Annuities in Poland
Current state of discussions
Agnieszka Chłoń-Domińczak
Ministry of Labour and Social Policy
Tallin, October 12, 2006
Outline of the presentation
The pension system in Poland
Prospects of future annuity market
Principles of annuity payments
Possible organisational structure
New system architecture
NDC
PAYG
mandatory,
administered by the
public institution,
individual accounts
Open
Pension
Funds
Funded
mandatory,
administered by private
institutions,
individual accounts
First Tier
Second Tier
Mandatory Social Security System
Savings and
additional
insurance
Funded
voluntary,
administered
privately,
individual accounts
Third Tier
7 Years of the System
21 funds started their activity in 1999
4 biggest funds attracted 65% of clients
Total number of enrolments in 1999 – around
10 million
Two age groups:
• Born in 1969 and later – second pillar mandatory
• Born between 1949 and 1968 – second pillar
voluntary
About 64% of voluntary age group
joined the new system in 1999
30-50
Market overview
Presently 15 funds exist after M&As
4 biggest funds have 72% of assets under
management
Total number of members 12.2 million
Total assets under management – PLN 102
billion (around $34 b)
Major amendment to the Pension Funds Act
came into force in October 2003; key
changes introduced in April 2004:
• New terms for rate of return comparison
• New principles of the ZUS lottery
• Decrease of fees
Market players in numbers
Pension Fund
Commercial Union OFE
ING Nationale-Nederlanden OFE
OFE PZU „Złota Jesień"
AIG OFE
Winterthur OFE
Nordea OFE
Generali OFE
Bankowy OFE
OFE Skarbiec-Emerytura
Allianz Polska OFE
OFE Ergo Hestia
OFE Pocztylion
Pekao OFE
OFE „DOM"
OFE Polsat
Total:
Source: KNUiFE
Net Assets
Aug. 31, 2006
(PLN million)
27,448
23,707
13,907
8,548
4,064
3,714
3,536
3,206
2,720
2,542
2,345
2,046
1,618
1,590
919
101,910
Market Share
by Assets
26.9%
23.3%
13.6%
8.4%
4.0%
3.6%
3.5%
3.1%
2.7%
2.5%
2.3%
2.0%
1.6%
1.6%
0.9%
100%
Members
Aug. 25, 2006
2,592,663
2,366,870
1,881,357
1,026,739
520,346
674,247
466,367
438,817
445,256
296,251
372,402
361,026
242,806
278,732
269,271
12,233,150
Investment performance of
Open Pension Funds
AVERAGE UNIT PRICE OF THE EXISTING FUNDS
25
23
21
19
17
15
13
11
9
7
5
01/00 08/00 03/01 10/01 05/02 12/02 07/03 02/04 09/04 04/05 11/05 06/06
Future annuity market
Pension funds
• 10 million participants in
the first year
• Simple investment
product with stable flow
of contributions
• Relatively quick breakeven
• Possiblity to change
provider
Annuities
• Gradual flow of
participants, low numbers
at the beginning
• Gradually raising flow of
contributions and
complex product
• Long-term outlook for
higher profits
• No option to change
provider
Prerequisites
Developed insurance market
Availability of annuity products
Availability of long-term bonds at least
as a benchmark
• inflation-indexed?
Projections of market
development
New pensioners
Premium value
300 000
16 000
250 000
14 000
12 000
mln PLN
200 000
150 000
100 000
10 000
8 000
6 000
4 000
50 000
2 000
0
men
women
2025
20
25
2023
20
23
2021
20
21
2019
20
19
2017
20
17
2015
20
15
2013
20
13
2011
20
11
2009
20
09
-
Principles of annuity payments
Life-time payments
Security
Equal status of men and women
Protection of purchasing power
Competition
Simplicity and transparency
Low costs
Immune to political interventions
Annuities - first approach
Specialised annuity companies
Licensed and supervised by Second Pillar
Supervisor
Fees:
•
•
lump-sum fee up to 7% of accumulated capital
additional fee in case of higher returns
Gender-specific life tables
Products:
•
•
•
•
single annuity
single annuity with guarantee period
joint annuity
joint annuity with guarantee period
Annuities - first approach
controversies
Political issues:
• Too expensive
• Gender specific tables are unfair
Professional issues:
• the fee system does not allow for efficient functioning
• better solution: fee deducted from reserves combined
with fee deducted from benefit payments
• companies should be allowed to use their own life
tables
• products are not defined fully (usually no maximum
values)
Annuities - alternative options
Competitive solutions:
• Specialised companies
• Life insurance companies
• Group savings institutions
Quasi-market solutions:
• Tender: one winner, one cohort
• Tender: multiple products, multiple winners, one
cohort
• Extending products of open pensin funds
Non-market solutions:
• One public annuity company
Conclusions
There is no “best solution”
Careful design in necessary
• Economies of scale
• Competition
Not only legislation, but the market must be
ready
Where are we right now?
• Not very far from 1999
When do we have to be ready
• by 2009