Disappointing take-up in first phase of auto-enrolment pension plan

Key points

  • Auto-enrolment pension plans were rolled out in 2019
  • Employee take-up is below government expectations
  • Investment fund management companies dominate the provider market
  • The government hopes for 80% the take-up of individual retirement accounts

Poland’s auto-enrolment employee pension plan (PPK) concluded its first phase on 12 November 2019, the deadline for around 4,000 of the largest employers, those with a workforce of at least 250. The second stage, for firms with 50-249 workers, starts in January 2020, the third, for firms with 20-49 employees, six months later. The remaining companies, including state budget entities, come on board in the first half of 2021.

The programme is compulsory for employers. They pay a minimum 2% contribution rate, with the option to increase it to 4%, with the exception of companies’ that already have an employee pension programme (PPE) with a basic minimum contribution of 3.5%.

Employees pay a basic 1.5% (0.5% for those on low salaries) with the option to raise this to 2.5%. The state provides each member an additional contribution of PLN240 (€56) and a one-off bonus of PLN250. All workers aged 18-55 years are automatically enrolled, while older workers can opt in.

The system is voluntary for employees, but they have to actively opt out. They can rejoin at any time, although they will be re-enrolled every four years. 

Based on the experience of other auto-enrolment schemes, including that of the UK, the government predicted a participation rate of 75%, or 11.4m workers by 2021. However, although final official data was not available, the initial signs are that take-up fell short of expectations.

According to a survey of employers by law firm Wojewódka i Wspólnicy and think tank Instytut Emerytalny, conducted after the November deadline, participation averaged 40%. 

The first phase covered companies with a range of owners, including the state treasury and foreign capital, Warsaw Stock Exchange listings, heavy and light industries, services and new technologies. It also included subsidiaries of large employers, which by themselves employ a relatively small number of workers. None of these appeared to affect the opt-out rate.

“We see companies where the participation rate reaches 70%, but also those where it is below 20%” - Marcin Pawelec

Participation was higher in companies with trade union representation, at an average 45%. It was unsurprisingly lower in firms with a high share of workers on fixed-term contracts as opposed to full-time employment.

“We see companies where the participation rate reaches 70%, but also those where it is below 20%,” reports Marcin Pawelec, spokesman for Aegon Poland. 

“A lot depends on the employer and its approach to the implementation of the PPK – for instance, information campaigns among employees. Experience from other markets shows that participation in similar pension schemes increases in time as people begin to see the benefits of saving in it. Therefore, we believe that the participation rate in Poland, even if at the beginning it is lower than forecasted, will grow year to year.”

Despite endless reassurances from minister Mateusz Mazowiecki, co-author of the PPK project, that PPK funds are private assets owned by their members, many employees and Polish media still think otherwise because of the previous government’s raid in 2014 on the sovereign bond assets of the second-pillar pension funds (OFEs) on the grounds that the funds were public monies.

“We think that this result is quite good, especially when we take into consideration the lack of trust in the pension system after changes in OFEs in 2013,” says Małgorzata Rusewicz, chair of Polish Pension Funds Chamber, and vice-chair of the Chamber of Fund and Asset Management. “We expect that, similarly to the UK, the participation ratio is going to increase simultaneously with the growth of assets and further continuation of the programme.”

Małgorzata Rusewicz

The government, still bullish about pushing up the participation rate, is now talking about targeting its future information campaigns directly at workers. Meanwhile, Mazowiecki mooted amending the constitution to enshrine the private nature of both the PPKs and the new retirement accounts that will replace the second-pillar (see box).

PPK asset managers must provide a minimum of five defined-date funds, depending on the years left to retirement, which is reflected in these funds’ asset allocation strategies. 

From the asset management perspective, PPKs have proved attractive to investment fund management companies (TFIs), which make up all of the 20 financial companies licensed to manage

PPKs, apart from three pension management companies – Aegon, Nationale-Nederlanden and Pocztylion Arka – and one insurance company (Compensa Life Vienna Insurance Group).

