HR & Payroll Manager at RSM Poland
In January 2020, the Ministry of Funds and Regional Policy announced that they had commenced works on a draft act amending certain acts in connection with the transfer of assets from open pension funds (OFE) to individual pension accounts (IKE).
On 2 March 2021, the website of the Chancellery of the Council of Ministers informed that the government approved the draft act.
What are the reasons behind changes to the open pension funds?
As a reminder, the 1997-1999 pension reform created two pillars of the pension system: the 1st pillar, compulsory and universal, administered by the Social Insurance Institution (ZUS), and the 2nd pillar, partially compulsory, universal and managed by private General Pension Societies through Open Pension Funds. In 2004, the Act on Individual Pension Accounts (IKE) and the Act on Occupational Pension Schemes (PPE) were implemented. Their goal was to introduce an extra system in Poland, voluntary and private, for accumulating pension savings individually or jointly with the employer. Today, we may say that both IKE and PPE have failed to become popular, and the value of savings accumulated in this system is low. As a result of the legal changes implemented in the years 2011-2014, the assets of the 2nd pillar of the pension system were liquidated by transferring PLN 153 million from OFE to the State Treasury and partly to the Demographic Reserve Fund. What followed was a decline of trust and confidence in the universal pension system.
From OFE to IKE or ZUS
The money accumulated in open pension funds are going to be transferred by default to individual pension accounts or –upon request of the OFE account holder– to the Social Insurance Institution (ZUS). Unfortunately, whatever the choice the future pensioner makes, part of the funds will be lost.
The first, default option, will involve a conversion fee in the amount of 15% of the savings. Moving the funds to IKE is also going to mean that these savings can be inherited in the future. Once you reach retirement age, you can withdraw your funds either in total or in instalments (with no extra charges).
In the second option, you have to declare that you want your funds to be transferred to ZUS in their entirety. Upon transfer, no extra fees will be charged, but your future pension benefits will be subject to pension tax. In this case, you do not have the option of withdrawing your total funds once you reach retirement age, and these funds cannot be inherited.
Time is money
As of 1 June 2021, a new act will come into force that is going to seal the fate of the 1999 ‘great pension reform’. Open pension funds will disappear from the market by 28 January 2022. There will be considerably less time to decide if you want your OFE savings to be transferred to an individual pension account, managed by transformed OFE funds, or to ZUS. The deadline is 2 August 2021.
Impact of changes on financial institutions and public finance
Open-end investment funds, established as a result of OFE transformation, will have to prepare cash to pay the conversion fee. At the end of the year, these institutions had 4% of their assets in bank deposits, 8% in corporate bonds, and 86% in equities. In order to secure funds to cover the 15% conversion fee they will have to sell some shares or bonds.
The assumption behind the new draft act on the transformation of OFE into IKE is that this reform is going to have a positive impact on the public finance sector, PLN 4.5 million and PLN 12.5 million in 2021 and 2022, respectively. These amounts result from the fact that ZUS will no longer transfer contributions to OFE and transfer all contributions to the Social Insurance Fund (FUS) instead.
What is more, according to the draft act, the 15% conversion fee is to be paid to FUS in two instalments (70% in 2021, and 30% in 2022), totalling PLN 10.04 billion (7.04 billion in 2021 and PLN 3 billion in 2022).
The ruling party’s assumption is that half of the funds will be transferred to ZUS and the other half to IKE. The portion to be received by ZUS is going to lower the official public debt statistics, giving the government more freedom to take on more debt while keeping away from the constitutional threshold of 60% GDP.
Another main assumption of the pension reform is doing away with what is known as the ‘slider’, which now reduces the pensioners’ savings accumulated in OFE. This is a money flow mechanism, whereby 10 years before an OFE member reaches the universal retirement age, the funds accumulated on his or her account are gradually transferred each month to ZUS and credited to an individual sub-account of the insured person. In other words, when the insured person reaches the age when they have 10 years left to their retirement, the ‘slider’ mechanism is activated and 1/120 of his or her savings is transferred from OFE to ZUS every month. As a result, when you retire, your entire contribution capital will be located in ZUS, and ZUS will pay you a single, life-long pension.
What will happen to assets from pension funds once they are transferred?
The investment policy of specialist open-end investment funds (SFIO) converted from OFE is supposed to be adjusted to the age and risk profile of the insured, thus ensuring the value of assets from OFE is protected in the long term. This may mean that the portfolio will be changed from a very risky one now (86% of equities) to a more balanced one. General pension societies (PTE) managing OFE will become investment fund companies (TFI). The costs of managing OFE funds by TFI will be strictly limited. The assets on ‘new’ IKE will be mostly invested in shares of companies listed on the Warsaw Stock Exchange. Five years before the insured person reaches the retirement age, these assets will be transferred to a special pre-retirement sub-fund, which is supposed to be safe by definition: shares can account for a maximum of 15%, whereas the rest will be invested in debt securities.
Funds transferred to ZUS are going to be credited to the future pensioner’s account. There is no cash or assets in the form of securities on this account. This account is an electronic record of the future pension liability that ZUS has towards that person. The balance of this liability is supposed to be the basis for calculating the pension in the future.
The decision to transfer the money either to ZUS or automatically to IKE must be taken by each insured person on their own, taking into account their age, number of years to retirement or trust and confidence in the universal pension system. In the future, a lot will depend on the situation on financial markets and the decision makers. The only thing that is certain here is that we do not have much time.
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