Changes in the financing of the pension system in the face of ageing: The new pension system in Poland and its adaptation to other countries systems

Transcription

1 The Year 2000 International Research Conference on Social Security Helsinki, September 2000 Social security in the global village Changes in the financing of the pension system in the face of ageing: The new pension system in Poland and its adaptation to other countries systems Beata PUTELBERGIER University of Lodz Insurance Department Poland I NTERNATIONAL S OCIAL S ECURITY ASSOCIATION (ISSA) RESEARCH PROGRAMME CONFERENCE HOSTS: FINNISH ISSA MEMBER ORGANIZATIONS

2 Summary In the past, the Polish pension system was based totally on pay-as-you-go rule. On 1 st January, 1999, the government introduced a new pension system, which consists of three pillars: the first pillar - obligatory, created on the basis of a defined contribution, but operating on the principle of inter-generational solidarity, the second pillar - obligatory, privately - managed fully funded defined contribution schemes, the third pillar - not obligatory, different forms of savings such as occupational pension programs. The first pillar closely resembles the one in Sweden and Latvia. The second pillar has many common features with the pension systems in Latin America countries (Argentina, Chile). The third pillar is modelled to a considerable extent on the employee pension programs in the US and the UK. Furthermore, in the Polish pension system there is the Demographic Reserve Fund, which is similar to the provident funds in several South - Eastern Asia countries (Singapore). 2

3 I. Introduction. By the year 2030, the proportion of the world s population aged 60 and over will have reached more than 16 percent, compared with the present 9 percent. 1 These demographic changes are the result of the combination of increased longevity and low birth rates. A rapid increase in the proportion of the elderly population constitutes a new challenge for pension systems to provide financial security for individuals who can no longer work to support themselves. Pension reform isn t easy technically and politically. While many countries are reforming their pension systems, only about 25 percent of these reforms can be classified as the substantial changes of pension systems. 2 Some try to delay the impending crisis for a few more years by increasing retirement age, the contribution rate, changing the structure of benefits etc. Poland is one of the countries in which a new pension system has been introduced. II. The old pension system in Poland. In the past, the Polish pension system was based totally on a pay-as-you-go basis. Pension benefits for retired workers were paid out of the revenues from a payroll tax imposed on the current generation of workers. All contributions went into proverbial one big bag and the amount of contributions a person paid did not translate into the amount of retirement benefits. Meanwhile, the Polish population was growing older. The natural increase and the fertility rate went down (figure 1 and 2) while life expectancy increased (table 1). 1 Schwarz,Anita M.and Demirguc-Kunt, Asli. 1999, Taking stock of pension reforms around the world, The World Bank, p. 1 2 Schwarz,Anita M.and Demirguc-Kunt, Asli. 1999, Taking stock of pension reforms around the world, The World Bank, p. 5 3

4 Figure 1. The natural increase in Poland, (in thousands) , thousands ,3 157, , , ,7 32,5 20, Source: Demographic Yearbook of Poland, Central Statistical Office Poland, Warsaw Figure 2. The fertility rate in Poland, ,5 2 fertility rate 1,5 1 0, Source: Demographic Yearbook of Poland, Central Statistical Office Poland, Warsaw

5 Table 1. Life expectancy at birth for men and women in Poland, Year Life expectancy at birth men women ,0 74, ,8 75, ,3 75, ,9 75, ,5 75, ,2 75, ,5 76, ,6 75, ,1 76, ,5 77, ,9 77,3 Source: Statistical Yearbooks of The Republic of Poland, Central Statistical Office Poland, Warsaw The combination of fewer births and longer life expectancy changed considerably the demographic structure in Poland. The demographic dependency ratio (ratio of people aged 65 and over to people aged 15-64) increased (figure 3). Figure 3. The demographic dependency ratio in Poland, (in percent) ,53 17, ,1 16, ,59 16, ,06 15, ,68 15, , , , , ,5 18 percent Source: Statistical Yearbooks of The Republic of Poland, Central Statistical Office Poland, Warsaw

