Experience from implementing voluntary fully funded pension insurance in the course of compliance wi

1
Experience from implementing voluntary fully
funded pension insurance in the course of
compliance with EU Directives in Poland(Part 1
Part 2)

• Skopje, 22 February 2007
• Regional Round Table
• Iwona Duda Pawel Pelc
• PFSA

2
Introduction

• Polish Financial Supervision Authority is
  integrated supervisory authority responsible for
  supervision over financial market.
• PFSA was created on 19 September 2006 and has
  replaced Securities and Exchange Commission and
  Insurance and Pension Funds Supervisory
  Commission.

3
Main topics

• Polish pension system
• Supervision
• Occupational pension schemes
• Individual retirement accounts
• Occupational pension funds
• EU directives compliance

4
Polish Pension System

• Polish pension system before the reform PAYG,
  DB, run by the state, one social security
  contribution (45 of the salary, paid by
  employer)
• Replacement ratio about 70

5
Polish Pension Reform

• Pension reform
• 1997 regulations related to open pension funds
  and occupational pension schemes
• 1998 regulations related to contributions and
  PAYG component
• 1999 implementation of the reform
• 2004 regulations related to individual
  retirement accounts, adaptation to EU directives

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New Polish Pension System

• Multi pillar approach
• PAYG mandatory
• Open pension funds fully funded mandatory
• Occupational pension schemes fully funded
  voluntary
• Individual retirement accounts fully funded -
  voluntary

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Design of the new system in Poland

• The whole system is Defined Contribution
• First payments from mandatory part of the system
  from 2009
• Lack of two crucial regulations related to
  payout phase and related to people working in
  special conditions

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Supervision

• In the years 1998-2002 there was a separate
  Superintendency of Pension Funds
• In the years 2002-2006 there was partially
  integrated supervisory authority Insurance and
  Pension Funds Supervisory Commission
• From 2006 Polish Financial Supervision Authority

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Polish Financial Supervision Authority

• The aim of the supervision over financial market
  is taking care about proper operations of this
  market, its stability, security and transparency,
  as well as trust to the financial market and
  taking care about interest of the participants of
  this market.

10
Structure of the PFSA

• PFSA is a Commission with chairman, two deputies
  and four members
• In the office of PFSA there are separate
  supervisory lines.

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Occupational Pension Schemes

• According to Polish law Occupational Pension
  Scheme is a set of agreements
• Company pension agreement (or multi companies
  pension agreement),
• Agreement with financial institution

12
Forms of Occupational Pension Schemes

• All Occupational Pension Schemes are based on
  Defined Contributions model including
• Occupational Pension Funds,
• Agreement with investment fund
• Group life insurance with capital fund in life
  insurance company
• Foreign management

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Financial Institutions in Occupational Pension
Schemes

• Occupational Pension Funds (managed by
  Occupational Pension Companies)
• Investment Funds (managed by Investment Funds
  Management Companies)
• Life insurance companies or Mutual life insurance
  institutions
• Foreign Manager

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Investement funds in OPS

• Contributions from OPS can be invested in open
  investment funds and specialist open investment
  funds
• In both types of investment funds there are units
  which are valuated on daily basis

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Agreements with investment funds

• Employer can sign agreements with different
  investment funds managed by one investment funds
  society.
• In such case emloyee has right to change
  investment fund or to divide contributions
  between more than one investment fund.

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Group life insurance with capital fund

• Life insurance risk cannot be financed from
  sources saved on insurance capital fund in case
  of not payment of the life insurance premium.
• At least 85 of basic contribution shall be
  transfer into insurance capital fund, and at
  least 1 of the contribution shall be used to
  cover insurance risk

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Aim of Occupational Pension Scheme

• Occupational Pension Scheme is created to
  accumulate sources of the participant in the aim
  of payout

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Steps required for creation of the Occupational
Pension Scheme

• Conclusion of the companys pension agreement (or
  multi-companies pension agreement)
• Conclusion of the agreement with financial
  institution or creation occupational pension
  society and occupational pension fund or buying
  shares of occupational pension society
• Registration by PFSA

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Participation in the Occupational Pension Scheme

• Eligible for participation in the Occupational
  Pension Scheme is employee, who is employed by
  employer not shorter than 3 months, if the
  companies pension agreement has not stated
  otherwise.
• Employee who is older than 70 years cannot join
  the Scheme

