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Thanks to PPK, a broad stream of money from the state, employees and employers will flow into financial markets. But will Employee Capital Plans provide us with a decent pension? A close look at the act suggests that they are more a form of savings account than retirement security.
The Act on Employee Capital Plans entered into force on 1 January 2019, and from 1 July some employers—initially those employing more than 250 people—had to start implementing them. Many myths have already grown around the subject. I do not want to persuade anyone either to join PPK or to declare that they will not pay an additional contribution, but only to take a broader look at the issue and examine some information circulating informally about it.
WHAT IS OUR PROBLEM?
Anyone following the statistics can see that our pensions will fall in the future. This is because the 1999 pension reform changed the equation used to calculate benefits. It no longer has the so-called basic component, that is, the social element, and periods with and without contributions from selected years are no longer counted. The equation is now very simple: our pension equals all the money we paid into the pension system during our lives divided by our so-called remaining life expectancy at retirement, equalised for the sexes and published by Statistics Poland. This is called a defined-contribution system, as opposed to a defined-benefit system, and means that the more we contribute, the fewer breaks we have from work and the later we retire, the higher our benefit will be.
Under such a system, those earning little or taking breaks from work for care, unemployment or other life circumstances—most of us—fare worse than before 1999. So do those, mainly women, who retire earlier. Being retired from age 60 adds 120 months to the denominator of our pension equation while, of course, fewer contributions have accumulated in the numerator. Already today, the average pension for women is almost PLN 1,000 lower than that for men. In 2019 the number of people with pensions below PLN 500, meaning those without enough service to qualify for the statutory minimum pension, rose 30% from 2018. We must also remember that half of current pensioners are still from the so-called old system, with benefits calculated under the older, more favourable rules. In 2018 the average new pension under the old rules was PLN 4,221.61, versus PLN 2,116.86 under the new rules. Yet even those on the new rules still have part of their pension calculated using so-called initial capital, a more favourable assessment of contributions made before 1999. Those who entered the labour market after 1 January 1999 will receive even lower benefits. Why do I write this? To show that, although in 1999 we saved a system that will probably remain solvent, we did not save future pensioners.
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EMPLOYEE CAPITAL PLANS
There are many ideas for addressing low pensions: a guaranteed minimum pension or even a so-called citizens’ pension, a hybrid model (part defined contribution and part defined benefit), raising the retirement age, taxing robots’ work, benefiting from greater labour productivity or so-called risk diversification. The last term simply means that our pension would be financed from several sources. In theory the government offers us this, though not entirely, by implementing Employee Capital Plans.
The idea is to encourage women and men in employment to save for old age. If we pay a contribution of 2% of our salary, the employer adds 1.5% and the state contributes an initial payment, currently PLN 250, plus annual payments of PLN 240. If we earn no more than 1.2 times the minimum wage, our contribution may be somewhat lower. Both employee and employer contributions may, however, be raised to as much as 4% if the parties so wish. That means saving more, but also receiving a lower salary while the employer faces higher labour costs.
The system naturally has pros and cons. One advantage is that our savings are topped up by the employer and the state. We can debate whether it is a good idea for billions of zlotys, including state funds from the Labour Fund, to flow to capital markets. But we have no influence over that now, because the legislature has provided for it. I assess the arrangement only from the saver’s point of view, not from that of the state: for the saver it is simply additional money. Another advantage is the ability to use 25% of the saved sum at any time in the event of one’s own or a family member’s serious illness. This is non-repayable and calculated on the whole sum, not merely what we contributed ourselves but also the employer’s and state’s contributions. Unfortunately, family members here are only a spouse and children, excluding, for example, partners living together without marriage. There is no help in the case of a parent’s serious illness either, which may prove crucial in an ageing society. It is also possible to borrow from oneself: to borrow PPK savings tax-free at 0% to finance a housing down payment, but only up to age 45.
Another advantage is that participation is voluntary. If we do not want to join, we simply complete a declaration and stay out. We must make that effort, though, which many see as a problem and a trap: people may be enrolled in PPK because they do not even know they must do anything about it. This is plausible, especially given that in June 2019 only 42% of employees had heard of the system, according to CBOS. I nevertheless think employees will quickly take an interest when they see that their pay is 2% lower. They will also pay more tax, since the employer’s contribution constitutes taxable income for the employee. I also assume that employers will inform employees about the system, as required by law, and will have to consult their representatives on details such as which institution to contract to operate and manage PPK.
Workplace pension programmes were also introduced through so-called auto-enrolment, automatic inclusion with an option to leave, for example in the United Kingdom and New Zealand. This is therefore neither a new nor an unusual solution. What is surprising is something else: we must renew our declaration to leave every four years, by 1 April 2023, 2027, 2031 and so on. People aged 55 to 70 must declare if they want to be covered, rather than being enrolled automatically, and people over 70 cannot join at all. Nor will all of us be enrolled immediately. First come large companies with at least 250 employees; from 1 January 2020 firms employing 50–249 people; from 1 July 2020 firms with 20–49 employees; and only from 1 July 2021 smaller firms with fewer than 20 employees and the entire public sector.