6 The average effective retirement age dropped to 57 years (55 for women and 59 for men) 3, the legal standard retirement age being 60 for women and 65 for men. This, together with a decline in employment, caused a decrease in the number of contributors (figure 4). The population of pensioners began to grow (figure 5). Figure 4. The number of contributors to social insurance system in Poland, (in thousands) , ,9 thousands , , , , , , , Source: Statistical Yearbooks of The Republic of Poland, Central Statistical Office Poland, Warsaw Figure 5. The number of pensioners in Poland, (in thousands) thousands Source: Statistical Yearbooks of The Republic of Poland, Central Statistical Office Poland, Warsaw Consequently, pension expenditures were growing to become the largest item in the government budget, accounting for about 15 percent of GDP in Poland in 1998, while in Western European counties it was less than 11 percent and in countries with similar income per capita - 8 percent of GDP. 3 Chlon, Agnieszka and Góra, Marek and Rutkowski, Micha³. 1999, Security through Diversity, Social Protection Discussion Paper No. 9923, The World Bank Pension Reform Primer, p. 5 6

7 The contribution rate was very high- 45 percent since Earlier in 1981 it was 25 percent and 38 percent in the period of Expenditures on old-age benefits was expected to increase, in accordance with demographic forecasts which showed a significant increase in the proportion of older people in relation to the working age population. The government could reduce future entitlements by: raising the effective retirement age eliminating early retirement and raising the normal retirement age, changing the pension formula to lower the average benefit, raising the contribution rate, but these changes would only postpone a fiscal crisis in the pension system. A reform of the system was inevitable. III. The new pension system. On January 1 st, 1999, the Polish government introduced a new pension system. It is applied to all Polish citizens born after December 31 st, Current retirees and persons born before January 1 st, 1949 will have their retirement benefits calculated according to the former system. Those born between December 31 st, 1948 and January 1 st, 1969 were free to choose whether to join the new system or stay in the old one. The new system was created as a combination of a pay-as-you-go and a funded pension scheme. It is assumed to be: sustainable, because it doesn t need extra charge from the state budget, intelligible, because each participant knows how much he puts into the system and how much he can receive in the future, motivating for work, because higher earnings mean higher contributions and higher benefits in the future, resistant to political manipulation. The new system is regulated by several laws: 1) Law of October 13 rd, 1998 on social security system, 2) Law of December 18 th, 1998 on old-age and disability pensions from the Social Security Fund, 3) Law of August 28 th, 1997 on the organisation and operation of pension funds, 7

8 4) Law of August 22 nd, 1997 on the employee pension system. The new system consists of three independent pillars. The first one is financed on a payas-you-go basis, the second and the third - funded. The first two pillars are financed from mandatory contributions. The third pillar is intended to supplement the benefits from the first two ones and participation is voluntary. The contribution rate for the old-age pension, equal to 19,52 percent of gross earnings, is divided between the first pillar (12,22%) and the second one (7,3%). These contributions, which are tax deductible, are paid equally by the employee and the employer. The Social Security Institution (ZUS) collects and transfers contributions to funded second pillar. An upper limit for contributions collection was set up at the level of 250 percent of average earnings. The pension system covers employees and the self - employed. In the case of a break in employment for reasons as national military service, maternity, the nursing of a disabled child, parental leave has provisions for contributions from the budget. The periods of unemployment are covered from the Labour Fund. The minimum retirement age remained unchanged. It is 60 years for women and 65 for men. The moment of retirement will be simultaneous in the first and the second pillar workers have joined the new pension system by March 31 st, The first pillar. The first pillar in the new pension system is obligatory. It was created on the basis of defined contribution but it operates on the principle of inter-generational solidarity just as in the payas-you-go system. This structure guarantees financial stability and sustainability. Every zloty of the 12,22 percent of the employee s gross earnings, paid equally by the employer and employee is registered in a personal notional account kept by Social Insurance Institute (ZUS). With annual indexation, the sum deposited on the account increases at a rate equivalent to 75% of overall salary increases. Indexation in line with the wage bill guarantees the equivalence of contributions paid in the early years and those paid just before retirement in determining the future pension benefit. 4 UNFE Monthly Bulletin May 2000 ( 8

9 All individuals who have entered the new system and started their working life before 1999 are eligible for a certain portion of pension benefits accrued under the old system. The sum of these benefits will be added to each personal account in the form of initial capital. The formula for calculating the initial capital is the following: Initial Capital (IC) = P o G 62 where G 62 - unisex life expectancy at the age of 62, P o - pension benefit accrued under the old system P o = 0,24 ρ w + 0,013 T B + 0,07 N B Ai 18 C i ρ - constant factor equal to min (, 1 ), A C A i - worker s age at the end of 1998, A r - normal retirement age, C i - years of contributing at the end of 1998, C r - required years of contributing (20 years for women, 25years for men), w - average gross economy - wide monthly earnings in relevant quarter, T - total years of contributing, r r N - other eligible years (for example university education, military service, bringing up children), B - individual assessment base. ZUS will have to calculate all initial capitals by the end of All participants will receive annual information about their virtual capital account balance, on the basis of which they can assess the amount of future pension benefits. After reaching the minimum retirement age, each worker will be free to choose the exact moment of ending his career. On the basis of the sum collected on a personal notional account the lifetime old-age pension benefit will be calculated according to the formula: where P - monthly pension benefit, P = C PNA G x C PNA - capital registered on a personal notional account kept by ZUS, G x - average (gender - neutral) life expectancy on retirement (in months). 9

