A major pension overhaul is about to take place. Though still in preparation, its execution will likely be very swift. Will it indeed encourage Poles to save up for retirement? How much will labor costs increase and how will it impact the investment market? WBJ sat down with Piotr Kochański and Rafał Zięba of Kochański, Zięba & Partners to discuss what the future of Poland’s pension system will look like in practice
Interview by Beata Socha
WBJ: Work on the new pension system reform, introducing Employee Capital Pension Schemes (Polish abbreviation: PPK), is gaining momentum. It has just been adopted by the government. How important is it and when is it going to see the light of day?
Piotr Kochański: This will be the biggest pension scheme overhaul since 2013, when the Open Pension Funds (OFEs) were largely liquidated. The program will cover 11 million Poles, 9 million from the private sector and 2 million in the public sector. It will include not only those working on employment contracts, but also those on civil-law contracts. It is set to come into force as soon as January 2019. Big employers will then only have six months to sign agreements with investment funds and start collecting contributions.
It seems to be a very good initiative that can help to build a capital component in the pension system. It’s been attempted before, e.g. with the voluntary Employee Pension Schemes (Polish abbreviation: PPE). But they had only a marginal impact. Only a little over 1,000 PPE schemes have been established.
Why do you think PPKs will fare better than PPEs?
Rafał Zięba: First of all, they are obligatory for all employers, even those who employ only one person. They will have to sign contracts with relevant funds and offer their employees PPKs. What is particularly important is that it will include all employees, even contract employees, as long as their contracts require social security contributions to be paid (this includes mandate contracts).
P.K.: The system will include employees by default. They will automatically be subscribed to a PPK (or multiple ones). An employee can leave the scheme at any time but will be again subscribed every four years and then will have to make the decision to leave again.
Do you think they will be popular among employees?
P.K.: When I first came to the US as a young lawyer, I came across employee pension plans for the first time. As I was being recruited by a law firm, the pension scheme was one of the things that my future employer used as a bargaining chip. That is another facet of these schemes – they can be used by employers to attract employees.
As an employer in a Polish law firm and in our other advisory and software companies, we have been applying a number of financial incentives to strengthen the bonds with our protégés and our most valued employees within our organization. The best incentives are those that they can take advantage of over the long term, generating safe profits from stable interest on the capital invested. PPKs seem to be aligned with this vision and inspire us to create more incentives for the employees that create actual bonds with the employer. At the same time, they provide an actual tangible reward system for the employee and for the employer for the work we do together.
What happens if an employer does not want to sign an agreement with a fund?
R.Z.: There will be fines of between PLN 1,000 and PLN 1 million for those who fail to sign an agreement or fail to pay contributions. Also, if an employer “encouraged” an employee to leave a PPK, they would face fines as well – up to 1.5 percent of their entire yearly salary fund.
How well do you think would this be enforced? We know that labor courts are quite effective when it comes to protecting employees from employers’ misconduct.
P.K.: Taking into account the level of potential penalties – up to PLN 1 million or up to 1.5 percent of entire yearly salary fund – employers cannot afford to ignore the PPK regulations. Similar mechanisms are already applied in Polish legislation, such as in the case of the GDPR or anti-trust regulations, where the penalties directly refer to the revenues achieved. The control mechanisms provided for in the PPK Act, including the flow of information about employers obliged to create a PPK and new control powers of the National Labor Inspectorate, are to guarantee the application of new regulations.
It seems that the threat of sanctions at this level can indeed be an effective motivator to comply with the regulations.
One of the most obvious questions is how much it will cost the employer and the employee.
R.Z.: The minimum contribution from the employee will be 2 percent of their salary. Those who make less than 120 percent of the minimum wage (in 2019 that will amount to PLN 2,664) will have the option to limit the contributions to 0.5 percent. If an employee wants to save up more, they will have the option to set aside another 2 percent.
The employer will be obliged to contribute 1.5 percent of the salary, and will also be allowed to contribute an extra 2.5 percent, which could be an extra incentive used by employers to attract talent.
So in total, the minimum contribution will be 3.5 percent (2 percent for those with lowest wages) up to even 8 percent.
Also, the State Treasury will contribute to the fund: the so-called “welcome subsidy,” where the Treasury adds PLN 250 to each employee’s account. Also, each year, there will be a so-called “loyalty subsidy,” set for 2019 at PLN 240.
Do you think this extra cost will be a significant factor to consider for companies looking to invest in Poland?
P.K.: The new system does impose extra labor costs. Companies are already analyzing – even before the system has been implemented – if perhaps it is more cost-effective for them to launch PPEs instead. If an employer already offers a PPE, pays a contribution of at least 3.5 percent and at least 25 percent of employees joined PPE, they won’t have to pay contributions for employees already included in their PPE scheme.
R.Z.: Looking at it from a global perspective, these costs will not be substantial. However, you have to take into account the financial results of individual companies. For instance, in the mining industry, the total cost of PPKs is estimated at PLN 107 million. This may seem relatively insignificant compared to the revenues the industry brings in, but when we take into account how demand and prices fluctuate in the mining sector, the cost could prove quite substantial for some companies and could affect their financial results.