Interestingly, the most common objection to the system, voiced by both right and left, albeit in entirely different contexts, is that PPK is really a second OFE. The fact that our money, and also that of employers and the state, flows into capital markets is indeed problematic. Should money intended to guarantee our pensions be played on the stock exchange? And should such a broad stream of money from the Labour Fund be directed to financial institutions? It is questionable at the very least. Especially for someone who distrusts markets, choosing this form of security may be difficult. All the more so because there is in fact no guarantee of payment: if we retire during a stock-market crash, our savings may have shrunk substantially. It should, however, be noted that these are to be target-date funds, invested more safely as we approach retirement age.
Liberal voices comparing PPK to OFE, in turn, say that “they will soon take our money.” Of course, we cannot predict this with complete confidence, not least because less democracy and rule of law make any prediction less certain. But under current law it seems rather unfeasible. The fundamental difference is that when OFE was introduced in 1999, part of our public contribution was diverted to it. The contribution was 19.52%, of which 12.22% went to ZUS, specifically the Social Insurance Fund, and 7.3% to OFE. ZUS thus still had the same expenditure but one third less revenue, causing a disastrous situation and a deficit in the Social Insurance Fund, described by Professor Leokadia Oręziak in her well-known book OFE: The Disaster of Pension Privatisation in Poland. Ending mandatory OFE membership and subsequent decisions, including transferring 51.5% of the units in each member’s account into special ZUS insured-person subaccounts, were not “theft of private money.” There are several reasons for this.
First, the money is still assigned to a particular insured person, and indexation at ZUS is even more favourable than OFE’s results. Second, a 2015 Constitutional Tribunal judgment (K1/14) confirmed that contributions transferred to OFE are public funds merely entrusted to the funds for management. Paying contributions is an obligation of insured people, and those contributions are public funds to cover public obligations of the state. Nobody stole anything from anyone. It is precisely this public status of contributions that fundamentally distinguishes OFE from PPK, which involves additional private money. PPK contributions also have no impact on the size of the Social Insurance Fund deficit.
Is it a pension system at all?
The truly crucial question, however, is whether Employee Capital Plans will provide us with a decent pension. Even if we assume our money will be well invested and no economic crisis will affect us? In my opinion, the answer is no, because this is not retirement security. A close look at the act suggests it is more like a savings account. Under Article 99, at age 60 we can take 25% of the sum immediately and the other 75% in 120 instalments; we can increase the number of instalments, but they will then be smaller. What does that actually mean? Until age 70 we may still have something from the system, but just when needs in old age increase sharply, with a single-person household and treatment costs, the money runs out. These payments, unlike those from ZUS, will not be indexed.
Another risk may lurk elsewhere: a person who has not earned the minimum pension, PLN 1,100 gross in 2019, but has a sufficiently long contribution period, 20 years for a woman and 25 years for a man, is entitled to a state top-up to that amount. If a PPK payment causes someone to exceed the threshold, however, ZUS may no longer top up the minimum pension. What then happens after age 70 when the PPK money is gone? This issue has not yet been regulated.
WHO, THEN, BENEFITS FROM THIS SYSTEM?
The financial market must of course be counted among the system’s biggest beneficiaries. Financial institutions that manage enough target-date funds or subfunds and have experience managing open-ended investment funds, pension funds or open pension funds will manage PPK participants’ savings. A broad stream of state, employee and employer money will therefore flow to them. It is worth adding, however, that the management fee is much lower than in OFE: 0.5% of a fund’s net asset value per year. A performance fee, a so-called success fee of 0.1%, is also possible, but only if the fund achieves a positive return. We should also mention the enormous role played in PPK by the Polish Development Fund (PFR). It keeps records and creates a dedicated portal, but is also the so-called designated financial institution. That means it creates an investment fund company, PFR TFI, which cannot refuse any employer the establishment of PPK, unlike other institutions. If an employer does not choose a TFI, although this is punishable by a fine, PFR will be the default company. PFR TFI nevertheless does not seem likely to dominate the market, although some fear it may be used to finance investments considered “politically correct.”
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Summary
Will employees benefit? Significantly, the name PPK does not even contain the word “pension.” To repeat, this is simply an additional savings account funded by three parties, not only by one person. If someone wants to save, with limited but not impossible early withdrawal, this is an idea worth considering. But PPK alone will not suffice to support citizens in retirement. It does not guarantee the level of payments or their indexation, does not provide so-called annuities, payments for life, and may increase pension inequality: those who can afford it will save, so additional state money will probably once again flow to the better-off. With PPK we get the chance to save on fairly favourable terms, but the future pension catastrophe has still not been averted.
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