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MAŁGORZATA REMBIASZ, ANDŻELIKA LIBERTOWSKA
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CONTENTS
Introduction ............................................................................................................5
1. Gerard HUGHES, John A. TURNER
Demographic challenge and longevity insurance benefits for public
pension reform ...........................................................................................................
7
2. Kamila BIELAWSKA
Pension reforms and long-term sustainability of public finances of the
central eastern European countries ............................................................................
21
3. Olgierd LISSOWSKI
Challenges for the European social model ................................................................
33
4. Andrzej SOŁDEK
Asset allocation in the Polish pension system ...........................................................
45
5. Jeko MILEV
Pay-as-you-go vs. fully funded pension system. Alternative or complementary components in the pension system? The case of Bulgaria ......................
63
6. Jaroslav VOSTATEK
Child pension and free-rider taxation ........................................................................
73
7. Marek SZCZEPAŃSKI
Barriers and drivers of development of occupational pension schemes
in Poland ....................................................................................................................
83
8. Marcin WOJEWÓDKA
The impact of trade unions on occupational pension schemes
in Poland .......................................................................................................99
9. Magdalena GADOMSKA
Management through the empowerment in the context changing
the Polish labour market ...............................................................................
109
10. Agnieszka MORAWIAK
New challenges. Knowledge and age management in a modern
enterprise .......................................................................................................
117
11. Wioleta DĘBCZYŃSKA, Tadeusz ZABOROWSKI
Social responsibility of insurance companies ............................................................
129
4
Contents
INTRODUCTION
The aging of the population is also more explicitly referred to in the literature
as an “aging crisis”. As a result of these long-term demographic trends the
ratio between the abundance of people of working and of post-production age
is changing.
This social process is a result of long-term demographic trends, most of which
can be regarded as the effect of civilization progress (better health care, reduced
infant mortality, improved working conditions, more rational and hygienic lifestyle, etc.). These positive trends in population growth include a decrease in mortality rate and longer life expectancy, and in most countries people are now living
longer than in the past and in the future they will live even longer, which is obviously a good thing.
The aging of the population observed in all the European Union countries as
well as the countries located on other continents (including the US, Japan or Australia) has exerted an increasing pressure on financing and social security – especially with regard to pension systems and health care. It has also affected the labor
market and the changes in work conditions associated with the need for the elderly
to adapt to the needs and possibilities of becoming more economically active.
This creates a huge challenge and increases demographic risk for social security
systems, as well as the risk of breaching the long-term financial sustainability
of these systems. In the future more people will live up to an old age, hence the
increasing importance of long-term care systems for the elderly. Only some countries (e.g. Germany) have already introduced the long-term care insurance for seniors. In other countries such system solutions do not exist.
How to meet such challenges? Do the pension and health care system reforms
introduced in different countries at the turn of the twentieth and the twenty-first
centuries sufficiently take into account the consequences of demographic aging?
In this respect, what should be the role of the state and how helpful may be the
financial institutions offering the instruments for financing additional retirement
or health insurance? In which direction is the European social model evolving?
How to adapt working conditions to the needs of the elderly?
These are just some questions that are addressed by the authors in this monograph, considering economic, social and technological problems associated with
demographic aging of the population from different points of view (the science of
social policy, finance, culture, and ergonomics). This interdisciplinary approach
is justified because of the multifaceted and complex nature of the problems.
6
Introduction
This monograph contains different texts by Polish and foreign authors
and this broadens the perspective of reflection on demographic aging even further.
Enjoy your reading and please send any comments and suggestions to:
[email protected].
Science editors of the monograph
M. Szczepański, M. Gajowiak, A. Libertowska, M. Rembiasz
Gerard HUGHES*
John A. TURNER**
DEMOGRAPHIC CHALLENGE AND LONGEVITY
INSURANCE BENEFITS
FOR PUBLIC PENSION REFORM
Longevity insurance benefits are deferred annuities that begin payment at advanced older ages, such as at age 80. These annuities would benefit some older retirees, particularly in
countries with modest public pension benefits, but the private sector has problems in
providing them, particularly when they must be provided on a unisex basis. Originally,
public pension programs in a number of countries were structured as a longevity insurance
program, with roughly 50 percent of those entering the workforce surviving to receive the
benefits because of relatively high benefit eligibility ages. Over time, however, as life expectancy has improved, the benefits these programs provide have slowly transformed into
benefits that most people entering the work force ultimately receive. This paper argues that
reintroduction of a longevity insurance benefit as part of public pensions could be an important policy in particular because this benefit is generally not provided by the private
sector. Ireland has introduced longevity insurance benefits as part of its public pension
program, providing examples of how such a benefit could be structured.
Key words: public pensions, social security, longevity insurance benefits
1. INTRODUCTION
As people grow older, especially for those living past their life expectancy and
for those relying on defined contribution plans, they risk having exhausted their
sources of income other than their public pension. People with fixed income
in retirement can see the real value of those income sources fall in half by their
*
**
Trinity College – Dublin, Ireland.
Pension Policy Center – Washington, DC, United States.
8
Gerard Hughes, John A. Turner
early eighties with inflation rates as low as 3 percent. People with low public pension benefits who are in their 80s and older are economically vulnerable. At that
age, few are able to offset their low benefits by working. They may have used up
their retirement assets other than their public pension benefit, and they may have
increased expenses due to increased need for medical care. In the future, with the
decline of defined benefit plans in many countries, it can be expected that an increasing percentage of the population will not have an annuitized benefit other than
public pension, and thus will be more likely to have spent down their other sources
of retirement income. As a matter of national policy, it is desirable that people
in this age group are able to live with sufficient resources to enjoy the last years of
their lives with dignity. Public pension provides a guaranteed lifetime benefit, but
in some countries, such as the United States and Ireland, it is insufficient for most
people to maintain their pre-retirement standard of living.
