Polish pension reforms began in 1999, but the presentation of new legislation relating to bridging pensions, annuities and the programmed withdrawal of funds suggests the reforms of the second pensions pillar could be completed just as the first pensions are paid next year.
Ten years ago, Poland introduced a new multi-pillar defined contribution (DC) pension system to replace the previous PAYG defined benefit (DB) scheme that was practically insolvent. This system, which is partly financed by contributions, and partly PAYG, compels people born after December 1948 to pay contributions of 19.52% of salary, of which part is paid into a non-financial defined contribution account managed by the public social security institution (ZSU). The remainder is paid into an open pension fund run by one of 15 private pension companies.
The reforms also introduced a third voluntary pension pillar. Andrzej Narkiewicz, principal at Mercer Poland, says this is not well-developed, and has only 5% of employees covered by schemes as it lacks tax incentives.
While the first pillar is now established, the remaining technical elements of the second pillar were only introduced to parliament in September. The government presented a draft law on the introduction of bridging pensions, which will allow temporary pre-retirement benefits for certain occupational groups. This was quickly followed by the first reading of a bill relating to the second pillar pensions.
Sources at the Polish Chamber of Pension Funds (IGTE) said, if the bill is approved, this would introduce a programmed withdrawal product for pension benefits for women of 60-65 - as women can retire from 60 but men have to wait to 65 - while a single life annuity product will be introduced for both men and women over 65.
The first payments from the second pillar are scheduled for 1 January 2009, with the original intention that private sector annuity companies would be established to make the payments. Narkiewicz says that, because the legislative process is late, setting up and establishing annuity firms has been delayed until 2014. So, between 2009 and 2013 benefits will be paid as a programmed withdrawal, where the money is paid from the open pension funds to the ZSU then to the member.
The delay to the annuities may have had another side-effect as the annuities legislation appears to have been designed for annuity firms to avoid meeting the Solvency II capital requirements by not classing them as insurers. Narkiewicz says: “It’s true the government made efforts to exclude these companies from the frames of the Solvency II directive. As it appears, the government wants to keep the supervision of these companies within Poland.”
Officials at the IGTE note nothing is certain because the legislation has not been properly discussed in parliament. The proposal is that annuities are paid from funds administered by either life insurance companies or pension fund administrators, known as general societies, which have high capital requirements.
The IGTE says that, while the bill would complete the reforms, “necessary changes” are required. This includes introduction of multi-funds and a revision of pension funds investment limits, particularly in relation to the use of derivatives and an increase in the limit for investing outside of Poland.
Narkiewicz says there is a need to look at investment rules in the near future but that, while foreign investments is a “hot topic”, there are also risks with currency rates - the risk will have closed if Poland adopts the euro, by 2011. “We do need to consider broadening the list of possible investments and the limit on foreign investments, as restrictions mean the biggest open pension funds have to invest heavily in Polish treasury bonds and equities, making them big players in the Polish financial market,” he adds.
Narkiewicz believes more effort needs to be focused on developing the third pillar as, at the moment, the only tax incentive is on capital gains tax for members, while the registration process and structure of the funds is very complex.
He points out it is “impossible” to require matching contributions between employers and employees, and also “impossible to require any vesting formulas for benefits”.
Combined with the complex registration procedure, Narkiewicz says the market has effectively developed a fourth pension pillar, which is exactly the same as the third but without the complex registration.
“Research by Mercer has shown around 28% of multi-national companies in Poland are offering pension plans, but it is split 50-50 between pillar three and pillar four.”
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