10 The use of unisex average life expectancy tables implies a redistribution including men, whose lifespan is shorter and women who live longer, a phenomenon which is observed also in the Polish population (table 1). The value of G x coefficient can be calculated according to the formula given below. G x = T x l x = ω t = x l x L t where: T x - stationary population over age x, T x = ω L t t = x = 1 2 l x + l x l x l ω L x - stationary population between ages x and x+1, L x = l x + l x l x - expected number of survivors to age x, l x expected number of survivors to age x + 1, ω - maximum age for one generation (generally ω = 100 years). The effect of contributions related benefits is to provide individuals a greater incentive to work, since each additional year of employment and contributing increases the amount of pension benefits. Benefits will be indexed to at least the level of consumer prices but no higher than wage growth. If a participant dies, the capital collected on the individual account is not inheritable and will be used to increase the revenues of the pay-as-you-go system. A minimum guaranteed pension was established to be paid to individuals who have contributed for a minimum of 20 years for women and 25 years for men. This pension will be paid out from general tax revenues, not from contributions to the pension system. This Polish first pillar closely resembles the one in Latvia and Sweden. Latvia was the first country to introduce a pension system with notional accounts in January In Sweden the new social insurance system was established simultaneously with the Polish one, in January

11 In all three countries the new first pillar - public pay-as-you-go based on notional accounts - mimics the defined contribution - based pension that would be offered in the private sector by insurance companies. Contributions are registered on the workers notional accounts. The balance on the account is indexed annually in line with the growth of total wages from which contributions are collected. Every year, each participant should receive the statement of the account balance. There is no fixed retirement age. In Poland, a minimum retirement age was set up at 60 for women and 65 for men, while in Latvia it is 60 years for both men and women, and in Sweden - 61 for all workers. On retirement, the pension benefit, paid in the form of lifetime annuity, is equal to the total capital on worker s account divided by the expected post-retirement life expectancy for a person s age group (G - value). In Poland and Latvia, pension benefits are indexed in relation to prices change, while in Sweden - whenever there is a deviation of real wage growth relative to the standard 1,6 percent. There are many similarities between the Polish, Latvian and Swedish first pillar, but Poland was the only country to establish a separate Demographic Reserve Fund to stabilise the contribution rate in the system in the face of demographic fluctuations in the future. This fund will accumulate any surplus accrued by the first pillar and a mandatory 1 percent of the total wage bill ( approx: 0,35% of GDP) The fund can be additionally supplemented by the privatisation revenues of the State Treasury property on the basis of separate regulations, as well as by interests and revenues from other sources. According to estimates, the assets of the reserve fund will have reached 14 percent of GDP by The Fund invests its assets to guarantee maximum protection and profitability. Until December 31 st, 2001 this fund will be managed by the social insurance administration and will invest its funds in Treasury bills and bonds and other securities issued by the State Treasury. After this date, it will be managed by the private managers selected via tender procedure. One single entity can manage up to 15 percent of total assets and invests funds domestically in: Treasury bills and bonds and other securities issued by the State Treasury, securities issued by communes, commune federations and the city of Warsaw, 5 Chlon, Agnieszka and Góra, Marek and Rutkowski, Micha³. 1999, Security through Diversity, Social Protection Discussion Paper No. 9923, The World Bank Pension Reform Primer, p.25 11

