposals) proposals of investment law improvements, multifunds system, external benchmark and high watermark fee system, improvement of acquisition system proposals of investment law improvements, multifunds system, external benchmark and high watermark fee system, improvement of acquisition system

14. 14 6. Conclusions increasing political risk to funded systems increasing political risk to funded systems Argentina (nationalization) Argentina (nationalization) Slovakia (return guarantees, fee cuts, opt-outs, voluntary participation) Slovakia (return guarantees, fee cuts, opt-outs, voluntary participation) Poland (FRD case, fee cuts, current proposals) Poland (FRD case, fee cuts, current proposals) fighting populism requires investing in pension education fighting populism requires investing in pension education media media population population message about demography should be made widely heard message about demography should be made widely heard better co-operation of pension associations? better co-operation of pension associations? Eurostat story will keep EU-12 from revealing their pension debts Eurostat story will keep EU-12 from revealing their pension debts