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The Warsaw Voice » Business » August 1, 2013
Business & Economy
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Dispute Over Pension Funds Heats Up
August 1, 2013   
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Poland is set to introduce far-reaching changes to its pension system after a government review but the country’s open pension funds (OFEs) will not be scrapped.

Poland’s open pension funds were created as part of pension reforms from 1997 to 1999 that introduced individual, defined-contribution pensions as a substitute for a part of the public pension. The reform assumed that a part of the pension contribution would be transferred from the national to the private system, although these would co-exist and the future pension would be paid from both.

In general, 19.5 percent of the gross salary is taken from workers and allocated to their future pension. Initially, 7.3 percentage points of that was transferred to pension funds, and the remaining 12 p.p. went to the pay-as-you-go system formed by the Social Insurance Institution (ZUS). However, in 2011 the contribution was cut to 2.3 percent. Since that time, a smaller part of the contribution has been transferred to ZUS. The contribution was originally expected to increase gradually to 3.5 percent in 2017, but that is unlikely to happen because the government now plans to thoroughly reform the pension fund system.

At a special press conference at the end of June, Finance Minister Jacek Rostowski and Labor and Social Policy Minister Władysław Kosiniak-Kamysz presented the government review of the pension system, the first since the start of pension reforms in 1999. They discussed the impact of the reforms on the security and amount of future pensions, as well as its effect on public finances, the capital market and the country’s economic growth.

According to the government report, OFEs have cost prospective retirees over zl.17 billion. Fees collected by OFEs do not depend on the performance of individual pension funds. At the same time, the rates of return achieved by pension funds have been lower than the inflationary adjustment of funds collected by prospective pensioners in their accounts in ZUS, and also lower than return on assets amassed in the so-called Demographic Reserve Fund, which was established in 1998 to better secure the solvency of old-age pension benefits. The Demographic Reserve Fund plays the role of a contingency fund for the old-age pension fund separate from the Social Insurance Fund. It is mainly supplied from assets collected as part of old-age pension contributions, income derived from the privatization of state-owned enterprises and return on investment.

Pension fund investments have also been subject to greater risk, the government says. Although pension funds initially played an important role in the development of the Polish capital market, their importance is bound to decrease, according to the report, and the same goes for their role in the privatization of state-owned enterprises. Another problem with pension funds is that they contribute to public debt and its servicing costs, leading to lower credit ratings for Poland from international rating agencies, officials say.

All this is why changes are needed to the pension system, government experts say—to reduce the costs and risks related to the operations of pension funds, for both future retirees and public finances, which means for all taxpayers. The new rules should facilitate the country’s economic growth and ensure the stability of Poland’s capital market, the government says.

The government has proposed three options for changes to the pension system. Under the first scenario, the government would do away with the so-called bond part of pension funds. This would mean that the assets which pension funds are not allowed to invest in stock would be transferred to subaccounts at ZUS, and index-linked there according to standard rules. At the same time, OFEs would be banned from investing in government debt.

Under the second scenario, those insured would still be able to choose the pension fund they want to invest in, but, in a change from the current rules, those failing to make the choice would no longer be automatically matched with a pension fund at random. Those failing to pick a pension fund would see their full contribution go to a subaccount at ZUS. Those deciding to stick with a pension fund would be able to change their decision at any time, while a move to ZUS would be irrevocable.

In the third variant, the insured person would be able to transfer either their entire contribution, that is 19.52 percent, to ZUS or a portion of it—17.52 percent, with the remaining 2 percent going to a pension fund. However, the insured person would have to contribute that additional 2 percent to the pension fund account from their own pocket.

Rostowski, who is deputy prime minister as well as finance minister, said that in the event of abolishing the non-stock part of the pension fund system, the government would want to see OFEs invest all their remaining funds in the real economy and shares. “Accordingly, under this option, investment in Treasury securities would be prohibited,” Rostowski said. He added that this option is designed to encourage investment in the real private economy while discouraging pension funds from investing a significant proportion of their funds in Treasury securities.

The labor and finance ministries have proposed that pensions from pension funds be paid out by ZUS. According to Kosiniak-Kamysz, the labor and social policy minister, the change introduced in 2011, when the part of the pension contribution transferred to pension funds was reduced from 7.3 percent to 2.3 percent, has had a positive impact on pensions. The level of inflationary adjustment at ZUS in 2011 and 2012 was about 14 percent, Kosiniak-Kamysz said, while the rate of return at pension funds at the time was only about 11 percent. This shows that the reduction in the pension fund contribution has had an overall positive impact on pensions, according to Kosiniak-Kamysz.

Many economists have criticized the government’s proposals for changes to the pension system, including the proposal to abolish the so-called bond part of the pension fund system. Critics say that the changes proposed by the government in effect mean that 100 percent of pension fund assets would now be invested in risky financial instruments, including shares of listed companies. At the moment, in an attempt to ensure that future retirees’ contributions are secure, pension funds can only invest a part of their assets on the stock market. They invest the rest of the money in less risky investments, mainly government debt securities, or bonds.

Prof. Stanisław Gomułka, former deputy finance minister now chief economist at the Business Centre Club, a leading business association in Poland, said, “This proposal is strange, almost shocking. Normally, the finance minister is happy that someone wants to buy Treasury securities. Our government, however, intends to prohibit the purchase of bonds by pension funds. This reduces pension funds to the role of risky players, thus posing a risk to the contributions of future pensioners.”

Equally critical of the government’s proposals is Leszek Balcerowicz, the architect of Poland’s economic reforms after the end of communism, an ex-minister of finance and former central bank chief. “This report resurrects ideas first mentioned [by government officials] two years ago, especially by Minister Rostowski. The main theses are false, as we have demonstrated,” said Balcerowicz. He added that the proposals by Rostowski and Kosiniak-Kamysz for changes to the pension fund system are an “attempt to seize easy money from the people.”

Balcerowicz accused the government of pulling the wool over people’s eyes, adding that its real intention was to use citizens’ money to patch up the hole in public finances.
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