Annuities in PolandCurrent state of discussions

Agnieszka Chłoń-DomińczakMinistry 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

Mandatory Social Security System

New system architecture

NDC

PAYGmandatory,administered by thepublic institution,individual accounts

First Tier

Open Pension Funds

Fundedmandatory,administered by privateinstitutions,individual accounts

Second Tier

Savings and additional insurance

Fundedvoluntary,administered privately,individual accounts

Third Tier

7 Years of the System

21 funds started their activity in 19994 biggest funds attracted 65% of clientsTotal number of enrolments in 1999 – around 10 millionTwo 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

Market overviewPresently 15 funds exist after M&As4 biggest funds have 72% of assets under managementTotal 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 FundNet Assets

Aug. 31, 2006 (PLN million)

Market Share by Assets

Members Aug. 25, 2006

Commercial Union OFE 27,448 26.9% 2,592,663ING Nationale-Nederlanden OFE 23,707 23.3% 2,366,870OFE PZU „Złota Jesień" 13,907 13.6% 1,881,357AIG OFE 8,548 8.4% 1,026,739Winterthur OFE 4,064 4.0% 520,346Nordea OFE 3,714 3.6% 674,247Generali OFE 3,536 3.5% 466,367Bankowy OFE 3,206 3.1% 438,817OFE Skarbiec-Emerytura 2,720 2.7% 445,256Allianz Polska OFE 2,542 2.5% 296,251OFE Ergo Hestia 2,345 2.3% 372,402OFE Pocztylion 2,046 2.0% 361,026Pekao OFE 1,618 1.6% 242,806OFE „DOM" 1,590 1.6% 278,732OFE Polsat 919 0.9% 269,271Total: 101,910 100% 12,233,150

Source: KNUiFE

Investment performance of Open Pension Funds

AVERAGE UNIT PRICE OF THE EXISTING FUNDS

5

7

9

11

13

15

17

19

21

23

25

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 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

Prerequisites

Developed insurance market

Availability of annuity products

Availability of long-term bonds at least as a benchmark• inflation-indexed?

Projections of market development

0

50 000

100 000

150 000

200 000

250 000

300 000

2009 2011 2013 2015 2017 2019 2021 2023 2025

men women

-

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

2009

2011

2013

2015

2017

2019

2021

2023

2025

mln

PL

N

New pensioners Premium value

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 approachSpecialised annuity companiesLicensed and supervised by Second Pillar SupervisorFees:

• lump-sum fee up to 7% of accumulated capital• additional fee in case of higher returns

Gender-specific life tablesProducts:

• 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 optionsCompetitive 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 readyWhere are we right now?• Not very far from 1999

When do we have to be ready• by 2009