Preventing people from falling into poverty as they age is a key goal of public
pensions. Longevity insurance is one way to address the income needs of older
people who have lived longer than they expected, and have used up their retirement
savings other than their public pension benefit. While all annuities provide retirees
a degree of longevity insurance, in recent years the term longevity insurance has
been used to refer to a particular type of deferred annuity. Longevity insurance is
a deferred annuity that starts at an advanced age, such as age 82. Longevity insurance annuities, an idea advanced by Milevsky [2005], provide insurance against
outliving ones assets, but only when that risk becomes substantial at advanced
ages.
This article proposes that longevity insurance should be added as a form of benefit provided by public pensions. This type of benefit would be particularly valuable as a part of a reform package that included benefit cuts. A social safety net
benefit would be needed to offset the effects of public pension benefit cuts on older
retirees.
This paper first discusses the increase in poverty at older ages. Second, it describes longevity insurance benefits. Third, it documents the role of longevity insurance in the early history of Public pension. Fourth, it describes problems with
the provision of longevity insurance by the private sector. Fifth, it compares the
provision of longevity insurance in the private sector to its provision in the public
sector, indicating advantages of providing longevity insurance benefits through
public pensions rather than through the private sector. Sixth, the paper discusses
government-provided longevity insurance benefits in Ireland. Seventh, it offers
concluding comments.
Demographic challenge and longevity insurance benefits …
9
2. RISK OF POVERTY AND MEDICAL EXPENSES INCREASE
AT OLDER AGES
This section discusses the increasing risk of poverty and medical expenses
at older ages, focusing on the situation in the United States as an example. Having
sufficient income in retirement is not just an issue of income. It also involves assets
and expenditures. Among Americans between age 30 and 64, not having enough
money to last in retirement is their top financial worry, according to the Gallup
organization. Running out of money in retirement has been on the top moneyworry list of Americans since 2000 [Dugan 2014].
Both the risk of poverty and medical expenses increase at older ages. Poverty in
the United States is high among people age 80 and older – a third higher than for
people age 65-69. Poverty is particularly a problem for older women. Women age
80 and older had a poverty rate of 13.9 percent in 2012, and 22.8 percent had income below 125 percent of the poverty line, compared to 8.9 percent and 13.0 percent for women age 65 to 69, indicating a 56.2 percent increase (5.0 percentage
points) in the poverty rate for older women [Social Security Administration 2014].
A reason for the increase in poverty is that people at older ages tend to rely on Social Security for an increasing proportion of their retirement income. That increase
occurs because of a decline in the importance of other sources of retirement
income.
These figures imperfectly measure how poverty rates increase as people age.
Due to the greater mortality risk of low-income persons, these figures understate
the percentage of older women who have fallen into poverty who were not in poverty earlier in life. If there were no change in the poverty status of any person, the
poverty rate would decline at older ages due to higher mortality rates for people in
poverty than for the rest of the population. The measured statistics show an increase in poverty at older ages, but that measure understates the increase in poverty
among the survivors. For example, a recent study of mortality of males finds that at
ages 63 to 71, the higher is lifetime income, at least up to a fairly high level, the
lower is mortality risk [Waldron 2013].
Data from Ireland show a substantial increase in medical expenses at older ages.
Research by Redmond [2015] on the cost of medication by age shows that in 2012
average annual expenditure by those under age 65 was €406 compared with €1,377
for those age 65-69 and €1,772 for those age 75 and over.
10
Gerard Hughes, John A. Turner
3. LONGEVITY INSURANCE IN THE PUBLIC
AND PRIVATE SECTORS
3.1. Longevity Insurance in the Historical Development
of Public Pension
In 1940, when benefits were first provided in the United States, the benefit eligibility age was 65. Taking into account that people entered the workforce at earlier ages than currently, from U.S. life tables for 1910 for the population age 18 that
year, 54 percent of the population would still be alive at age 65 [Glover 1921].
Thus, the U.S. data suggest that slightly more than half of those entering the workforce survived to receive benefits in the early years of Social Security.
Over time, three changes have fundamentally altered the nature of the old-age
benefits that Social Security provides. First, the benefit eligibility age has been
lowered to age 62. Second, life expectancy has increased. Third, the average age at
which workers enter the labor force has increased. With these three changes, the
United States Social Security has transitioned from a longevity insurance program
to a program providing old-age benefits for a substantial proportion of the population that entered the workforce in their youth. Now, 87.8 percent of those age 20
survive to age 62. By comparison, the percentage age 18 still alive at age 65 is 81.1
percent [Arias 2014], so most of the difference is due to improvements in life expectancy, rather than delayed entry into the labor force or the reduction in the benefit eligibility age.
Similarly, public pensions provided longevity insurance benefits in Germany,
the U.K. and Ireland, but with reductions in retirement age and increases in longevity they are not benefits that most people receive.
3.2. Longevity Insurance in the Private Sector
Most U.S. life insurance companies do not offer longevity insurance annuities.
Recently, however, an increasing number of companies have started offering deferred annuities. Symetra began selling longevity insurance annuities in 2008,
while Northwestern Mutual began in 2011 [Tergesen 2012]. Five companies began
offering deferred annuities in 2013, and by midyear 2014 an additional three companies began offering them [LIMRA 2014]. New York Life is the largest seller of
this type of annuity in the United States. In 2011, it launched its Guaranteed Future
Income Annuity [New York Life 2011]. This annuity product provides deferred
annuities that start at retirement ages, such as age 62, but it can also be used to
provide a longevity insurance annuity starting, for example, at age 82. However,
only 4 percent of the people making purchases outside of pension plans of these
Demographic challenge and longevity insurance benefits …
11
annuities through New York Life purchase an annuity that is solely a longevity
insurance annuity. Most purchase such annuities that also provide death benefits
[New York Life 2012].
