Annuities in Poland Current state of discussions

1
Annuities in PolandCurrent state of discussions

• Agnieszka Chlon-Dominczak
• Ministry of Labour and Social Policy
• Tallin, October 12, 2006

2
Outline of the presentation

• The pension system in Poland
• Prospects of future annuity market
• Principles of annuity payments
• Possible organisational structure

3
New system architecture
Mandatory Social Security System
4
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 30-50 joined
  the new system in 1999

5
Market overview

• Presently 15 funds exist after MAs
• 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

6
Market players in numbers
Source KNUiFE
7
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
8
Future annuity market

• Pension funds
• 10 million participants in the first year
• Simple investment product with stable flow of
  contributions
• Relatively quick break-even
• 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

9
Prerequisites

• Developed insurance market
• Availability of annuity products
• Availability of long-term bonds at least as a
  benchmark
• inflation-indexed?

10
Projections of market development
New pensioners
Premium value
11
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

12
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

13
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)

14
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

15
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