12 debt securities guaranteed by the State Treasury, shares admitted for public trading, fully secured bonds admitted for public trading, fully secured bonds issued by companies whose shares have been admitted for public trading. The investment policy should be guided by a 50 year forecast of revenues and expenditures of the Reserve Fund. The Demographic Reserve Fund is modelled on solutions used mostly in the former colonies in Africa and Asia, namely the provident funds. A provident fund is the type of prefunded, centrally-managed, defined contribution scheme. The largest, in terms of membership, is the Employee s Provident Fund in India with more than 20 million participants. The best known is the Central Provident Fund (CPF) of Singapore with over one million contributors. The CPF in Singapore is one of the largest provident funds in relation to national income with 55,6 percent of GDP. 6 A provident fund is not simply a social security scheme. Its funds are used by government for a wide variety of social, political and other objectives, e.g. financing of targeted investments and to lend to government at low yields, housing, health care financing and education, etc. 7 The funds of the Polish Demographic Reserve Fund can be used for no other purpose than the financing of the future pension benefits when the baby-boom population starts to retire. Like in Singapore, it may be a source of funds for the government, because of investment restrictions (i.e. investments in Treasury bills and bonds). The Fund is only one part of the Polish first pillar, while in Singapore the formal pension system relies entirely on the Provident Fund. the second pillar. 2. The second pillar Participation in the second pillar is also obligatory. Diagram 1 presents the structure of 6 Iglesias, Augusto and Palacios, Robert J. 2000, Managing public pension reserves. Part I: Evidence from the international experience, The World Bank, p. 5 12

13 Diagram 1. The structure of the second pillar. Contribution (7,3% of worker s gross earnings) Pension fund society Open pension fund custodian Annuity company Pension benefit 7,3 percent of worker s gross earnings is channelled through the Social Insurance Institution (ZUS) to the pension fund indicated by the participant (only one out of twenty one 8 open pension funds (OFE) operating on the market) and deposited on individual account. Funds can be freely chosen and they are not permitted to refuse a contract. As newly introduced institutions, they belong to the category of privately managed, fully funded, defined contribution schemes. A fund collects and invests financial resources intended for the payment of cash benefits to members who have attained retirement age. The duration of the fund is unlimited. The fund is established and governed by only one pension fund society, which also represents the fund in relation to third parties. The establishment of the fund requires licences for both the managing society and the pension fund, issued by the Pension Fund Supervision Authority (UNFE). The fund acquires legal personality when it is entered by the managing society in the 7 Asher, Mukul G. 1999, The pension system in Singapore, The World Bank, p. 8 8 state as of June 15 th,

14 register of funds held by the Provincial Court in Warsaw. Table 2 presents twenty one pension funds and their managing societies. Table 2. Pension fund societies and pension funds in Poland. Name of pension fund society Date of Name of pension fund Date of UNFE UNFE licence issue licence issue Commercial Union PTE BPH Commercial Union OFE BPH CU WBK S.A. CU WBK PTE BIG Banku Gdañskiego OFE Ego S.A. Pioneer PTE S.A Pioneer OFE PTE Nationale Nederlanden OFE Nationale - Nederlanden Polska S.A. Polska PTE PZU S.A OFE PZU Z³ota Jesieñ PKO/Handlowy PTE S.A Bankowy OFE PTE PBK S.A OFE PBK Orze³ PTE Skarbiec Emerytura S.A OFE Skarbiec Emerytura Winterthur PTE S.A Winterthur OFE PTE DOM S.A OFE DOM AIG PTE S.A AIG OFE PTE Norwich Union S.A OFE Norwich Union Zurich Solidarni PTE S.A Zurich Solidarni OFE Pocztowo-Bankowe PTE OFE Pocztylion S.A. PTE Polsat S.A OFE Polsat Pekao/Alliance PTE S.A Pekao/Alliance OFE Epoka PTE S.A OFE Epoka PTE Allianz Polska S.A OFE Allianz Polska Arka - Invesco PTE S.A Arka - Invesco OFE PTE Kredyt Banku PBI S.A OFE Kredyt Banku PTE HMCSA OFE Rodzina Source: UNFE Report 1999, p. 14 ( The most important position on the pension fund market, according to the number of participants, is held by five pension funds: Commercial Union PTE (21,63%), PZU Z³ota Jesieñ (16,22%), Nationale Nederlanden Polska OFE (14,65%), AIG OFE (7,95%), Norwich Union OFE (7,10%) 14

15 with about 68% of all participants (data as of January 21 st, 2000). 9 A managing society conducts its activities only in the form of a joint - stock company (S.A.) with the minimum capital paid-up in total prior to the registration of the society not lower than the zloty equivalent of ECU The articles of association of society and pension fund must be approved by the supervision office. Society board members must fulfil several requirements, for example: not be convinced criminals or in areas with tax or social security payments, have a university degree (at least one-third of the members should have a degree in economics or law), have professional work experience of at least 7 years. Any changes concerning articles of association and board membership must be reported immediately to the supervision authority. Each society is liable to fund members for damages resulting from any failure to perform, or from inadequate performance of, its obligations relating to the management of the relevant fund and its representation, unless this is due to circumstances for which the society is not liable. The society manages a fund for a fee. It is allowed to charge two types of fees: the management fee must not exceed 0,05% of the assets value per month (all pension funds settled this fee at 0,05% of the assets value per month), the administration fee on contributions, equal for all participants of a particular fund. Table 3 presents the fees for pension funds. 9 UNFE Monthly Bulletin, January 2000 ( 15