Annuities provided through employer-provided retirement plans in the United
States and the European Union must calculate benefits on a unisex basis. Because
of the longer longevity of women, annuities provided outside of pension plans are
generally provided on a gender specific basis. Thus, employer-sponsored pension
plans are required to use the same mortality rates for men and women, despite the
fact that women at typical retirement ages on average live about three years longer
than men in the United States [Arias 2014].
The gender difference in life expectancy is considerably greater at older ages.
The U.S. life tables for 2009 show that women age 62 are 35 percent more likely
than men that age to survive to age 85 [Arias 2014]. At age 85, women’s life expectancy is 17 percent longer than that of men. Thus, when priced using genderbased mortality rates, women’s single life longevity insurance annuities purchased
at age 62 and beginning payments at age 85 would cost considerably more than
those for men, perhaps as much as 50 percent more. Thus unisex longevity insurance annuities provided by pension plans would not be a good deal for men
[Turner and McCarthy 2013].
Problems with the provision of longevity insurance annuities in the private sector, compared to universal provision through public pension old-age benefit programs, also include that adverse selection may be more of an issue in that they
presumably would only be purchased by people with really long life expectancies.
Further, potential purchasers may be concerned with the risk of life insurance company insolvency over a long time period, with government reinsurance not providing adequate protection, a concern that may be overstated. New York Life [2012]
in the United States expressed the opinion that pure longevity insurance annuities
would have limited appeal, but that those annuities combined with another benefit
payment feature, in particular a death benefit, would be marketable. While such
a benefit would reduce the annuity income provided by the annuity, it would nonetheless provide some longevity insurance benefits.
3.3. Longevity Insurance Annuities Provided by Government
The government has several advantages over the private sector in providing
longevity insurance annuities. First, it is able to limit its liability against the possibility of an unexpected improvement in life expectancy by indexing to life expectancy improvements the age of eligibility for benefit receipt. While the private
sector could do this prospectively for new clients, the government is able to do this
for people nearing the age of entitlement for the benefit. For example, adjustments
to benefit generosity are made at retirement age in Sweden for immediate annuities
12
Gerard Hughes, John A. Turner
received at traditional retirement ages. Since this adjustment is known in advance,
and it is made in small increments, it involves little risk or uncertainty for participants.
Second, the government has a hedge against increases in the liability due to unexpectedly large improvements in life expectancy to the extent that people work
longer (and pay more taxes) due to improvements in health at older ages or due to
raising the eligibility age for Public pension benefits. Currently, no asset exists for
the private sector to invest in that provides a full hedge against unexpected improvements in life expectancy.
Third, the government does not have to deal with adverse selection because
it provides the benefit to a pre-selected group. In the private sector, insurance companies would provide longevity insurance to people who self-select, in part based
on their subjective expectation of long life expectancy.
4. LONGEVITY INSURANCE BENEFITS IN IRELAND
This section discusses the provision of longevity insurance benefits for older
persons through a government program in Ireland. Ireland has had a noncontributory social assistance pension since 1909 and a contributory social insurance pension since 1961. The value of the social assistance pension depends on
satisfying a means-test and a sliding means-scale is used to pay smaller pensions
than the maximum flat-rate benefit to those who have some means. The maximum
flat-rate value of the social insurance pension depends on having an annual average
of 48 or more contributions to the social insurance fund during working life.
A sliding scale of average contributions is used to pay smaller pensions to those
with average contributions less than 48 per year. The social assistance pension,
therefore, depends on income and assets and the social insurance pension depends
on participation in the labour force.
In the national budget for 1972 both the contributory and non-contributory pensions were increased by the introduction of an age allowance for pensioners who
were aged 80 years and over. In his budget speech the Minister for Finance
[Ireland 1972], Mr. Colley, said that the reason for introducing the allowance was
that “I am especially conscious of the fact that very old persons are often at a disadvantage because of their inability to do things for themselves and shop around
for the best value. In recognition of this, all non-contributory [and contributory]
old age and blind pensioners aged 80 and over will receive a further increase
of 50p per week”.
Demographic challenge and longevity insurance benefits …
13
4.1. Nominal Value of the Allowance and Relative to the Pension
For the first two years, as Figure 1 shows, the value of the age 80 allowance
was the same (€0.64) for both the contributory (social insurance) and noncontributory pension (social assistance). In 1974 the allowance was slightly higher
for the contributory pension, but from 1975 to 1978 it was higher for the noncontributory pension. From 1978 to 1984 the allowance was higher for the contributory pension. Thereafter the allowance has been the same nominal value for both
pensions. There was a significant increase in the nominal value of the allowance in
2006 when it was increased to €10. The nominal value of the allowance has remained at €10 since 2006. Thus, the real value has decreased since 2006.
When the age 80 allowance was introduced in 1972 it amounted to nearly
10 percent of the maximum non-contributory pension and to around 8 per cent of
the contributory pension. In the first few years after its introduction it declined by
about 2 percentage points to around 6 per cent for the contributory pension
and around 8 per cent for the non-contributory pension. Between 1975 and 1996
the age allowance stabilised at just under 8 per cent for the non-contributory pension and just over 6 per cent for the contributory pension. In the following ten years
up to 2005 the allowance was allowed to decline in percentage terms to around
5 per cent for both pensions or about half of what it had been up to 1995. In 2006
there was an increase of about 11/2 percentage points in the value of the allowance
relative to both pensions and since then the allowance has stabilised at around 4.5
per cent for both the contributory and non-contributory pension.
