The Polish Parliament is expected to pass legislation allowing Chile-style mandatory pension funds to be set up, with contributions in the first year of operation, expected to be 1999, estimated at $3bn.

The new funds, in which major domestic and international banks and insurance companies are expected to be shareholders, will accumulate contributions very rapidly, covering only those aged 45 and under and so not having to pay out benefits.

It will be mandatory for new entrants to the labour market to take out a pension from a choice of funds. Those under 45 can partially opt out of the state scheme. Although no additional payments can be made to the funds, the government is also legislating for a voluntary company employee pillar, aimed at helping companies facing difficulties recruiting and retaining skilled labour.

The pension funds, part of a raft of reforms, are expected to revolutionise the capital markets, while part of the cost of conversion from the existing pay-as-you-go scheme, known as ZUS, will be met by receipts from an extensive privatisation programme which will add further liquidity to the stock market.

The three laws now before parliament allow the privatisation receipts to be used to pay for the change, sanction the provision of employee funds and stipulate the design of both the mandatory or open funds and the employee funds.

One of those who helped draft the law covering fund design is Iain Batty, pensions lawyer with McKenna & Co, a UK law firm with extensive Eastern European coverage. He says more legislation is required before the schemes become operational. He predicts that institutions will begin to set up the funds next spring with the first payments coming on 1 January 1999.

The two salient areas where further legislation is still required is the reform of the social security system - with details of partial opt-outs in particular to be considered - and the structure of the regulatory authority. Batty predicted that the social security law will be drafted before the autumn elections in the light of the consensus in Polish political circles that action must be taken.

Explaining the reasons behind the adoption of the Chilean model, Batty says: Because it was replacing the social security system, it was thought that you needed as risk-free an environment as possible. That meant having large well regulated, well supervised funds, rather than smaller company funds.”

He adds that, given the predicted timetable, financial institutions which want a stake in the market should be researching the market now. He cites the example of Dutch company Nationale Nederlanden, which got in early in the nascent Eastern European insurance sector and now has a significant market share. “I think every major player in the bank and insurance sector in Poland whether domestic or international wishes to get into this market while some financial institutions not currently in Poland are now looking at the market because they can see the potential of these funds.”

Batty says Poland has a rich history of pensions reforms which were discussed but not implemented because of competing ministries and interests but he is optimistic this time.

The turning point came last autumn with the establishment of the Office of the Government Plenipotentiary for Social Security Reform, a post with cabinet status. The first holder of the post died unexpectedly, but work continued under the provisional supervision of Michal Rutkowski, seconded to the Polish government from the World Bank. He helped produce these laws in co-operation with the ministries of economy and labour.

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