16 Table 3. Administration fees for all pension funds in Poland. Name of pension fund Initial fee Administration fee in later years Commercial Union OFE BPH 10% after 2 years - 4% CU WBK OFE Ego 7,9% without changes Pioneer OFE 8,8% after 2 years - 8,2% OFE Nationale - Nederlanden 8,7% after 2 years - 5,8%; after 5 years - 4,8%; Polska after 10 years - 4,3% OFE PZU Z³ota Jesieñ 9% after 2 years 7%; after 15 years - 3% Bankowy OFE 9,9% after 20 months - 8,9%; after 3 years - 8,7%; after 4 years - 8,4%; after 10 years - 7,4%; after 15 years - 5,4%; after 20 years - 2,5%; after 25 years - 0% OFE PBK Orze³ 8,9% after 2 years - 8,5%; after 4 years - 7,9% OFE Skarbiec Emerytura 7,9% after 2 years - 6% Winterthur OFE 9% after 3 years - 5,25%; after 10 years - 5%; after 20 years - 3,5% OFE DOM 8,9% after 2 years - 4,5% AIG OFE 8,5% without changes OFE Norwich Union 8% without changes Zurich Solidarni OFE 9% after 2 years - 7% OFE Pocztylion 8,9% after 2 years - 7,5%; after 15 years - 2,9% OFE Polsat 8,5% without changes Pekao/Alliance OFE 7,8% after 2 years - 6%; after 3 years - 5,5%; after 4 years - 5%; later - 4,5% OFE Epoka 7,9% from 2 to 15 year - 6,5%; after 15 years - 2,5% OFE Allianz Polska 6,5% %; %; later - 4% Arka - Invesco OFE 8,9% after 3 years - 7,9% OFE Kredyt Banku 8% after 2 years - 6%; after 10 years - 4,5% OFE Rodzina 9,5% 9% in second year; 8,5% in third year; from 4 th to 15 th year - 5,8%; later - 3,8% Source: pension funds data. Each fund must appoint a depositary for its assets on the basis of an appropriate agreement. A depositary may be a domestic bank with a minimum capital of the zloty equivalent of ECU not affiliated to the pension fund society or the National Securities Depositary. The custodian must be confirmed by the supervisory agency. The depositary is liable for damages resulting from the pension fund s failure to comply with legal requirements and must inform the 16

17 supervisory office of any irregularity. This should guard against misappropriation of pension fund assets with additional security provided by the assets of the custodian. 10 Each pension fund operates in a way that is similar to an open investment (mutual) fund. The contributions paid by participant are converted into accounting units on the date of conversion, at least four times a month. Each accounting unit represents a proportionate share in each asset of the fund. It is valued daily and the results are published in major newspapers in Poland. The balance on the worker s individual account is calculated as the number of accounting units multiplied by their respective values. The investment policy of the fund, as determined by the managing society, is very important. The fund must ensure the maximum security of the assets and maximise the overall return on investment. The Law on the organisation and operation of pension funds regulates the composition of the pension fund portfolio. The fund may invest only in: bonds, bills and other securities issued or guaranteed by the State Treasury or the National Bank of Poland, bank deposits and bank securities, shares in companies listed on the regulated stock market, shares or any other securities in companies quoted on the regulated over the counter market and shares or any other securities in companies not listed on the regulated stock market and not quoted on the regular over the counter market but admitted to public trading in securities, shares in the National Investment Funds, investments certificates issued by closed or mixed investment funds or participation units disposed of by open investment funds, bonds and other debt securities issued by the communes, unions of communes or the city of Warsaw admitted and not admitted to public trading, fully secured bonds issued by entities other than communes, unions of communes or the city of Warsaw admitted and not admitted to public trading, bonds and other debt securities issued by public companies not admitted to public trading, any other forms of investments specified in the ordinances of the Council of Ministers. 10 Chlon, Agnieszka and Góra, Marek and Rutkowski, Micha³. 1999, Security through Diversity, Social Protection Discussion Paper No. 9923, The World Bank Pension Reform Primer, p.30 17