Although successive governments in Ireland have never legislated for formal
indexation of social welfare pensions in line with increases in prices or earnings,
publicly provided pensions were implicitly indexed in line with earnings up to
around 1980. After 1980 pensions were increased somewhat faster than earnings
until 1998 when the Pensions Board [1998] recommended that social welfare pensions should be maintained at 34 per cent of average earnings. Implementation of
this recommendation necessitated a significant increase in social welfare pensions
relative to earnings as the pension-earnings ratio in 1998 was just over a quarter. In
the following ten years up to the beginning of the economic and financial crisis in
2008 social welfare pensions increased much faster than earnings. Since 2008 the
level of social welfare pensions have been frozen as part of fiscal consolidation in
response to the crisis and then as part of the EU/IMF Programme of Financial
Support for Ireland agreed with the Government of Ireland in 2010 [Department of
Finance 2010].
14
Gerard Hughes, John A. Turner
Fig. 1. Increase in Age 80 Allowance, Social Insurance Pension, Earnings and the Consumer Price Index to Base Oct 1972 = 100
Source: Age 80 Allowance and Social Insurance Pension – Department of Social Protection, Rates of
Payment, 1972-2014; Earnings – Central Statistics Office, Quarterly Industrial Survey, 1972-2007
and Earnings and Labour Costs, 2008-2014; Consumer Prices – Central Statistics Office, Consumer
Price Index 1972-2014
Over the whole period since 1972, the social insurance pension has increased by
over 30 times, well in excess of the increase in earnings which increased by nearly
22 times. Although the age 80 allowance was paid as part of the social insurance
and social assistance pensions it did not grow at the same rate as these pensions as
it increased by only about half of the rate (16 times) they increased. This suggests
that policy makers treat the age allowance as a separate component of the income
package provided for the very old population. However, both the age allowance
and the social welfare pensions have kept ahead of price inflation which has increased by about 13 times since 1972. The improvements in the basic social welfare pensions over the last forty years or so have ensured that, starting from a low
level of pension relative to earnings, pensioners’ living standards have risen faster
than those of employees and although the value of the age allowance declined relative to the pensions it made a modest contribution to helping the very old population cope with an increase in the cost of living.
Demographic challenge and longevity insurance benefits …
15
4.2. Increase in Life Expectancy and the Age 80 Allowance
The great increase in life expectancy since Irish independence means that far
more people are now living into their 80s and qualifying for the age 80 allowance.
The first life table compiled in independent Ireland for the period 1925-27 indicated that life expectancy at birth was virtually the same for men (57 years) and women (58 years) while at age 65 both men and women were expected to live for another 13 years on average (Figure 2). In the mid-1920s, therefore, very few men
and women lived into their 80s. This hardly changed until the 1960s when there
was an increase in life expectancy at age 65 for women of two years to 15 years
and a slight decline for men to 12 years. However, there were significant gains at
birth for both men and women by the mid-1960s with life expectancy for men increasing to 68 years and to 72 years for women. In the following forty years up to
2005-07 life expectancy at birth and at age 65 increased significantly for both men
and women. The latest life table for Ireland shows that life expectancy at birth is
77 years for men and 82 years for women and 17 years for men and 20 years for
women at age 65. Most people retiring at age 65 can, therefore, expect to live into
their early to mid-80s. Overall, the older population age 80 and over increased by
7 percentage points from to 17 to 24 per cent between 1971 and 2011 (Figure 3).
Fig. 2. Life Expectancy at Birth and at Age 65 for Men and Women, 1925-2047
Source: Central Statistics Office – Period Life Expectancy at Various Ages by Age, Sex and Year
1926-2011 and Population and Labour Force Projections 2016-2046
16
Gerard Hughes, John A. Turner
Fig. 3. Male, Female and Total Population Age 65+ and Age 80+, 1971-2011
Source: Central Statistics Office, Census of Population 1971-2011
As we have seen, successive Irish governments have implicitly increased the
social insurance pension at least in line with earnings. In the National Pensions
Framework [Department of Social Protection 2010] a target has been adopted to
maintain the value of the State pension at 35 per cent of average weekly earnings.
As a percent of GNP, the cost of the age 80 allowance decreased over time from
the early 1990s to 2005, but has generally increased since then (Figure 4). Assuming that the value of the improved age 80 allowance is increased in line with real
earnings and that 80 per cent of the very old population will continue to receive the
allowance in the future we can project the cost of the allowance relative to real
GNP over the next 30 years or so to 2046. These projections indicate that there
would be a steady increase in the allowance relative to GNP from 0.07 per cent in
2011 to 0.16 per cent in 2046 as the growth in the very old population will increase
faster over this period than the projected growth in GNP.
Demographic challenge and longevity insurance benefits …
17
Fig. 4. Cost of Age 80 Allowance as Percentage of GNP, 1983-2013
Source: Department of Social Protection, Rates of Payment, 1972-2014; Central Statistics Office,
Historical National Income and Expenditure Tables 1970-1995 and Expenditure on Gross National
Income at Current Prices 1995-2013 and authors calculations
5. CONCLUSIONS
Longevity insurance benefits are deferred annuities that begin payment at advanced older ages. The government has several advantages over the private sector
in providing longevity insurance annuities. First, it is able to limit its liability
against the possibility of an unexpected improvement in life expectancy by indexing the age of eligibility for benefit receipt. While the private sector could do this
prospectively for new clients, the government is able to do this for people nearing
the age of entitlement for the benefit. Second, the government has a hedge against
the liability to the extent that people work longer (and pay more taxes) due to improvements in health at older ages or due to raising the eligibility age for Public
pension old-age benefits. Currently, no assets exist for the private sector to invest
18
Gerard Hughes, John A. Turner
in to provide a hedge against unexpected improvements in life expectancy. Third, the
government does not face adverse selection because it provides the benefit to a preselected group. In the private sector, by comparison, insurance companies would face
adverse selection because they provide longevity insurance to people who selfselect, in part based on their subjective expectation of long life expectancy.