In the first phase, the biggest number of contracts went to PKO TFI and the TFIs of the state-owned PZU group. These both signed up more than 1,000 employers, followed by Nationale-Nederlanden PTE with some 550. 

As Rusewicz explains, PKO and PZU “have a very strong brand in the local market, long-lasting relations with their corporate clients and very competitive PPK offers”.

Aegon told IPE that it sees the best opportunity to gain a PPK market share in the second and third wave. “This is why we focused mainly on them in our business plans,” says Pawelec. In the first wave, the PPK obligation covered about 4,000 companies and most of them already had a financial partner. In the second wave there will be far more – about 16,000. Many of them so far lack experience with employee financial benefits, such as group insurance. “We want to reach this group with our PPK offer supplemented with other solutions, such as group insurance,” Pawelec says.

Government delays second-pillar axe to latter half of 2020

In November 2019, Poland’s ruling Law and Justice (PiS) government published its draft bill on the dismantlement of second-pillar pension funds (OFEs), postponing their break-up to the second half of 2020, with the law itself set to take effect in June. 

According to the government, the delay followed from earlier public consultations on the project. Elections in October, resulting in PiS maintaining its majority in the lower house but losing it in the upper chamber, also intervened.

The dismantlement plan has undergone big changes since it was first announced in 2016. The most significant is that the proposed transfer 25% of each OFE member’s assets to the Demographic Reserve Fund (the first pillar’s contingency fund for pensions) has been scrapped. 

Instead, members have two choices. The default option is for the full OFE asset pot to go to newly created third-pillar individual retirement accounts (IKEs). The alternative is that the assets are credited to a member’s sub-account at the first-pillar Polish Social Insurance Institution (ZUS), with the assets moving to the Demographic Reserve Fund, to be managed by the Polish Development Fund. The latter is also coordinating and administering the PPK project.

In the first instance, the member pays a 15% ‘conversion’ tax to ZUS’s Social Insurance Fund, 70% transferring in 2020, the remainder a year later. 

In the ZUS case, there is no up-front payment, but the resulting pension is subject to personal income tax. Also, unlike the IKE option, funds in the ZUS account are not inheritable. 

The government has predicted that 80% will take the IKE option, and has been stressing that the monies in those accounts will be private property, notwithstanding that in 2015 the Constitutional Tribunal ruled that the previous year’s bond transfer from the OFEs to ZUS was legal because the funds were public monies.

The conversion tax will provide a short-term boost to ZUS, but reduce its longer-term retirement liabilities. According to recent data from the Polish Financial Supervision Authority, as of the end of October 2019, OFE assets totalled PLN154.9bn (€36bn).

The disappearance of the OFEs means, in the case of those still voluntarily contributing 2.92% of gross wages to the second pillar, that this will now go to the first pillar, not the IKEs. Account holders will be able to add extra funds and, if they already have an IKE, merge them two years after the law comes into effect, although the assets that originated from the OFE account will be ring-fenced for access on reaching retirement.

The investment policies of the new funds will reflect the age and risk profile of members, in marked contrast to the OFEs’ existing high equity bias. This is currently more than 80% since they were barred from investing in government bonds.

The OFEs’ reliance on the the Warsaw Stock Exchange has, since 2018, produced poor results, with the 12-month return to September 2019 averaging minus 3.5%. The funds have also experienced a net outflow owing to the slider mechanism that incrementally removes assets from OFE accounts to ZUS for those with 10 or fewer years left until retirement.

According to the Polish brokerage Trigon, outflows to ZUS totalled PLN5.8bn in the first 10 months of 2019, against PLN2.7bn of inflows. The slider will disappear with the liquidation of the OFEs.

Małgorzata Rusewicz, chair of Polish Pension Funds Chamber, and vice-chair of the Chamber of Fund and Asset Management describes the OFE transformation as a rational solution. “Because of its present legal discipline including public property of assets, and the ongoing transfer of money to ZUS, the funds don’t increase the level of social security on retirement much, and they entail a negative impact on the capital market,” she says. 


Poland: Auto-enrolment off to a slow start