Youthful Poles sign up for private pensions
Kevin Hall looks at the details of the changes
By the end of this month all Poles under the age of 30 will have chosen and signed up to private pension fund, as the radical reform of pensions in the country moves towards completion.
Begun in January this year, the aim is a stable, transparent pension system based on a western European model. The overhaul is just part of a massive programme to restructure Polish health, education and public administration systems by the year 2004.
The pension system reform will completely change the manner of calculating and paying benefits. New forms of saving for old age, previously unknown in Poland, will also appear; capital pension funds and employee pension programmes. The Social Insurance Company (ZUS) is also being overhauled as it will have to keep individual accounts for each employee.
Under the new system, the size of a future pension will depend on the total value of lifetime contributions paid by the employee and on the age at which he or she retires. Contributions made through the year 1999 will be taken into account when calculating a pension under the new system; they will be recalculated to form “initial capital”.
As of the start of January, ZUS was transformed into a new institution that will offer a number of insurance services for individuals; old-age insurance being one such service.
The reform does not only reorganise ZUS. Part of the pension contribution will be sent to newly established open-ended pension funds whose task will be to invest the money profitably.
Under the new system, a pension will be drawn from both the previous pay-as-you-go plan and from the new open-ended funds. Those who because of their age will not be covered by the new arrangements will be able to choose additional insurance.
The new system will consist of three components, or pillars. The first pillar is based on the pay-as-you-go principle. This means that, just as it has been up to now, pensions will be paid from current contributions made by people in work.
However, the old system of blanket contributions to the system has been eliminated. Instead, an individual’s specific contributions will be registered in an individual ZUS account. That means the size of an individual’s pension under the first pillar will depend solely on his total lifetime contributions. A pension from the first pillar will be wholly guaranteed by the state. However, pension rights registered on the individual’s ZUS account cannot be inherited.
The second, or funded-pension pillar, is a novelty in the Polish pension system. Some 37.5% of the pension contribution will be transferred to the second pillar and invested in open-ended pension funds, operating under state supervision.
The third pillar will cover all forms of voluntary contributions, including the Employee Pension Programs (PPE) supported and supervised by the state. Investment in this fund must not exceed 7% of earnings, but these will be exempt from ZUS contribution. The decision on establishing a PPE rests with the employer, but also depends upon a workplace agreement between employers and trades unions.
The new pension system will be introduced gradually. As of March this year, pension fund contracts could be signed by individuals, who had been bombarded by advertising from the previous month, and continue to be so. With a potential 10m clients to aim at competition has been fierce. Little wonder when it is estimated that by 2004 pension funds will be managing assets worth in excess of $25bn (E23.8bn). Even the Church is involved in managing a fund in this fiercely Catholic country.
Formally operating since the spring, funds will sign up under 30-year-olds by the end of this month and individuals aged between 30 and 50 by the end of the year. By the end of March 2000 employees will be informed of the balance in their ZUS accounts for 1999, and 2004 will see the end of the calculation period for those who started work before reform got underway.
The first pensions will be paid from the first and second pillars in the year 2009. The retirement age will remain at the current level, 60 years for women and 65 years for men. After reaching this age, the decision on when to retire will be up to the insured. The value of an individual’s contribution in a given year cannot exceed 30 months’ average wages in the national economy as forecast for that year. From this January, all those who are over retirement age, including current pensioners may work while drawing pensions
The government remains, however, committed to running the old state system for those born before 1949.
Meanwhile, those born after this but before 1969 will have the right to choose whether they want to have the total amount of their contribution registered on their individual ZUS account (first pillar) or whether they prefer to have their contribution divided and part of it transferred to a designated open-ended pension fund. Those born after 1968 will be covered by the new system in its two-pillar version.
Calculation of individuals ‘initial capital’ begins from the commencement of this year. This means that each contribution paid will be registered in individual accounts. The accrued pension rights of all those who had worked before the start of the reform and were born after 1948 will be recalculated and expressed in zlotys as the initial capital.
The calculation of the initial capital will be a one-off operation. ZUS has five years, until the end of 2003, to make the calculations. For the employed, this means in practice that they will be obliged to send to ZUS, by a specified date, all the documents required by this institution at retirement. In most cases the necessary documents are kept by the workplace. The employer will apply to ZUS for the calculation of the initial capital of its employees. The initial capital will be indexed in line with the same rules that will govern the indexation of contributions registered in individual accounts.
After the introduction of the reform, the employee’s gross wage will be calculated in a slightly different manner. Around half of the ZUS contribution will be added to the current gross wage. This will not result in a change in the net wage received by the employee; it only means part of the previous ZUS contribution to the state will formally be included as part of the employee’s earnings. The employer will pay the second part of the pension contribution. He will also be responsible for transferring the two parts of the contribution to ZUS.
In fact, the new system will place a number of new responsibilities on employers, mainly relating to the administration of ZUS, and new accounting systems.
Another of the reform’s targets is to depart from separate pension regulations affecting career soldiers, policemen, State Protection Office (UOP) officers, border guards, state fire service and penitentiary service employees. People employed by uniformed services this year onwards will be affected by the general pension system.
All these state employees who started work before this year will remain in the old system. However, the rules of old-age pension indexation will be changed. Pensions will be indexed in line with generally binding regulations.
But while employees and employers have new regulations and rules to grapple with, so too, naturally do the fund managers. The funds will be obliged to keep their investment portfolios diversified. There will be no restrictions on investing in bonds and bills issued by the state treasury and the National Bank of Poland, but limits are placed on other assets such as stocks, National Investment Funds’ shares, bank deposits, communal bonds, units in mutual funds and so on. As a general rule, the fund is allowed to invest a maximum of 5% of its assets in the securities of one issuer. Investment is banned in real estate or financial instruments which can bring a large speculative profit but bear a high risk, such as derivatives.
Related legal regulations are also designed to prevent the uncontrolled outflow of money abroad. Investment in foreign securities cannot exceed a total of 5% of a fund’s assets.
With just six months to go to the end of the first administrative phase, it seems Poland is on schedule.