Poland bets on behavioral science to restore trust in DC savings plan

After a previous government burned Polish employees by raiding their retirement funds five years ago, the country’s current leaders designed a flagship savings plan with a Nobel prize-winning behavioral science theory to incentivize participation.

As it turns out, the skeptical Poles may need more coaxing.

So Premier Mateusz Morawiecki wants to convince them that the assets will be out of reach for politicians, now and in the future. And to show that he’s serious, he surprised lawmakers and analysts this week by proposing to do something unprecedented: amending the constitution for the first time since it was adopted in 1997.

Reports from asset managers, including NN Investment Partners, confirm that the initial participation rates in the program, which has been rolled out to the biggest companies since July, is roughly about 40%, compared with the government’s 75% ambition.

That may reduce the scale of flows to the country’s capital market, projected at 15 billion zloty ($3.9 billion) annually. Money managers hope that the retirement savings program will revive Warsaw’s stock exchange.

The voluntary system, which includes incentives and offers a default option of enrollment, is based on behavioral theory research that won Richard Thaler the 2017 Nobel Memorial economics prize, according to Pawel Borys, one of the plan’s architects and the head of Poland’s state investment fund PFR SA.

The plan puts aside 2% of employees’ salaries into funds. Employers top up workers’ savings with a further monthly contribution of 1.5% while the government chips in with bonuses in the early stages of the program. The incentives are meant to “nudge” reluctant Poles to begin saving and to limit departures, as in such cases the bonuses would be lost and different taxes would apply.

According to Mr. Thaler, a “nudge” is any aspect of a program that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. Putting fruit at eye level counts as a nudge but banning junk food doesn’t, according to the Nobel laureate.

“The level of trust in the pensions system is small after the 2015 raid and changing the constitution could change that,” Mr. Borys said. “We need stable regulations.”

The previous retirement savings system, set up in 1999 and based on the then-touted Chilean defined contribution model, proved vulnerable for savers. Their assets were ultimately determined as being part of the public sector, which allowed Poland to annul $39 billion of government bonds held by privately run funds in 2014, duly assigning the liabilities to the state’s strained pay-as-you-go pension office.

The new system won’t let the government dip into citizens’ savings even if Mr. Morawiecki doesn’t manage to change the constitution, according to its architects.

Nevertheless, the administration isn’t helping itself to build faith in its proposal by planning a “transfer fee” for moving employees from the old system to the new one — at a cost 15% of the savers’ already accumulated assets.

Source: https://www.pionline.com/defined-contribution/poland-bets-behavioral-science-restore-trust-dc-savings-plan

BiznesPolska Editor’s Note:
I have yet to see an article that highlights the biggest flaw: 40% of the Investments in these schemes must be allocated to WIG20, which is dominated by politically-controlled white-elephants, and will be terrible long-term investments. The government is really trying to fool its own citizens. Shame on you, Mazowiecki!

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