Ireland provides longevity insurance benefits through its public pension programs. The approach taken in Ireland provides an example of how longevity insurance benefits could be provided in other countries.
ACKNOWLEDGMENTS
We received valuable comments from Thomas Prost and other participants
at Netspar Pension Day in Utrecht, Netherlands, from Michelle Maher and other
participants at the Pension Policy Research Group conference in Dublin, Ireland,
from Gerard Scully and his colleagues at Age Action Ireland, from participants
at the NERI Labour Market Conference in Belfast, Northern Ireland, and from
participants at the International Actuarial Association Colloquium in Oslo,
Norway. We have also benefited from collaboration on earlier papers with David
Blake and David McCarthy.
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Webb A., Gong G., Sun W., 2007, An Annuity People Might Actually Buy, Center for
Retirement Research at Boston College, Issue in Brief no. 7-10, July,
http://crr.bc.edu/images/stories/Briefs/ib_7-10.pdf.
Whitman D., Purcell P., 2006, Topics in Aging: Income and Poverty Among Older Americans in 2005, Congressional Research Service, http://digitalcommons.ilr.cornell.
edu/cgi/viewcontent.cgi?article=1022&context=crs.
Wu K.B., 2013, Income and Poverty of Older Americans, 2011, Fact Sheet 287, AARP
Public Policy Institute, http://www.aarp.org/content/dam/aarp/research/public_ policy_ institute/econ_sec/2013/income-and-poverty-of-older-americans-AARP-ppi-econ-sec.pdf.
20
Gerard Hughes, John A. Turner
Kamila BIELAWSKA
PENSION REFORMS AND LONG-TERM SUSTAINABILITY
OF PUBLIC FINANCES IN THE CENTRAL EASTERN
EUROPEAN COUNTRIES
During last two decades pension systems in the countries of Central and Eastern Europe
were reformed several times, including structural and parametric changes. The main aim of
the reforms was to secure payment of future public pensions in light of population ageing.
Financial and economic crisis accelerated parametric reforms including increase in retirement age, but at the same time a few countries retreated from the structural pension reforms
comprising capitalization of old-age pension contribution in privately managed pension
funds. Both types of reforms influence medium and long-term fiscal stance. The aim of the
paper is to evaluate the results of pension reforms and post 2008 re-reforms in CEE countries for the long-term sustainability of public finance.
Key words: pension reforms, sustainability of public finance, Central Eastern
Europe
1. AGEING AND FISCAL SUSTAINABILITY
ON THE EUROPEAN UNION AGENDA
The issue of long-term sustainability of public finances in the EU became more
important when the decision about the creation of the monetary union was taken.
Focusing on long-term assessment of the functioning of social security systems
was reflected in the establishment of the Ageing Working Group of the Economic
Policy Committee (AWG/EPC) in 1999. First demographic projections and their
impact on public spending associated with an ageing population (ageing-related
public expenditures) were published by the AWG in 2001. The EU summit in

University of Gdansk, Faculty of Management, Department of Finance and Financial
Risk.
22
Kamila Bielawska
Stockholm in 2001 adopted a strategy to strengthen the long-term sustainability of
public finances due to the ageing population, based on three measures [Oksanen
2009, p.12]:
a) the rapid reduction of public debt,
b) an increase in employment and labor productivity,
c) review, and where necessary, reforming public pension systems, health and
long-term care.
From that moment analysis of the impact of public expenditure related to demographic change on the sustainability of public finance have become a permanent
action taken at the EU level.
Every three years since 2006, a set of reports covering the issue of impact of
ageing on public finances has been published. First arrives the Joint Report prepared by the European Commission (DG ECFIN) and the Economic Policy Committee (AWG) on Underlying Assumptions and Projection Methodologies for the
exercise of age-related expenditure projections. It covers demographic and economic assumptions which are crucial to evaluate public programs connected with
ageing. This methodological report is followed by the Ageing Report: Economic
and budgetary projections for the EU Member States, which covers the long-term
projections of age-related public spending in the area of pensions, health care,
long-term care, education and unemployment benefits (further called Ageing Report). On the basis of this report Fiscal Sustainability Report is presented, which
assess the medium and long-term fiscal stability of EU Member States in light of
ageing populations.
Long-term stability of public finances became a part of MSs’ stability or convergence programs (SCPs’s) presented annually to the European Commission and
ECOFIN Council to assess the compliance of national fiscal policies with the EU
regulations. Every implemented structural reform need to be assessed in terms
of medium and long-term stability of public finances and presented in SCPs.
In fact, for many years these forward looking projections had no practical influence on current evaluation of fiscal stance. According to the Maastricht Treaty
member states were expected to avoid excessive deficit (ex post nominal deficit of
general government sector less than 3% of GDP) and keep the gross public debt
below 60% of GDP or reduce it gradually.
The situation changed when Sweden and several Central and Eastern European
countries introduced structural pension reforms implementing multi-pillar systems
that include a mandatory, fully funded pillar. This type of structural pension reform
makes public finance sustainable in long run, but causes in short and medium term
a pressure on fiscal balance. According to the Eurostat Decision on Classification
of funded pension schemes and impact on government finance [Eurostat 2004],
neither contributions diverted from the PAYG pillar to mandatory pension funds
nor assets of pension funds invested in T-bonds could be taken into account when
calculating the public deficit and debt. To smooth the difference in government
accounts between reformers and non-reformers, the Stability and Growth Pact re-
Pension reforms and long-term sustainability of public finances …
23
form of 2005 allowed transition costs to be taken into account on a linear regressive basis for a transitory period of five years if the general government deficit
remained close to the value of 3% of GDP. Transitory period ended when economic crisis hit the economies of European countries. In 2010 reformers renewed
a request to the European Commission to redefine GGS deficit and debt excluding
public spending related to creation of funded component of pension systems [Égert,
2013]. However, the request was accommodated by the regulation during the second reform of Stability and Growth Pact in 2011, effective in 2012 evaluation
round of SCPs.
