Poland’s state pension system
inherited from the pre-1989
communist regime is bankrupt
and represents a growing threat to fiscal
and state finances. But getting
funded and private pension systems
off the ground has proved difficult
because of the problems experienced
by all transitional economies: people
with disposable income spend it on
things that they have wanted for years
rather than making provision for their
future while the vast majority just
don’t have the disposable income that
would allow them the choice.
In addition the old idea fostered by
years of communist rule that somehow
the state will provide is still prevalent
while the high inflation of the
1980s and subsequent financial scandals
as the new system bedded down
have cultivated a perception that saving
is just not prudent.
So governments attempting to
reform the system are faced with an
almost sisyphusian task, on the one
hand undertaking a reform of the old
state system while on the other
attempting to construct a voluntary
“The drafting and passage of much
of the pension legislation was done
under Wlodzimierz Cimoszewicz’s
Alliance of Democratic Left (SLD)-
led administration in 1996-97 and it
was implemented by Jerzy Buzek’s
right of centre coalition during 1997-
2001,” says James Kernan of PricewaterhouseCoopers
in Warsaw. “However,
the policy group working on the
issue did not change between governments.
Among the reform’s intellectual
authors was Marek Góra and the
group included Krzysztof Pater, later
a minister. It was a very inclusive
process and they were politically savvy
enough to get on well with people in
both governments to see the job
through. So while people at ministry
level changed, this team, known as the
plenipotentiary for pension reform,
stayed largely intact throughout the
four years from the introduction of
the reform to implementation.”
“What has been important is that the
Polish pension reform has never
belonged to any political party or any
political power,” says Góra, a professor
at the Warsaw School of Economics.
“So we have had a left-wing government,
then a rightist government, then
the left and now we will have a right
again, but the reform design has stayed
unchanged. And this is partly due to the
fact that it was done beyond politics.”
The reforms included an overhaul of
the old pay as you go system, the ZUS,
whose obligations grew rapidly in the
1990s when placing workers on early
retirement was one of the most popular
methods of resolving labour market
problems, giving Poland the
region’s highest growth in the number
of pensioners and the highest
replacement rate. The reform
retained the ZUS for those born
before 1949 and the rest of the population
was transferred to a new system,
the new ZUS, which was composed of
a notionally defined DC element partfinanced
on a PAYG format and a second,
funded DC system, which is
defined in Poland as a second-pillar
programme and which those born
after 1949 were obliged to join.
“The basic pension system has been
designed in a way that differs fundamentally
from most other European
pension systems and so the terminology
we use can be misleading,” says
Góra. “We don’t have a first pillar
because that is usually understood as
including redistribution and we don’t
have any redistribution in the new system.
Neither do we have what is usually
considered a second pillar, which
is an additional occupational or
employer-paid programme. What we
call the second pillar is also part of the
basic system. The new pension system
is based entirely on personal retirement
accounts, of which everybody
has two, one administered by administered
by ZUS and the second by the
Universal Pension Society (PTE).”
In addition, a voluntary scheme was
developed — the employee pension
programmes (PPE), which as offered
to employees at their employer’s initiative.
And while here had been
agreement about their introduction it
as soon evident that although there
were no major party-political problems
over the reforms, ideological differences
were hampering their execution
and that while the authors of the
pension reform had one vision, the
regulatory authority during Buzek’s
period in office had another. Consequently,
little was done to promote
the new voluntary structure with
employers and among the wider population.
“The market was expecting the government
to support its social reforms
with a campaign explaining that if
people didn’t save for themselves they
would be quite poor on retirement,”
says Antoni Leonik, chairman and
CEO of PKO/Credit Suisse Investment
Funds Co. “But it didn’t happen
in the 1990s and the financial industry
will not do this because if will not
break even if they have to launch customer
acquisition campaigns.”
