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Government unveils controversial pension reform aimed at cutting borrowing needs


2010-12-31



The government on 30 December outlined far-reaching changes to the country’s pension system intended to reduce the borrowing needs of the state and prevent public debt from reaching 55% of GDP. The proposals drew a mostly critical response from economists. They will now be submitted before Parliament, and are expected to take effect in April 2011.

Under the proposed changes, mandatory payments to private pension funds (OFE) will be reduced to 2.3% from 7.3% of the salary, with the remaining 5% diverted into newly-created sub-accounts within the state system (at the Social Insurance Office, ZUS). These payments will be adjusted each year for inflation and economic growth, ensuring full benefit security for savers, Prime Minister Donald Tusk stressed. The part to be diverted to the state system will be progressively reduced to 3.8% of the salary in 2017.

As a result, the government will need to borrow much less to cover current ZUS spending on pensions (in 2011 the savings are estimated at PLN 12bn or €3bn).

Simultaneously, to soften the impact for private pension funds, in 2012 the government will introduce new tax incentives encouraging individuals to make extra voluntary contributions to pension funds or to mutual funds (they will be phased in over 2012-2017).

Also, private pension funds will be expected to tailor investment strategies to the age of savers, with more aggressive portfolios allowed for younger members. At the same time, the government stopped short of banning client acquisition by OFE on the secondary market.

Most economists are highly critical of the proposals. In their view, they amount to a dismantling of the pension system, undermining benefit security and raising the prospect of lower pensions for savers.



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