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Polish parliament approves pension reform

POLAND – In the face of a mixed response from the industry, the Polish parliament has approved a package of reforms that includes capping fees.

The Sejm, the lower house of parliament voted through the government's proposals on July 29. Thereafter it moves to the Senate, the upper house, for legislative scrutiny, and presidential approval. Assuming no hitch, the majority of the amendments will come into effect on April 1 2004.

"The basic aim is to reduce the cost of the system, and at the same time pass on these reductions to fund members," explained Krzysztof Pater, undersecretary of state at the Ministry of Economy, Labour and Social Policy.

"Additionally, we want to increase competitiveness of the funds and create a situation where it will be more profitable for a pension fund management company to be managing one of the best performing funds."

The government also wanted to address the currently high concentration of the market, which Pater describes as ultimately risky. There are currently 16 open-ended pension funds or OFEs in the second-pillar system. Of these, the top three (Commercial Union, ING Nationale-Nederlanden and PZU, the former state-owned insurer) had between them, as of the end of June, 56% of the 11.3 million fund members. In terms of net asset value, which stood at PLN37.769 billion ($9.8 billion or Euro8.6 billion), they controlled 65%.

"Since the system started we have not observed price competitiveness," explained Pater. "There have been many comments that pension funds are too expensive."

Michal Szczurek, CEO of the ING Nationale-Nederlanden pension society, countered that the administrative fee controls expressly reduce price competition. "No player will voluntarily reduce fees because the political risk of further fee reductions is too high," he predicts.

In addition to changes in the second-pillar law, the government plans further overhauls in the pensions system. Parliament is now set to debate its proposed "individual pillar" system, which would extend capital tax exemptions to other savings such as mutual funds and life insurance, similar to the IRA accounts in the US.

And it intends to overhaul the third-pillar system, which currently revolves around the employer pensions programmes or PPEs. The changes here include changing the rule that says there is no legal way of terminating the programmes or temporarily suspending contributions. "This will significantly reduce the financial risk for the employer," noted Pater.

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