18 No limitations are to be applied in the case of investments in bonds issued by the State Treasury. Limitations apply to any other instruments: 40 percent in quoted stock, 10 percent in National Investment Funds, 10 percent in the secondary stock market, 10 percent in the National Bank of Poland papers, 15 percent in municipality bonds, 10 percent in close - ended investment funds, 15 percent in open - ended investment funds, 5 percent in foreign securities. A general principle has been adopted whereby the fund may invest no more than 5 percent of their assets in securities of a single issuer. Figure 6 presents the composition of the pension funds portfolio. Figure 6. The aggregated portfolio of pension funds over May April A - investments in Treasury bills, B - investments in bank deposits and bank securities, C - investments in shares in companies listed on the regulated stock market, D - investments in bonds listed on the regulated stock market, E - other investment categories. May 1999 D 33% A 38% C 3% B 26% June 1999 C 6% D 16% A 11% B 67% 18

19 July 1999 A 26% D 58% B 3% C 13% August 1999 A 19% D 63% B 6% C 12% September 1999 D 70% A 18% B 4% C 8% October 1999 A 11% B 1% C 13% D 75% 19

20 November 1999 A 10% B 2% C 22% D 66% December 1999 E A 1% 7% B 2% D 60% C 30% January 2000 E 1% A 9% B 2% D 56% C 32% February 2000 E 2% A 11% B 4% D 48% C 35% 20

21 March 2000 E 2% A 11% B 1% D 53% C 33% April 2000 E 2% A 12% B 2% D 55% C 29% Source: UNFE Monthly Bulletins - January 2000, April 2000, May 2000 ( The stock of shares in the investment portfolio of pension funds reached the level of 28,5 percent of invested assets in April That was a significant increase in comparison with May 1999, when only 3 percent of the assets were invested in shares. The proportion of bonds listed on regulated stock market was rather stable, about 50 percent of all assets. The pension funds decreased the stock of Treasury bills from 38 percent in May 1999 to 11,7 percent in April The consequence of the increase of shares in the funds investment portfolio was a decline in the stock of bank deposits and bank securities. Since December 1999, pension funds have invested in other investment categories, e.g. NIF shares and bonds not admitted to public trading. The assets of the pension funds grew rapidly from 2,3 millions zlotys in May 1999 to 4.598,6 million zlotys in April 2000 (figure 7). 21

22 April Figure 7. The aggregated value of pension funds assets at the end of every month, May May 1999 July 1999 September 1999 November 1999 January 2000 March 2000 mln zl Source: UNFE Monthly Bulletins - January 2000, April 2000, May 2000 ( The capital in the second pillar is secured by a mechanism of a minimum required rate of return. At the end of each quarter, a average rate of return is calculated on a 24 - monthly basis, weighted by the size of the fund. The mandatory minimum rate of return is less than the average rate by 50 percent or 4 percentage points, whichever is lower. When a fund doesn t meet a minimum rate, it is required to cover the difference from their own resources on a special reserve account. This reserve is created from between one or three percent of the total assets, depending on the size of the fund. If the reserve is not sufficient, the managing society is obliged to cover the deficiency from its own assets. Failing this, the managing society is declared bankrupt and the deficiency is covered by the Guarantee Fund, which is administered by the National Securities Depositary. Its assets come from the contributions made by all managing societies and the investment returns on these contributions. The total assets of the Guarantee Fund can not exceed 0,1 percent of all pension funds assets. In the case of deficit in Guarantee Fund, the solvency of pension funds is state - guaranteed. When a person retires, the capital collected in the pension fund will be transferred to one of the licensed annuity companies. Retirement is registered simultaneously in both the second and the first pillar. So far, no law regulations on annuity companies have been issued. These companies are assumed to offer several types of lifetime retirement benefits: single life annuities, single life annuities with guaranteed benefits for survivors during the period of at least 10 years, 22

