On 4 July 2016, the Ministry of Development (MR) presented an idea for the changes in the pension scheme. It can be interpreted as a desire to ultimately and permanently separate public, compulsory pay-as-you-go part of the pension plan from private, voluntary and unit-linked products. The MR’s proposal also shows determination to encourage long-term saving in the Poles. Provided that the interpretation is a correct one, we consider this idea to be a step in the right direction.
Moving in the right direction, however, does not guarantee reaching the goal. Reforming pension scheme is a project full of traps – both those that arise from the complexities of the issue, as well as those that are the legacy of the recent past and the conceptual grid used in Polish politics. In addition, new solutions will come into force in an atmosphere of citizens’ extreme lack of trust to pension scheme institutions and the state, which is supposed to be a regulator and guarantor of a pension scheme. We believe that restoring confidence is more important than any specific element of the proposal for a system’s overhaul and, as such, it should be a key objective of the government project.
In the process of rebuilding trust, one should remember four important factors. Firstly, people tend to distrust solutions that will enable the state to deny their savings the private status at any given moment. Secondly, the ownership is commonly understood not only as an undoubted legal title, but first and foremost as a real freedom to manage the saved funds. Thirdly, people distrust the complex products, as they are inclined to trust only what they can understand. And fourthly, the trust requires fair treatment – the state that encourages bad investment products cannot expect it from its citizens.
A major shortcoming of the MR’s proposal is the too far-reaching state control over private funds. Limiting payments, both before and after reaching retirement age, makes it substantially more difficult to convince citizens that the state will not seize their money one day. And this condition has to be met in order to restore the basic trust for the system that was so painfully shaken during the, so-called, two partitions of the Open Pension Funds (OFE) over the years 2010-2013. Without this, the plan for universal voluntary saving for retirement is doomed. Concerns are also being raised about the tax as high as 25%, which is to be levied on the transfer of funds from the public sector to the private one.
Our alternative suggestion is based on the belief that the Poles are avoiding pension products not because of the lack of appropriate fiscal incentives, but mostly due to the shortage of easily accessible and attractive investment products. We believe that instead of creating new legal structures for long-term saving for retirement (PPK and IPK), as MR proposes, we should make better use of those already existing (Individual Retirement Account, Individual Pension Security Account, Employee Pension Scheme), and at the same time stimulate the private sector to provide appropriate financial products to accompany them. For it is them that are lacking, and not programs with fiscal incentives. Pension Investment Funds (FIE), proposed by us, may be such a product.
FIE are a natural adaptation of Open and Close Investment Funds to the needs of saving for retirement. In our opinion, the starting point for determining the framework in which FIE would function could be our concept, on the basis of which we would need to reach a final solution, together with a wide group of stakeholders in the capital market. It should be flexible enough so that the market could offer a wide range of investment options provided by competing financial institutions, and at the same time precise enough for the clients to be sure that they do not buy a pig in a poke.
The text above is an excerpt from a commentary to the proposal of the Ministry of Development of 4 July 2016, concerning the proposed changes in the OFE and the third pillar, along with an alternative proposal, by Maciej Bitner and Maciej Bukowski.