As a result the PPE never really got
off the ground. “The PPE has had
very weak support from employers,
and, as Poland has the EU’s highest
unemployment rate, employers don’t
have any motivation to offer this to
their employees,” says Pater, one of
the system’s architects and until late
2004 minister of social policy at the
ministry of labour & social policy.
According to Pater, there are around
260 registered PPEs with some
100,000 members, or some 0.3% of
the labour force, and 150m zlotys
(€36m) of contributions transferred.
Not much after five years.
On returning to office in 2001 the
SLD-led coalition decided to redraft
its voluntary approach and, while not
abandoning the PEE programme, to
accept that forcing businesses into a
further cost and increasing the cost of
employment was not a beneficial policy
line to pursue. Instead it decided to
sidestep employers and offer a system
that individuals could sign up to at
their own initiative. The result is the
individual retirement account (IKE).
“The idea came to me around 1996,
inspired by the US individual retirement
pensions,” says Pater. “The system
is constructed to give pension
possibilities at a time when people
have low incomes and so may have little
money for saving, when high
unemployment means that employers
won’t offer pensions as an inducement
and anyway cannot afford the
support pension payments and when
unemployment means that it is
unlikely that employees will have 40
continuous years of contributions. It
is very simple because we wanted to
make it easy to understand by the people,
easy to monitor by the financial
tax authorities and easy to operate to
avoid additional costs to financial
The IKE was launched in September
2004. “It has gone fairly well, with a
lot of financial institutions offering it,
and the expectation is that a lot of people
will sign up,” says Kernan.
But Leonik thinks more must be
done to make the IKE attractive.
“There is a capital gains tax advantage
attached to the IKE but it is deferred
for many years so people don’t feel
this at the moment. It needs a different
sort of tax incentive, something
deductible from the taxes people are
paying now. Then it would work
much better.”
Pater concedes the tax issue but
says the government has calculated
that currently the country
would gain more from garnering the
tax receipts and thereby improving its
budgetary position so it could meet
the Maastricht criteria more rapidly
than from encouraging saving for
retirement which currently is only of
interest to people with higher
incomes. “We assume that 20% of
employees will participate and if we
were to give a further tax incentive it
would increase the deficit by more
than 1bn zlotys,” he says. “After we
join the Euro-zone and the macroeconomic
situation is stabilised we
can address the issue again.”
However, that decision may not be
taken by this government. A general
election is due next year and all opinion
polls indicate that the current government
is in for a crushing defeat and
that the next administration will be a
coalition of the centrist Citizens’ Platform
(PO) and the centre-right Law
& Justice (PiS) party. Opinion polls
show the PO getting 28.9% of the
vote and the PiS 17.6% while the SLD
and its Social Democracy of Poland
(SdPl) coalition ally just scrape in over
the 5% of the vote threshold for parliamentary
representation. “Under
the Polish electoral system a combined
PO/PiS vote of 46.5% would
deliver a parliamentary majority with
around 60% of the seats,” says Rafal
Zagórny, a finance minister in
Buzek’s government and a PO MP.
Both PO and PiS are relatively new
creations but they both emerged from
the Solidarity-based factions that
made up previous right-of-centre
governments. And this raises the
question of whether the new government
will let the IKE programme
wither on the vine in a repeat of its predecessor’s
neglect of the PPE initiative.
“Looking at the new model, I would
say that it works and I wouldn’t say
that there was a lot of need to change
anything because it is still very
young,” says Zagórny. He adds that
the PO has a team formulating its policy
on pensions in what all parties consider
a pre-campaign period. “They
are focusing on issues directly linked
to ZUS because it is Poland’s biggest money consumer. It needs a lot of
changes, meaning a lot of social cuts,
because without serious social
reforms there is a serious risk for the
Polish budget in the future.”
The PO’s likely coalition party
agrees. “Our first task will be to
defend the reform, but that doesn’t
mean that nothing is to be changed,”
says Artur Zawisza, a PiS MP and a
member of the parliamentary public
finance committee and previously the
social policy committee. “The only
cuts to be made will be in the ZUS to
ensure that officials do not waste
funds through administrative inefficiencies.
