POLAND - Poland's second-pillar system is finally set for a radical overhaul in 2011 in a peculiar compromise that maintains the contribution level, but slashes the amount managed privately.

Under the existing system, workers pay 19.5% of taxable income into the mandatory pensions system.

Of this, 12.2% is retained by ZUS, Poland's Social Insurance Institution, which administers the first-pillar pensions system.

The remaining 7.3% is diverted to second-pillar open pension funds (OFEs) managed by private-sector financial institutions.

On 30 December 2010, prime minister Donald Tusk announced that the government proposed to retain the 7.3% share moving to the second pillar but cut the OFE transfer to 2.3%.

The remaining 5% would be managed in newly created second-pillar individual sub-accounts by ZUS, with an annual return indexed to GDP growth and inflation.

The changes to Poland's pensions system have been intensely debated for the best part of 2010 against an economic background of a growing government deficit and public debt.

Under EU procedures, contributions to the second pillar counted as budget expenditure. On 10 December, Tusk wrested a significant concession from the European Commission, which will now allow EU member states that instituted second-pillar pensions to offset the cost of these reforms against their budget deficit and debt.

Nevertheless, by the end of 2010, Poland's debt was running close to 55% of GDP - the constitutional level which, if breached, automatically triggers pensions and other spending cuts. The changed system will, the government claims, reduce state subsidies for pension payouts.

The sums in question are considerable. In 2010 alone, Poland's 14.9m second-pillar members transferred PLN2.8bn (€707m) to the OFEs.

The OFEs are major players on the Warsaw Stock Exchange (WSE), with some 36% of €55.4bn of net assets invested into shares at the end of 2010.

WSE share prices fell sharply in response to the government's news. The government says it will extend the OFEs' equity investments by replacing the existing one-size-fits-all portfolios with lifecycle funds, including an aggressive, equity-weighted portfolio for younger members, although it has not yet supplied any details.

As a further sweetener, the government proposes that, as of 2012, individuals can make a voluntary, tax-deductible top-up starting at 2% of wages and rising to 4% by 2017.

Meanwhile, the 5% share to be managed by ZUS will also start falling after some two years from the revised system's start, to 3.8% by 2017.

Ultimately, the new proposals reflect a compromise between the coalition government's centre-right Civic Platform (PO) and its junior partner, the Polish Peasants' Party (PSL).

In October 2010, PO minister Michal Boni, the prime minister's chief adviser, drafted revisions that largely focused on structural issues such as lifecycle funds, while PSL ministers pushed for a higher contribution to the state pillar at the expense of the second.

The government plans to draft the law by the end of January and have the system approved by parliament and the president for 1 April - clearing the decks for a general election later in the year.