23 joint life annuities paid until the death of the spouse, with the survivor s pension equal at least 75 percent of the original benefit, joint life annuities with guaranteed benefits for survivors during the period of at least 10 years. The total benefit received from an annuity company will depend on the amount collected on an individual account in the pension fund and on the retiree s age. Such factors as the retiree s place of residence and health are not allowed to be taken into account in the calculation of pension benefits. The Polish second pillar incorporates many features of Latin American pension systems, especially those in Chile and Argentina. There are many similarities but also some important differences. Chile was the first country in the region to radically reform its pension system in 1981 by introducing a mandatory defined contribution system. Argentina began the transition to a new pension system in June A visible difference between the Chilean and the Polish pension system is the elimination of unfunded public pillar in Chile. The Chilean pension system is based exclusively on private pension funds, while in Poland private pension funds operate under the second compulsory tier. Argentina has maintained the unfunded public pillar, in connection with a second pillar made up of two components: an unfunded defined benefit scheme operated by the state, private funded pension funds. People starting their working life in Chile have to join the new private system. In Argentina, only the first pillar is obligatory and workers have a choice between the funded and unfunded components of the second pillar. In Poland, the new system is obligatory for all workers aged under 30 on January 1 st, 1999 and voluntary for those aged between 31 and 50. In these three countries there are also many similarities concerning the structure of the private pillar. Each pension fund can be managed by only one specialised and authorised company. Such companies are required to have a minimum capital and to maintain a reserve to meet any shortfalls in profitability. In addition, they must establish a custody agreement with an appropriate institution for the safekeeping of the pension fund assets. An employee can choose one out of several 23

24 operating pension funds. Each worker must be treated equally. Each pension fund is required to send regular statements of the balance on individual account to the participants. The system of contributions collection is different in each country. In Chile, contributions are collected by private pension funds, whereas in Argentina, as well as in Poland they are collected centrally. Each fund must generate at least a minimum rate of return over a certain period. In Poland this rate is calculated on a 24 - month basis, while in Chile and Argentina - on the 12 month basis. In each country the fund investments are regulated by law and supervised in order to ensure diversification and safety. Private pension funds are supervised by the supervision office. In Chile, the supervision office is financed from general government revenues, in Argentina from fees paid by pension fund management companies and in Poland from both sources. On retirement, the benefits in Chile and Argentina may take the form of either a lifetime annuity or scheduled withdrawals according to participants individual life expectancy. In Poland, only one possibility is offered in the form of a lifetime annuity. 3. The third pillar The third pillar of the new Polish pension system is not obligatory. It consists of forms of voluntary long-term savings for retirement such as occupational pension programs. Participation in the third pillar offers an opportunity of gaining additional pension benefits. This pillar allows a reallocation of a person s income across the life - cycle according to his or her preferences and needs. 11 There is free choice concerning the timing and the amount of savings The occupational pension programs. Occupational pension programs may operate in only one of the four categories: an occupational pension fund, an agreement on contributing employee contributions to an investment fund, 11 Chlon, Agnieszka and Góra, Marek and Rutkowski, Micha³. 1999, Security through Diversity, Social Protection Discussion Paper No. 9923, The World Bank Pension Reform Primer, p.35 24

25 a group employee life insurance agreement with a joint - stock life insurance company, a group employee life insurance agreement with a mutual life insurance company, which members are employees. An occupational pension program can be offered by one employer or jointly by at least two employers with at least five employees each (joint intercompany occupational pension programs). An employee who wants to participate in an occupational pension program must: be at least 18 years old, have worked for a given employer for at least 3 months, meet the criteria set out in the occupational pension agreement. A person employed by more than one employer may participate in more than one pension program at the same time. The registration of an occupational pension program requires the conclusion of an company pension agreement of the kind mentioned above. The program must be entered in the register of employee pension programs kept by the supervision office (UNFE). The company pension agreement must define at least the following elements: the form of the pension program, the conditions which the employees should fulfil on entering and leaving the program, the rules of participation in the program, the rules for accumulation, disbursement, repayment and transfer disbursement of the accumulated funds. This agreement must be signed by the employer and the employees representatives (unions or in their absence, representatives elected by a general meeting of employees). Each employee must present a statement of participation to the employer. The statement include the amount of declared contributions and the arrangements provided in the event of his/her death. A basic contribution for all participants was established at the level of not more than 7 percent of the employee s salary. It is not subject to social security contributions. The basic contribution is financed by the employer. An employee can make an additional contribution from his/her net remuneration. Contributions are calculated, deducted and transferred by the employer on the employee s accounts. 25