Who will be responsible for managing the new pension funds?
P.K.: Investment funds, employee pension funds and life insurance societies will be allowed to offer PPKs. These institutions will have to apply to be listed on the so-called PPK register, which will be maintained by the Polish Development Fund.
And who chooses the fund that is to take care of employees’ future pensions?
P.K.: The employer together with trade unions, or employees’ representatives if there are no trade unions in a company.
What happens when you change your job? Where does the money go? Is it transferred to your new employers’ fund?
P.K.: The funds accumulated in the PPK will follow the employee. If the employer changes, the funds already collected may be transferred to another PPK account with the new employer. The system assumes the continuation of raising funds, and the change of employer will not have a negative impact on the funds already accumulated.
Poles have not had good experiences with private pension schemes. Private OFE pension funds, introduced in 1999, were all but dismantled in 2013, with many Poles left bitter that their savings were practically appropriated to cut the budget deficit. How do you expect them to respond to this new regulation?
R.Z.: OFEs were criticized for a number of reasons. Most of these issues have been addressed in the new proposed scheme. For instance, the legislator has explicitly stated that the money accumulated in the schemes are the private property of the employee. It will not be subject to court execution, except for alimony execution. The money will also be inherited by the employee’s family.
Also, management fees of pension funds, which were widely criticized in the wake of the 2008 crisis, have been capped. Fund managers will only charge up to 0.5 percent of the fund’s assets as a management fee. They will be allowed to increase the fee to 0.6 percent only if their returns are positive and above the reference rate of returns, set by the Finance Ministry and based on interbank reference rate and five-year bonds. By comparison, in 2016, the remuneration for managing investment funds was even up to 4 percent.
If PPKs are indeed Poles’ private money, under what circumstances will they be allowed to withdraw it?
R.Z.: First of all, when they reach 60 years of age, they will be entitled to withdraw 25 percent of their money as a lump sum and the remainder in at least 120 monthly installments. They will also be eligible for lump sum payouts of 25 percent in case of illness – either their own, their spouse’s or children’s.
If they want to buy or build a house, they will be allowed to take out even all of the money collected, but they will have to put it back in the fund over the following 15 years.
We all still remember what happened with a lot of these funds in 2008 and 2009. During the financial crisis, a large portions of these pension funds evaporated. Do you think that Poles will feel safe investing in pension funds?
P.K.: It all depends on how these funds are managed. The legislator took precautions to ensure that money in these funds is invested in a safe way. For instance, the closer an employee is to reaching retirement age, the less risk will be allowed in their investment portfolio. So the structure of the investment will be different for a 25-year-old than for a 40-year-old or a 60-year old.
If there are so many constraints on how these funds are managed, will investment funds and insurance societies be in fact interested in running them?
P.K.: This is where theory will meet reality. We all hope for the best. Definitely it cannot be left to chance. There has to be a system put in place that will ensure these funds are run in a professional and sensible way.
I’m afraid the time for the rollout may be too short for institutions to be able to build teams, tools and know-how in order to launch PPKs in time. Then there is the question of whether we can round up a sizable group of system managers who will be able to step in and ensure successful management of these funds. Personally, I’m afraid it may be a tall order. But the determination and the farsightedness of the project’s authors deserve praise.
R.Z.: Surely, these funds should only be entrusted with and managed by professional entities, which have historically proven to be diligent and effective. Over the past 25 years we have gained enough experience to make the right choice. We must bear in mind that nothing is 100 percent certain on the financial market. Still, a sensible and diversified investment policy can effectively protect against fluctuations in the capital markets and exchange rates.
Do you think the money from PPKs will be able to breathe new life into the Warsaw Stock Exchange, which has been largely marginalized after the OFEs withdrew their capital in 2013?
P.K.: I think we all believe that the new system will provide a robust source of capital for the WSE. Currently, the liquidity of the Polish bourse is far lower than it was a few years ago, a situation to large extent caused by the legal changes to the open pension funds. Similarly, the number of new IPOs is nowhere near last year’s figure. PPKs could be a “new opening” for the WSE, which is otherwise well-regulated and deserves a chance to thrive.
R.Z.: It would be fair to mention that insufficient funds are not the only barrier that the WSE is facing. There are other regulations that affect the investment volume on the bourse, like for instance for shares of companies that have perpetual usufruct of arable land. These companies have to inform investors in their prospectus of the pre-emption rights of the Agricultural Market Agency to any newly issued shares. And that poses additional risks to potential investors. Abolishing these restrictions would in no way weaken the regulations protecting arable land and would make investing in these companies more attractive.
Similarly, State Treasury companies that are listed as strategic are also under overly stringent regulations. Shares that are owned by the State Treasury are excluded from trading, which is understandable, but the exclusion is also extended to subscription rights, seemingly against the law. In practice, it limits the buyer pool to the State Treasury.
No doubt, in order to improve the condition of the WSE, the legislator, the Financial Supervision Authority or the District Attorney office need to address how these provisions should be applied