Poland's second pillar providers are looking for clarity, writes Krystyna Krzyzak
The pressures experienced by the second pillar system have failed to register a public interest. Elections held in October 2011 returned the same two coalition parties to government - Civic Platform (PO) and its junior partner, the Polish Peasants' Party (PSL). The PSL retains the labour and social policy portfolio, the ministry responsible for pensions, although Jolanta Fedak, the minister noted for her trenchant hostility to the privately managed second pillar, has been replaced by Władysław Kosiniak Kamysz. He is a 30-year old medical doctor who has yet to express an opinion on the privately managed system.
The pensions industry does not want a repetition of 2011, with the privately managed funds used once again to make up for budget shortfalls. Its programme does include some changes to the pensions system, including raising employer contributions to disability pension fund over the government's term by two percent. The contributions had been lowered when the opposition was last in power, but the fund is severely in deficit. It intends to eliminate pension privileges for farmers, miners, priests, police and fire fighters, and raise the retirement age, currently 65 years for men and 60 for women, to 67 years for both. These start in 2013, for completion by 2020 for men and 2040 for women. "This is the most important change, although the increase is too slow, especially for women," observes Grzegorz Chłopek, vice president and chief investment officer at ING PTE. "With the workforce: retiree ratio falling and the current social system underfunded, it poses big problems for future GDP." As an economist Dariusz Stańko, external adviser to the Polish Chamber of Pension Funds approves of the rises but cautions that they need to be implemented alongside other changes to healthcare and the labour market.
These policies contribute to the aim to lower the government deficit from around 5.6% of GDP to 1% by 2015, and the public debt from around 54% of GDP to 47% by 2015. Poland has been instructed by the European Commission to lower its deficit to the 3% Maastricht criterion for euro adoption by 2012, while the debt level, although well below the 60% Maastricht level, is close to Poland's own legal limit of 55%. While the markets were initially positive about the programme, the rating agencies have postponed any upgrade until they see results.
What was missing, notes Stańko, was any reference to the private pensions industry, or the government report he authored in 2010, which was discussed, then shelved. The report included the increasingly alarming absence in Polish pensions legislation of payouts for retiring OFE members.
The most recent proposal on lump-sum payouts and annuities was vetoed by the president in 2009. The current solution for female OFE members who have retired allows for a programmed withdrawal via ZUS while retaining the remaining funds in the second pillar fund. In 2014 the first significant tranche of male members retires.
Previous proposals have included returning the clients to the first pillar pay-as-you-go system, and a new class of company offering annuities. "Returning to the pay-as-you-go system is not good for the clients as the monies would not be invested but indexed, while setting up new companies would be expensive. Our proposal is to let life insurance companies, who have actuarial experience - as well as pension funds - offer annuities," says Chłopek. With the premiums to OFEs now reduced, programmed withdrawals for a proportion of earlier wages is a possibility. "But we have a limited time, 18 months, to prepare the legislation," he warns.
A related omission is the introduction of different classes of OFE funds catering for the age and risk profile of members. These were promised in 2011 but have yet to materialise. Meanwhile, the pension companies can only offer one, multi-asset fund that leaves members exposed to the vagaries of the equity market at the time of retirement. "We should be allowed to differentiate investment strategies for younger clients and those approaching retirement, especially when the markets are so volatile," notes Andrzej Sołdek, president of the board at PZU.
The coming years carry mixed blessings for the Polish pensions industry. On the one hand, as of 2012 the PTEs (second pillar management companies) will be allowed new business lines. They can offer individual retirement accounts (IKEs), as well as a new savings vehicle - the individual pension insurance account (IKZEs). Contributions to IKZEs, unlike IKEs, are tax-free and expected to prove popular. Most PTEs will offer them.
On the other hand, by 2012 companies will not be able to canvass individual potential clients directly for new business, while any advertising has to be strictly factual. One rationale was that some sales teams earned commission by persuading clients to change OFEs, while the client's personal fund lost value on the transfer. Andrzej Sołdek told IPE that PZU, which had previously used the parent company's sales force and agencies, would focus on internet advertising.
One consequence is an increase in the number of new OFE entrants who fail to choose their own fund and are then assigned by a Social Security Institution (ZUS) lottery. In 2011, around 321,000 new members were assigned this way, compared with 166,850 in 2010. The lottery excludes funds holding more than 10% of total assets - ING, Aviva and PZU - with the remaining funds participating if their two consecutive three-year rates of return are above the average and above inflation. The system remains controversial, especially for the excluded funds, who see their smaller competitors gaining clients at no cost or effort. "There should only be one criterion for taking part in the lottery - efficiently managing the fund and providing the client with the best return," says Andrzej Sołdek. "It's not good for us," adds ING's Grzegorz Chłopek. "Our portfolio will get older and therefore our investment policies will have to change. But for clients it is not good either. The cheapest funds are excluded from lottery". Marcin Żółtek expresses concern that business will become more onerous if it materialises that pension management companies be required to raise their capital, while still subject to the management fee cap, minimum rate of return guarantee and the already low level of fees themselves. "We present compelling arguments to change the lottery system. If it becomes the only way to acquire clients, there is no reason why the biggest pension funds should be excluded," he complains.