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Sejm backs pension reform


2011-03-27



The Sejm on 25 March passed the government’s controversial pension reform plan. The bill now looks set to clear the Senate and be approved by the President in time to take effect on 1 May.

At the heart of the reform is a substantial reduction in pension payments to open (i.e. private) pension funds (OFE), with a bigger chunk of mandatory contributions to be diverted to the state system. The effect will be to significantly reduce the state’s borrowing needs. Under the plan, as of 1 May payments to private funds will be reduced to 2.3% from 7.3% of the gross salary, and the remaining 5% will instead be transferred into newly-created sub-accounts at the Social Insurance Office (ZUS). By 2018 the private chunk will gradually go up again, but only to 3.5%. The payments made to the new sub-accounts will be adjusted each year for inflation and economic growth, and will be inheritable. As a result, the government’s borrowing needs will be slashed by PLN 190bn (approx. €47.3bn) by 2020, including PLN 11bn (€2.7bn) already this year, the government calculates.

At the same time, to soften the impact for private pension funds, in 2012 the government will introduce a special tax break equal to 4% of taxable income for persons making extra voluntary contributions to pension funds or to mutual funds. Furthermore, the OFE will get a freer hand to invest in equities, with the relevant ceiling to be lifted gradually from 40% of assets at the moment to 90% in 2034.



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