2. PENSION REFORMS IN CEE COUNTRIES
Most of the CEE countries reformed pension systems at the turn of 19th and 20th
centuries introducing multi pillar systems with the mandatory pension funds. Hungary (1998) and Poland (1999) were the pioneers, followed by Latvia (2001), Bulgaria and Estonia (2002), Lithuania (2004), Slovakia (2005) and Romania (2008).
All of the CEE countries decided that the contribution to funded part of pension
system should not increase labor costs and though was financed by reducing first
(PAYG) pillar revenues. The size of funded pillar depends on the level of contribution and switching rules.
Hungary, Poland, and Slovakia put the contribution to the funded pillar
at relatively high level (from 6% to 9% of wage). Other countries gradually increased contribution rate (2% to 6%). Estonia was the only country which decided
to supplement the contribution to the funded pillar by the additional contribution
paid by worker (4% + 2%).
The structural reforms in CEE countries were accompanied by changes of
PAYG pension formula and parametric changes. Latvia and Poland introduced
NDC formula, which strictly adopts the level of pension to the changes in life expectancy. Most of the countries also made parametric reforms such as an increase
in retirement age, phase out or reduction of early retirement, less generous indexation rules.
When the crisis hit the CEE economies, some of them permanently or temporarily reversed or reduced funded pillar (Table 1) to limit excessive deficits and debt
of general government sector. The far-reaching decisions were taken in Hungary
(nationalization of pension funds) and in Poland (partial reversal and partial reduction of funded pillar). Economic and fiscal crisis also accelerated parametric
changes such as increase of retirement age (in Bulgaria, Slovakia, Poland), restricting or eliminating early retirement (Bulgaria, Hungary) and switch from wage to
CPI indexation of pensions (or other less generous) almost in all countries.
24
Kamila Bielawska
Introduced re-reforms of funded pillars and parametric changes in public pension systems influence future public spending on pensions.
Table 1. Second pillar policy decisions in CEE countries
Type
of decision
Duration
of change
Country
Reversal
Permanent
Hungary
8% contribution on 2nd pillar reduced to 0%
in January 2011; assets transferred to GGS
Part reversal
/ part reduction
Permanent
Poland
Reduction of
contributions
Permanent
Slovakia
Temporary
Estonia
Contribution rate reduced to 2.3% in May 2011.
From February 2014 contribution at 2.92%, in
February 2014 assets invested in government bonds
transferred to GGS and redeemed. In 2014 system
made opt-out and opt-in in specified time slots.
Assets from pension funds transferred gradually to
PAYG pillar 10 years prior to retirement
9% contribution reduced to 4% in 2013 with planned
further increase to 6% in 2024. Funded scheme optout and opt-in system
6% contribution rate cut to 0% between June 2009
and January 2011 and shifted to PAYG. Gradual
increase from 2011. Rate set at 3% in January 2011
and 6% in January 2012. In 2014-2017 at 8% to
offset missed contributions
8% contribution rate reduced to 2% in May 2009.
Rates increased to 4% from 2013
5.5% contribution rate reduced to 2% in July 2009.
Rates further lowered to 1.5% in January 2012 and
2.5% in 2013. Change to 3% (2%+ 1%) January
2014, voluntary participation. Additional contribution at 2% in 2016-2019
Temporary reduction
Reduction in planned growth path of contribution
rate from 2% to 6%. Rate froze at 2%, started to
increase from 2011 at annual rate of 0,5pp
Second pillar contribution remains at 5%
Latvia
Lithuania
Romania
No change
Permanent
Bulgaria
Short description of the change to second pillar
Source: [Price and Rudolph 2013, p. 16] based on [Schwarz 2011] and author’s update.
3. PROJECTIONS OF PENSION EXPENDITURES BASED
ON AGEING REPORTS
The analysis of changes of public pension spending allows to evaluate the scope
to which the labor markets and pension system adopted to the demographic change.
The 2012 Ageing Report to some extend counted for re-reforms of pension systems
in CEE countries. Figure 1 shows the level of public pension expenditures in 2010
Pension reforms and long-term sustainability of public finances …
25
and 2060 and their projected change over 2010-2060 in % of GDP. In three analyzed countries (Estonia, Latvia, Poland) the 2012 projection indicated decrease in
public pension expenditures over 2060. Other countries were expected to face the
increase in pension spending of which the highest level (over 5% of GDP) was
forecasted for Slovakia. But some of parametric reforms were not incorporated to
the 2012 Ageing Report. For Bulgaria: accelerating the retirement age, increase in
the required length of service for military forces and switch from Swiss to CPI
indexation of pensions. For Hungary, the 2012 Ageing Report did not covered
gradual elimination of early retirement schemes by either phasing out several forms
of entitlements or by transformation into non-pension benefit and change in pension indexation (moreover indexed only to inflation).
20
15
10
2010
2060
Change
5
0
BG
EE
LV
LT
HU
PL
RO
SK
-5
Fig. 1. Public pension spending change in CEE countries over 2010-2060 in % of GDP
Source: [The 2012 Ageing Report]
The outcomes of the 2015 Ageing Report show the ongoing progress in stabilizing or reducing public pension expenditures in horizon of 2060 (Fig. 2). The 2015
Ageing Report incorporates all changes to pension systems of analyzed countries
(by the end of 2014) and no further reforms were put in action before April 2015.
