the role of funded pillar in pension schemes zbigniew derdziuk the president of social insurance...

The role of funded pillar

in pension schemes

Zbigniew Derdziuk

the President of Social Insurance Institution

Moscow, 1st November 2011

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Projected demographic changes

low fertility ratelonger life expectancy

affect on rising of dependency ratio

The role of funded pillar in pension schemes


Analysis – the baseline situation (1)

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Raising dependency ratio threatens the financial stability of pension schemes based on total PAYG financing

• high a budgetary burden (nominal and percentage)• high share of budget subsidies according to GDP

Analysis – the baseline situation (2)



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• resistant to demographic changes

• financing benefits postponed in time

• potential possibility to achieve significant rates of return in the long term

Advantages of funded pillar



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• sensitive to changes in the economy

• expensive in maintaining than the NDC system

• difficulty in choosing a pension fund

(Poland: choice 1 within 14 OPF)

Disadvantages of funded pillar (1)



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Unpredictability of future benefits

because of the long time horizons for investing funds in capital markets

The difficulty in securing adequate indexation of benefits

who would cover the cost of indexation -State or pay-out institution

Disadvantages of funded pillar (2)



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The amount of benefits depends onaccumulated capital and the age of retirement ,

but also important is the economic situation in the period before retirement

Unsatisfactory level of benefits in case of long-term low-income or breaks in employment (unemployment, long-term illness, childcare)

Disadvantages of funded pillar(3)



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• each pension reform requires a full analysis

including the step of paying benefits, security guarantees and the indexation of benefits

• each pension scheme requires the corrections • concern for maintaining the stability and predictability

of the system • adjusting to changes in economic conditions and

economic forecasts • ensuring trust, security and sense of justice

Findings (1)



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In order to maintain the stability of the pension system will be necessary to choose (prof. N. Barr):

• reducing amounts of benefits • increasing amount of pension contributions • raising the retirement age (adjustment to labour market) • stimulating economic growth

Findings (2)



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general old-age pension contribution – 19.52% of gross salary

• Old system – total contribution goes to the first pillar – SIF

New system (obligatory for persons born after 31 December 1968)– contribution is divided between SIF and OPF

Since 1999 all contributions are recorded on the individual account of insured person.

Supplement – present situation in Polish pension scheme (1)



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Contribution cutting to OPF after 1st May 2011

I pillar II pillar

SIF OPF

before 12.22% + 7.3% = 19.52%

now 12.22% + 5.0% + 2.3% = 19.52%

subaccount

in SIF

Supplement – present situation in Polish pension scheme (2)



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Since 2009 ZUS has started paying out the temporary old-age pension from the new system

- only women (60-65) are entitled

From 2014 the annuity old-age pension will be paid out

- for all

Pay-out institution to be defined.

Completing the pension reform in Poland



Website: www.zus.pl

the role of funded pillar in pension schemes zbigniew derdziuk the president of social insurance...

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