26 The disbursement of funds is made only: at the request of a participant after attaining the age of 60 or upon obtaining early retirement rights, if the participant does not request the disbursement of funds before he is 70 years old, once he attains that age, in the case of liquidation of the occupational pension fund, life insurance firm or mutual life insurer, unless a transfer disbursement is made, in the case of a participant s death. The pension benefit can be paid out as a lump sum, in instalments, in cash or transferred to an indicated account, which is not a part of an occupational pension program. Payments from occupational pension programs are tax free. An employee pension program may be liquidated in the event of: the winding up or insolvency of the employer, life insurance firm or a mutual life insurer, the liquidation of an investment fund or occupational pension plan, a diminution in the value of pension program funds below the level stated in the agreement with a life insurance firm, a mutual life insurance firm, an investment fund or in the statute of the occupational pension fund. All occupational pension programs are supervised by the supervision authority (UNFE). By April 4 th, 2000 employers have created ten occupational pension programs: four in the category of a group employee life insurance agreement with a joint - stock company, five in the form of an agreement on contributing employee contributions to an investment fund, one occupational pension plan. The third pillar of the new Polish pension system is modelled to a considerable extant on the employee pension programs in the United States and the United Kingdom. The American and British occupational pension plans can have either a defined - benefit or defined - contribution formula. In Poland these programs can be offered only as the defined - contribution type. Polish occupational pension schemes form the third pillar, while in the UK and the US - they belong to the second pillar. 26

27 In Poland, as well as in the US and the UK, the employee pension programs are voluntary and their operation is regulated by special law. These programs can be self - administered or with the management of funds by specialised financial institutions (e.g. insurance companies). The main difference between the Polish, American and British employee pension programs is tax treatment. In US and the UK, employer s contributions are tax deductible for all occupational pension programs, employee s contributions in the UK are tax deductible for all occupational pension programs, whereas in the US - this true for certain types of programs: 401(k) schemes 12 and defined - contribution schemes such as the IRAs 13. Pension benefits are taxable under income tax. In Poland contributions are paid from net remuneration and benefits are tax free. 12 the most popular defined-contribution pension plans among the majority of employers. 13 Individual retirement accounts which offer tax incentives for individual, and can be applied to low- and middle - income employees. 27

28 Bibliography 1. Aiyer, Sri-Ram. 1997, Pension reform in Latin America: quick fixes or sustainable reform?, LCR FPSI. 2. Asher, Makul G. 1999, The pension system in Singapore, The World Bank Pension Reform Primer. 3. Bowers, Newton L. Jr. and Gerber, Hans U. and Hickman, James C. and Jones, Donald A. and Nesbitt, Cecil J. 1986, Actuarial mathematics, The Society of Actuaries. 4. Chlon, Agnieszka and Góra, Marek and Rutkowski, Micha³. 1999, Security through diversity, Social Protection Discussion Paper No. 9923, The World Bank Pension Reform Primer. 5. Davis, E. Phillip. 1995, An international comparison of the financing of occupational pensions, European Monetary Institute. 6. Demarco, Gustavo and Rofman, Rafael with contributions from Whitehouse, Edward. 2000, Supervising mandatory pension funds: issues and challenges, The World Bank Pension Reform Primer. 7. Disney, Richard. 2000, Notional accounts as a pension reform strategy: an evaluation, The World Bank Pension Reform Primer. 8. Disney, Richard. 1999, OECD public pension programmes in crisis: an evaluation of the reform options, The World Bank. 9. Gesell, Rainer and Müller and Süß. 1998, Social security reform and privatisation in Poland: parallel projects or integrated agenda, FIT Discussion Paper No. 8/1998 European University Viadrina, Frankfurt. 10.Grandolini, Gloria and Cerda, Luis. 1998, The 1997 pension reform in Mexico: genesis and design features. 11.Iglesias, Augusto and Palacios, Robert J. 2000, Managing public pension reserves. Part I: evidence from the international experience, The World Bank. 12.Laboul, André. 1999, Private pension systems: regulatory policies Working Paper AWP 2.2 OECD. 13.Law of October 13 rd, 1998 on social security system. 14.Law of August 28 th, 1997 on organisation and operation of pension funds. 15.Law of August 22 nd, 1997 on employee pension programs. 28

29 16.Queisser, Monika. 1999, Pension reform: lessons from Latin America, OECD Development Centre Policy Brief No Schwarz, Anita M. and Demirguc-Kunt, Asli. 1999, Taking stock of pension reforms around the world, The World Bank. 18.UNFE Monthly Bulletins, January May 2000 (www. unfe.gov.pl.). 19.Vittas, Dimitri. 1995, The Argentina pension reform and its relevance for Eastern Europe, The World Bank. 20.Whitehouse, Edward. 2000, Pension reform, financial literacy and public information: a case study of the United Kingdom, The World Bank Pension Reform Primer. 29