20
Participation in the Occupational Pension Scheme

• Also individual enterpriser or partner in the
  partnership who is covered by the social security
  insurance can participate the scheme which is
  open to its employees

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Participation in the Occupational Pension Scheme

• At least half of the employees shall be in line
  with conditions to join to the scheme based on
  the data from the day of sending application for
  registration to the PFSA
• In case of employers employing more than 500
  employees this requirement is lowered to one
  third of employees

22
Participation in the Occupational Pension Scheme

• Person who is employed by more than one employer
  offering Occupational Pension Scheme can
  participate in the same time in more than one
  Occupational Pension Scheme

23
Companys Pension Agreement

• Companys Pension Agreement is concluded between
  employer and representation of employees
• Representation of employees consists from all
  companys trade union organisations operating
  within the employer
• In case of lack of trade union organisation,
  employees can form their representation in the
  form usually used in the employer, for the period
  not longer than 24 months

24
Process of negotiations of the Companys Pension
Agreement

• Employer presents offer to create Occupational
  Pension Scheme to representation of employees
• If during two months of negotiations there is no
  agreement, employer can sign agreement only with
  main (representative) trade unions

25
Multi-companies Occupational Pension Scheme

• Representation of employers can sign
  multi-companies pension agreement with
  multi-companies employees representation.
• New employer can join multi-companies pension
  agreement after acceptance of above mentioned
  representations.

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Agreement with financial institution

• Agreement with financial institution is signed by
  employer.
• Form of the program as well as the name of
  financial institution and the level of basic
  contribution is decided in companys pension
  agreement

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Employees participation

• Employee can join to Occupational Pension Scheme
  in the form of declaration.
• Employee may declare voluntarily additional
  contribution to the scheme

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Contributions to the scheme

• Basic contribution financed by employer up to
  7 of employee salary (basic contribution can be
  defined as percentage of salary or as flat amount
  or as percentage of salary with a cup)
• Additional contribution fully voluntary,
  declared by the employee if the companys pension
  agreement has not forbidden it up to the cup
  defined in the law

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Tax treatment

• Tax, Exemption, Exemption
• In case of basic contribution there is exemption
  from social security contributions

30
Employers duties

• Calculating and transferring basic contributions
  to the financial institution
• Calculating, deducting from employees salary and
  transferring additional contributions to the
  financial institution
• All contacts between employee and financial
  institution are effected through the employer

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Role of the supervisory authority

• Registration of the Occupational Pension Scheme
  to the Register of Occupational Pension Schemes
• Supervision over Occupational Pension Schemes in
  the area of compliance with the legal
  requirements
• Possibility of issuing fines up to 50.000 PLN

32
Register of the OPS

• Number of registered OPS 1085
• Number of deleted OPS 116
• Number of operaing OPS 969
• (as on 31 January 2007)

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Participation in OPS

• There was 260 000 participants in OPS at the end
  of 2005 (data for 2006 are still not available)
• More than 11 of total number of participants
  were passive (without contribution paid)

34
Suspension of transfer of basic contributions

• Employer can suspend transfer of basic
  contributions or periodically reduce its level up
  to 3 months during 12 subsequent months
• Employer can extend such period in agreement with
  representation of employees (up to 24 months in
  48 subsequent months)

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Liquidation of the Occupational Pension Scheme

• Occupational Pension Scheme can be liquidated in
  case of liquidation financial institution, in
  case of merger between employers (one employer
  can offer only one Scheme), termination of the
  agreement by the financial institution,
  liquidation or bankruptcy of the employer,
  termination by employer and similar situations.

