POLAND – Poland's deputy premier and finance minister Jacek Rostowski and Władysław Kosiniak-Kamysz, minister of labour and social policy, have unveiled a long-awaited report on the future of the country's second pillar.
The only payout system proposed – the most time-critical issue given that the first significant tranche of male second-pillar fund (OFE) members retires next year – was that recommended earlier by the Finance Ministry.
Ten years before retirement, the funds would be transferred incrementally to the Polish Social Insurance Institution (ZUS) sub-accounts set up in 2011 when the OFE contribution rate was slashed from 7.3% of gross wages to 2.3%
The ministers ruled out six of the nine proposals from across the spectrum of stakeholder opinion: a partial or total liquidation of the system, maintaining the status quo, reducing the contribution rate, re-instating the pre-2011 7.3% rate and a system of programmed withdrawals suggested earlier by the pensions industry.
The ministers' confirmation of prime minister Donald Tusk's earlier promise that there would be no nationalisation calmed the Polish stock market, which early on 26 June plunged to a 10-month low.
The market’s nervousness was understandable given that extensive earlier leakages of the report painted a largely negative picture of the second pillar.
It argued that the costs incurred by the funds were excessively high, some PLN17bn (€3.9bn) since the start of the system in 1999, including PLN2bn during the financial crisis year of 2008 when their assets declined by PLN20bn.
In 1999-2012, the report states that OFE returns averaged 6.6%, compared with 6.8% on savings at ZUS, 8.5% on ZUS sub-accounts and 7.2% at the ZUS buffer fund, the FRD.
Meanwhile, the Warsaw Stock Exchange's benchmark WIG index returned 7.7% and government bonds between 6.7% and 6.9%, while GDP growth averaged 7%.
Additionally, the returns generated by OFEs were highly volatile, leaving imminent retirees exposed to sudden downturns.
This argument largely underpins the ministers' choice of ZUS for payouts.
The report acknowledged the positive contribution OFEs had made to the development of the Polish capital markets – they now account for 18% of stock exchange capitalisation – but added that their value to the government was decreasing as privatisations tailed off.
The Finance Ministry's hostility to the second pillar centres on its impact on public finances.
The report calculates that, under Eurostat methodology, Poland's public debt in 2012, at 56% of GDP, would have been 18 percentage points lower without a second pillar.
Alongside an assumed higher credit rating, the report notes that the country would have saved PLN13.3bn in debt servicing costs in 1999-2012.
The first of the three key proposals is designed to slash borrowing costs.
All government bond investments would be transferred to the ZUS sub-accounts and indexed in a similar way – the average of five years' nominal GDP growth excluding any falls – with the OFEs subsequently restricted to investments in what Rostowski described as the "real" economy, including corporate bonds.
The report estimates that the bond transfer would reduce public debt by the equivalent of 11% of GDP.
This proposal includes lifting OFE limits on equity investment – in 2013, this stands at 47.5% of net assets – and the removal of the minimum guaranteed returns and the penalties that missing these incur.
According to the report, these changes would increase competition among OFEs for clients and have a positive impact on future retirement benefits.
The remaining two proposals would change the existing mandatory system into a voluntary one.
In the first, each OFE member would have three months to inform ZUS whether they wish to remain in the private system or transfer their assets to the state fund.
In this 'opt-in' system, members who do not inform ZUS will have future OFE contributions transferred to the state sub-account.
The decision to transfer to ZUS is irrevocable, while those who choose to remain in the private system can change their mind in future.
New labour market entrants – who currently get assigned by lottery to an OFE if they do not specify one themselves – will under this proposal default to the first pillar.
Irrespective of their decisions, retirees would still be entitled to a guaranteed minimum state pension.
In the second voluntary proposal, members opting into OFEs could augment their second-pillar contributions by a further 2% of gross wages.
On retirement, members could choose to receive a lump sum or buy a retirement product from the market.
The report is now set for a month's consultation before being drafted into legislation, giving the dismayed if not entirely surprised pensions industry the last chance to publicise its case.
The early response of the Polish Chamber of Pension Funds (IGTE) was to stress that the industry wants to cooperate with the government to produce a reformed system of benefit to all Poles.
The chamber noted that the report failed to address the costs incurred by ZUS as a result of earlier changes in contributions and eligibility, and special treatment for groups such as miners and farmers.
According to the chamber, economists' analysis show that, thanks to OFEs, Poland's GDP growth was some 3-7% higher than it would have been otherwise, and the unemployment rate some 2 percentage points lower.
IGTE chairwoman Małgorzata Rusewicz said: "We are already concerned reading about the proposed 'voluntary' measures and transfer of money to ZUS 10 years before retirement.
"In both cases, the money transferred from the OFEs to ZUS would be spent immediately on payment of benefits to the existing pensioners.
"This means the money saved by OFE members will no longer be available for the contributors themselves when they want to use their savings.
"What is more, their contributions will not be invested for 10 years, which, in the economists' opinion, will mean accordingly lower pensions than in the case of leaving the savings in the OFEs."