Most countries in Central and Eastern Europe intends to reduce the level of
pension expenditure in relation to GDP over the forecast horizon. For Slovakia projection results show the increase in public spending on pensions by 2% of
GDP (which is lower increase comparing to the 2012 projection) and by 0,3% in
Lithuania (also much lower increase than in the previous projection). In Poland the
expected reduction in public spending on pensions will be lower than in the previous projection due to transferring a part of the funded pillar contribution to the
PAYG pillar, what bears higher liabilities of government.
26
Kamila Bielawska
12
10
8
6
2013
4
2060
change
2
0
-2
BG
EE
LV
LT
HU
PL
RO
SK
UE27
-4
Fig. 2. Projections of public pension expenditures change 2013-2060 in % of GDP
Source: [The 2015 Ageing Report]
In most of the CEE countries the projected reduction of public pension expenditures to 2060 would be possible due to the off-set of demographic change ratio by
the coverage and benefit ratio contribution (Table 2). The coverage ratio effect is
defined as the number of pensioners (of all ages) to the population over 65 years,
so it represents changes in pensionable ages and phasing out early retirement.
Table 2. Decomposition of pension expenditures change over 2013-2060
Country
2013
Level
Dependency
ratio
contribution
Coverage
ratio
contribution
Benefit
ratio
contribution
Labour
market
effect
Interaction
effect
2060
Level
BG
9.9
6.7
–3.1
–2.5
–1.2
–0.3
9.4
EE
7.6
5.4
–2.0
–3.8
–0.5
–0.4
6.3
LV
7.7
3.8
–1.4
–4.5
–0.8
–0.3
4.6
LT
7.2
4.3
–2.2
–0.9
–0.6
–0.4
7.5
HU
11.5
7.8
–3.5
–1.9
–1.9
0.5
11.4
PL
11.3
12.4
–5.2
–5.2
–1.4
–1.2
10.7
RO
8.2
6.8
–2.3
–4.0
0.0
–0.6
8.1
SK
8.1
11.3
–4.2
–2.6
–1.3
–1.0
10.2
UE
11.3
7.2
–2.6
–3.0
–1.4
–0.4
11.1
Source: [The 2015 Ageing Report, p. 117].
Pension reforms and long-term sustainability of public finances …
27
The highest value of the coverage ratio are observed in Poland and Slovakia.
The benefit ratio effect captures the development of the relative value of the average pension with respect to the average wage. The highest value of the benefit ratio
characterizes countries which incorporated the sustainability factor (benefit linked
to life expectancy) – Poland and Latvia.
The expected decrease in public pension expenditures due to the lower average
pension to the average wage will be supplemented by pensions paid from the mandatory pension funds. After partial or permanent reduction of funded pillars in CEE
countries expenditures for private individual pensions are expected to count for 2%
of GDP in Latvia and Estonia and about 1% of GDP in Romania and Lithuania.
There were no projections available for Bulgaria and Slovakia.
4. ASSESSMENT OF FISCAL SUSTAINABILITY
The analysis of fiscal sustainability in the EU takes into account the capacity of
public authorities to provide servicing the public debt in the long term. In other
words, it is assumed that fiscal policy is not sustainable, if it leads to excessive
public debt and ever-increasing debt service. Ensuring the sustainability of public
finances means avoiding excessive growth of public debt which is a burden for
future generations, on the condition that the State is able to provide citizens with
access to public and social services, even in adverse economic conditions and taking into account the challenges associated with an ageing populations. Measures of
sustainability of public finances used in the Fiscal Stability Reports are S1 and S2.
In a recent report (of 2012) complemented with S0, which shows the risk of fiscal
pressure in the short term. In this research author focus on indicators S1 and S2.
The meaning and interpretation of indicators is presented in Table 3, components
of indicators – in Table 4.
S1 and S2 indicators are calculated on the basis of unchanged policies over
time, which means that any structural change acting on the balance and debt
of public sector debt entails changes in their value.
In current Fiscal Sustainability Report of 2012, the input data for the assessment
of long-term public finances of Member States come from the autumn economic
forecasts from the European Commission, so they are burdened with larger than
usual the level of risk. Difficulties arise, among others, from the uncertainty of
formation of potential GDP and the output gap. In particular, attention should be
paid to the fact that the primary structural balance was adjusted in recent years
to a much greater rate than the average in the decade preceding the occurrence
of the fiscal crisis. The path of fiscal consolidation carried out by EU countries
in 2009-2013 seems questionable to continue in future periods.
28
Kamila Bielawska
Table 3. General characteristic of S1 and S2 indicators
Interpretation
of values
Indicator
Meaning
S1 –
Medium-term
sustainability
indicator
(up to 2030)
Shows the upfront adjustment effort required, in
terms of steady improvement in the structural
primary balance to be introduced until 2020, and
then sustained for a decade, to bring debt ratios
back to 60% of GDP in 2030, including financing
for any additional expenditure until the target
date, arising from an ageing population
S1 < 0 – low risk
0 < S1 < 3 – medium risk
S1 > 3 – high risk
S2 –
Long-term
sustainability
indicator
(indefinite
horizon)
Shows the adjustment to the current structural
primary balance required to fulfil the infinite
horizon inter-temporal budget constraint, including paying for any additional expenditure arising
from an ageing population
S2 < 2 – low risk
2 < S2 < 6 – medium risk
S2 > 6 – high risk
Source: own based on [Fiscal Sustainability Report 2012].
Table 4. Components of S1 and S2 indicators
Indicator /
components
Required adjustment
given the initiary
budgetary position(IBP)
Required adjustment to reach
debt to GDP
ratio of 60% in
2030 (DR)
S1 =
Gap to debt-stabilizing
primary balance in
2020 through a steady
gradual adjustment
+
Additional adjustment required
to reach a debt
target of 60% of
GDP in 2030
+
Additional adjustment required to
finance the increase
in public expenditure due to ageing
population up to
2030
S2 =
Gap to debt-stabilizing
primary balance
+
0
+
Additional adjustment required to
finance the increase
in public expenditure due to ageing
population over an
infinite horizon
Source: [Fiscal Sustainability Report 2012, p. 19].