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Payout from the Scheme

• Payout based on the request of the participant
  or from age 60, or from age 55 in case of early
  retired participant , or without request of the
  participant at the age 70, or based on the
  request of successor in case of death of
  participant
• Lump sum or partial payment

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Transfer from the scheme

• To another Occupational Pension Scheme
• To Individual Retirement Account
• From Individual Retirement Account
• Transfer from the scheme is not possible when the
  participant is employed by the employer managing
  the Occupational Pension Scheme

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Return

• In case of liquidation of the Scheme where there
  is no transfer saved sources are returned to the
  participant
• In case of return 30 of the sum of contributions
  is transferred to Social Security Institute

39
Individual Retirement Accounts

• Included in the new pension system in 2004.
• Financial institutions whose can offer IRA
  investment fund, brokerage office, insurance
  company, bank.
• Possibility of transfers between IRA and OPS
• TEE tax treatment

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Occupational Pension Funds

• Occupational Pension Fund is created by
  Occupational Pension Society
• Occupational Pension Fund has separate legal
  personality
• Occupational Pension Fund can invest up to 30
  of assets in investments denominated in foreign
  curriencies

41
Occupational Pension Funds

• Occupational Pension Fund cannot invest in
  securities issued by Occupational Pension Society
  which manages that fund
• Up to 5 of asets of the OPF can be invested in
  securities issued by shareholders of OPS which
  manages that fund and up to 10 of assets of the
  OPF can be invested in securities issued by
  entities related to that shareholders

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Investment limitations for OPF

• Investment limitations for OPF, except to
  investments in units of investment funds and
  investments in assets denominated in foreign
  curriencies are very similar to limitations for
  Open Pension Funds
• Detailed rules related to investments of OPF
  shall be presented in statute of OPF

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Investment limits for OPF

• Deposit in a single bank or with two or more
  affiliated banks 5 for a selected single bank
  or a group of affiliate banks investment limit
  may stand at 7,5)
• investment certificates of a single closed-end
  investment fund 2
• investment certificates or bonds of a single
  securitisation fund 5
• investment in all securities of a single issuer
  or of two or more affiliated issuers 5or other
  securities of shareholders of the

44
Occupational Pension Society

• Occupational Pension Society is one purpose non
  profit joint stock company which creates, manages
  and represents the OPF.
• Employers offering OPS in the form of the OPF are
  the only shareholders of the OPS
• The only income of OPS is management fee up to
  0.05 of net assets of the OPF monthly

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Occupational Pension Society

• Employers whose are shareholders of the OPS are
  obliged to cover costs of the operations of the
  OPS based on the rules written in the statute of
  the OPS
• Costs of the operations of the OPF that are not
  covered from assets of the OPF are finansed by
  OPS.

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Transfer of management of the assets of the OPF

• OPF can invest its assets in units of open
  investment funds or specialist open investment
  funds
• OPF can delegate management into entities
  entitled for management of portfolio of
  securities.

47
Licensing process for OPS and OPF

• PFSA issues licenses for Occupational Pension
  Society and then for Occupational Pension Fund
• PFSA has 3 months for licensing OPS and 3 months
  for licensing OPF
• OPS and OPF after license from PFSA are
  registered in court registers

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Occupational Pension Funds data

• Number of operating OPF 5
• Number of liquidated OPF 2
• Number of members of OPF 60,728 (as at the end
  of 2006), including 18,178 passive members
  without contribution paid

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EU compliance

• Issue of investment limintations for pension
  funds was subject of accession negotiations with
  EU in relation to freedom of capital movement.
• Poland has accepted that limits for foreign
  investments of Occupational Pension Funds shall
  be in line with the freedom of capital movement.

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Foreign investments of OPF

• Instead of the previous 5 limit for foreign
  investments it was introduced 30 limit for
  assets denominated in foreign curriencies, what
  is in line with prudential requirements of EU.

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Changes to be in line with Occupational Pension
Funds Directive

• New form of the OPS foreign management
• Possibility for foreign employers to be
  shareholders of Occupational Pension Society
• No other changes required as Polish pension
  system if fully DC

52
Foreign manager

• Entity, regardless its legal form, situated in
  the teritory of UE member state, supervised by
  the supervisory authority of such state, that
  subject of activity is collecting financial
  sources and investing them in the aim of pay out
  to the pension scheme participants after their
  retirement age.

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Foreign management agreement

• Agreement or statute of the fund cannot allow to
  cover insurance risks from contributions.
• All documents shall be presented in Polish
  language

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Conclusions

• Development of voluntary pension savings in
  Poland is very slow
• Important factor is high level of unemployment
  (about 15, but it used to be about 20)

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Thank you for your attention

• pawel.pelc_at_gmail.com
• pawel.pelc_at_knf.gov.pl
• zastepca_at_knf.gov.pl