EurWORK European Observatory of Working Life

Social partners call pension systems overhaul ‘unconstitutional’

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Pension reform introduced by the Polish government has been strongly criticised by the social partners, institutions and experts. The reforms are the most significant changes to the pension system since 1999, placing severe restrictions on private pension funds and redirecting a larger part of their contributions to the state’s Social Insurance Institution. The social partners argue that this is a shortsighted attempt to reduce public debt and rescue public finances.

Background

On 6 December 2013, the Polish parliament voted on proposals to change the pension system by redirecting a larger part of contributions to private pension funds to the state’s Social Insurance Institution (ZUS).

President Bronisław Komorowski signed the Act on 27 December 2013 and then decided to send it to the Constitutional Tribunal. He expressed concern about the opinions of several institutions, which had suggested that the regulations may be unconstitutional. At the same time, however, he emphasised that the changes were necessary to rescue public finances and reduce public debt.

He said he was particularly concerned about the sections of the Act that ban investment of private pension funds in government bonds and force investment instead primarily in the stock exchange, and the introduction of fines for those who ignore the Act’s ban on the advertising of private pension funds.

Pension system reforms

Since 1999, the Polish pension system has comprised three main elements.

  • The Social Insurance Fund, administered by the state-owned ZUS.
  • The privately run open pension funds.
  • Voluntary investment schemes offered by financial institutions (PL1304039Q).

The system was last reformed in 2011 when the Polish government introduced several changes that came into force on 1 May 2011 (PL1102019I).

On 1 February 2014, the latest reforms were due to be implemented. The changes were voted on and passed in December 2013, the second round of reforms promoted by the right-wing liberal government led by the Civic Platform (PO).

The reforms go deeper than those introduced in 2011:

  • open pension funds will have to transfer 51.5% of their assets at the end of January 2014 to ZUS;
  • open pension funds will have to transfer to ZUS all of their government bonds, and they have been forbidden to invest in government bonds in the future;
  • between 1 April 2014 to 31 July 2014, everybody who has money in open pension funds will have to decide whether to stay in it or to transfer all of their contributions to ZUS;
  • all those wishing to remain in an open pension fund will have to declare this in writing to ZUS, otherwise their assets will be automatically transferred to ZUS;
  • open pension funds are banned from advertising until the end of July;
  • a minimum level of investment in shares for open pension funds will be introduced, at least 75% until the end of 2014, 55% until the end of 2015, 35% in 2016 and 15% in 2017;
  • contributions that remain in open pension funds will be gradually transferred to ZUS, beginning ten years before retirement;
  • several tax incentives will be offered to those who decide to save in individual pension accounts (the third pillar of the system).

Reduction of public debt

On 3 February 2014, open pension funds transferred over PLN153 billion (€37 billion as at 6 March 2014) (51.5% of open pension fund portfolios) to the ZUS. The asset transfer included:

  • PLN134 billion (€32 billion) in treasury bonds, which reduced public debt by 9% of GDP;
  • PLN17.2 billion (€4.1 billion) in other treasury-guaranteed papers;
  • PLN1.9 billion (€0.5 billion) in cash.

The Ministry of Finance has announced that treasury papers will be cancelled and the money will be credited to the ZUS. The Ministry has also announced that, as a result of the cancellation of treasury bonds handed over by the private pension funds, Poland’s public debt will amount to some 50% of its gross domestic product (according to EU methodology) at the end of 2014.

Social partners’ views

The changes have met with strong criticism from the social partners – from both employers and trade unions. The pension system overhaul is seen as controversial by the social partners and, in their opinion, it may also be unconstitutional.

Representatives of financial institutions and of employers’ organisations such as the Confederation Lewiatan and Business Centre Club have accused the government of ‘grabbing’ the money of insured people to reduce public debt. In the Confederation’s view, the transfer of assets from private pension funds to ZUS will bring only short-term recovery of public finances and will expose future retirees to losses.

Since November 2013, the Confederation’s pension companies have led an educational campaign called ‘I will stay in the open pension fund’, promoting open pension funds to those who will shortly have to decide whether or not to stay in the ‘second pillar’ of the pension system.

The All-Poland Alliance of Trade Unions (OPZZ) has supported some changes in the pension system, but criticised the lack of public consultation and awareness-raising campaigns aimed at future retirees. The Independent and Self-Governing Trade Union (NSZZ ‘Solidarność’) has, together with employers’ organisations, opposed the pension system overhaul.

Commentary

Reforms of the pension system have always generated social tensions and public discussion. The recent changes, which severely restrict the second pillar of the system based on private open pension funds, can be seen as the most significant.

As with previous reforms, there has been strong criticism of the government’s unilateral decision. Considering the importance of the changes and the condition of the state budget, it is understandable that the president has had to sign the Act and send it to the Constitutional Tribunal. It is not clear, however, what the government will do if the tribunal decides that the reform is unconstitutional.

Marta Trawinska, Institute of Public Affairs

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