It takes commercial credit
year-by-year, adding to the budgetary
and state deficits.”
Zawisza’s proposals for the secondpillar
new ZUS include a reduction of
administrative barriers for pension
funds wishing to enter the market and
to increase competition. “The market
is too concentrated,” he says. “There
were 20 pension funds a few years ago
but consolidation has reduced this to
a handful, creating something of an
oligopoly, which is not good for
The PiS is in favour of giving tax
incentives to boost the attractiveness
of the IKE. “We do not agree with the
Pater argument that meeting the
Maastricht criteria for ERM membership
is more important than the pension
system and we are against a fast
accession to the Euro-zone,” Zawisza
says. “In fact we are quite sceptical
about it. When the law establishing
the IKE was passed Mr Pater told parliament
more than 3m, and at least
1.5m, people would be members of
various IKE programmes,” he recalls.
“But so far only 100,000 people have
signed up. It’s a drop in the ocean. So
from that perspective we are very
much in favour of tax incentives that
are as strong as possible to encourage
people to participate in IKE.”
However, he concedes that PO,
which would be the senior partner in
any centrist coalition, shares the current
government’s enthusiasm for
euro entry as soon as possible.
“Of course, a 20% unemployment
rate doesn’t help to develop the IKE,
but there is a very low level of knowledge
about IKE and generally people
have not been informed about it,”
Zawisza says. “When we are in power
we must improve this, it must be a priority.”
So no repeat of the earlier neglect of
the PPE? “It was a real mistake of
Buzek’s government not to promote
the PPE,” Zawisza insists. “It did not
see how the PPE could be important
in the whole system. Even as an opposition
MP I am grateful to Pater for
proposing the PPE law.”
Pater makes the point that although
the uptake of the PPE and IKE may be
low now when only 25% of the economically
active population are able
to save long term, “taking into
account the development of the economy,
the increase in the standard of
living we can expect that year-by-year
the number of participants will
He notes that the tightening of regulations
in January 2005 to remove
the financial incentives that have been
enjoyed by some 6,000 employee
pension programmes that have not
registered under the PPE legislation
may spark a new influx into the
scheme. “All those employers have
the choice of transferring these programmes
in or lose the advantages,”
Pater says. “It’s too early to determine
how many will do so but we expect it
will be a significant number.”
So for the moment, at least, it
appears that both major political blocs
accept that the state system needs
reform and that the new programmes,
while not able to take off in light of the
country’s economic realities, at least
provide an infrastructure on which to
build as the economy develops.
But Góra insists that for the moment
the PPE and IKE are merely additional
elements but are not crucial for
the system, and a focus on them
deflects attention from a considerably
more fundamental question. “What
we still have to establish is what institution
will pay benefits for the basic
system,” he says. “This is a key challenge.
The only decision taken so far is
that payments will be made as annuities.
It has to be an insurance product,
there will be no other options. But we
don’t know what type of institution or
institutions will pay them. We lost
three years doing little on this issue
while the focus was placed on the IKE.
Now we have to concentrate on this
question because the system will not
be able to work without a decision.”
And there are those who insist that
the real political battle over Polish
pensions is not domestic but
against an external adversary – Eurostat.
The clash centres on the character of
the funds in the second pillar, whether
the money in the open pension funds
should be counted as part of Poland’s
public finances, as the Polish government
asserts, or as part of the public
pension system and so not to be
counted as part of the public financial
system, as held by Eurostat. The
Eurostat case would mean that
Poland’s public finances were in
worse shape than Warsaw contends
and so delay by some years Poland’s
meeting of the ERM criteria.
“Our position is that money is private
when it is still owned by the people who
paid it but it is public while it is in the
pension fund,” says Zawisza. And here
there is a national consensus, with pension
specialists across the political spectrum
in Poland prepared to pursue the
issue to the European Court of Justice.