Required adjustment due to cost of
ageing (CoA)
Pension reforms and long-term sustainability of public finances …
29
Among analyzed countries three were characterized by a medium risk of sustainability of public finances in 2030 (Lithuania, Poland and Slovakia). The main
reason for greater fiscal effort necessary to improve the stability was predicted up
to 2030 due to an increase in age-related public expenditures. In the case of Poland
and Slovakia, S1 indicator does not include permanent reduction of mandatory
funded pillar, which should within the forecast horizon contribute to a decline
in the value of S1 (Table 5).
Table 5. S1 values and its components for the CEE countries
Country
Bulgaria
Estonia
Latvia
Lithuania
Hungary
Poland
Romania
Slovakia
EU 27
Risk
low
low
low
medium
low
medium
low
medium
x
S1
IBP
DR
CoA
–1.5
–3.4
–2.0
0.3
–0.4
0.1
–1.4
2.2
1.8
–0.1
–0.4
–0.3
0.8
–0.2
–0.3
–0.4
1.1
–0.4
–2.3
–3.0
–0.9
–1.1
0.9
–0.2
–1.4
–0.2
1.7
0.8
0.2
–0.8
0.7
–1.3
0.6
0.4
1.3
0.4
Source: own based on [Fiscal Sustainability Report 2012].
For other countries, the value of S1 indicates a low level of risk of fiscal stability up to 2030, although the situation in individual countries varies. For example,
in Bulgaria the expected increase in age-related expenditures in 2030 was eliminated by low level of public debt, and thus left more “fiscal space” to finance the increased spending. Generally, low debt levels in relation to GDP of analyzed CEE
countries compared to the EU’s average means that in the medium term a significant fiscal adjustment is not required (except Slovakia).
The long-term fiscal sustainability of CEE countries showed greater variation
(Table 6).
One of the surveyed countries – Slovakia was qualified to the group of countries
with a high risk of loss of fiscal stability, which resulted from the expected increase
in determined by the increase in expenditure on pensions (the highest among the
surveyed countries and more than three times the average for the EU-27). The S2
indicator for Slovakia did not include the reduction of contributions to pension
funds and changes in rules of participation in the funded pillar of pension system,
as well as other changes to the PAYG part of the system (i.e. linking the retirement
age with an average duration of life, reduction of the indexation of benefits). Additional factor was the highest fiscal effort associated with the stabilization of the
30
Kamila Bielawska
public debt (the largest in the group of countries surveyed and more than three
times higher than the average in the EU-27).
Table 6. The risk of loss of fiscal stability in the infinite horizon in the countries of Central
and Eastern Europe
Country
Bulgaria
Estonia
Latvia
Lithuania
Hungary
Poland
Romania
Slovakia
EU27
S2
IBP
LTC
(long-term
cost of
ageing):
2.8
1.2
–0.7
4.7
0.5
1.5
3.7
6.9
2.6
0.5
0.5
0.7
0.9
0.1
0.4
0.1
1.8
0.5
2.3
0.7
–1.5
3.8
0.3
1.1
3.6
5.1
2.2
Risk
medium
low
low
medium
low
low
medium
high
x
Of which
Change
in pension
expenditures
1.6
–0.1
–1.4
3.0
–0.2
–0.6
2.4
3.5
1.1
Source: own based on [Fiscal Sustainability Report 2012].
Table 7. Fiscal stability of CEE countries according to the preliminary forecasts
of the 2014
Country
Medium-term risk
S1
Long-term risk
S2
Bulgaria
low
–1.2
medium
3.4
Estonia
low
–2.8
low
0.1
Latvia
low
–2.4
low
–0.1
Lithuania
medium – > low
–1.0
medium
3.1
Hungary
low
–0.8
low
0.6
Poland
medium – > low
0.2
low
–0.8
Romania
low
–0.5
medium
4.4
Slovakia
medium – > low
–0.1
high – >medium
4.3
Source: [Identifying…, 2014].
Pension reforms and long-term sustainability of public finances …
31
Three of the eight CEE countries studied were classified as medium risk of
long-term fiscal stability (Bulgaria, Lithuania and Romania). The main reason for
this was the expected increase in pension expenditure. Bulgaria, still maintaining
the funded pillar, in 2012, introduced a number of changes that will reduce fiscal
pressure in the long term (acceleration of the increase in retirement age for men
and women since 2012 instead of 2021, less generous indexation of pensions,
extending the period of entitlement to pensions for uniformed services).
In 2014, the European Commission has prepared a preliminary assessment of
medium- and long-term sustainability of public finances, taking into account most
of changes in mandatory pension systems, including the rate of contribution and
participation in funded pillar. The results of preliminary estimates are shown in
Table 7.
Changes to the funded pillar of pension systems helped to improve the fiscal
stability measured by S1 and S2 indicators in analyzed countries, both in the medium and long term. However, it should be noted that in most of the CEE countries,
the effect of the increase in public pension expenditures related to the acquisition
of all or a part of the contribution from the second pillar will emerge in the years
beyond the forecast horizon (after 2060). The 2015 Ageing Report supports the
European Commission preliminary assessment of S1 and S2 indicators as of 2014.
The forthcoming Fiscal Sustainability Report [2015] should reflect positive changes in public finances stability at least over 2060 horizon.
5. CONCLUSIONS
The deterioration in fiscal positions of most of the CEE countries since 2008
and the necessity to be up to fiscal rules in the EU, extorted fast fiscal consolidation which also comprised changes in pension systems. Policy decisions on pension
systems differed between countries studied, most often combining parametric and
structural changes. Introduced changes have had a significant influence on short,
medium and long-term sustainability of public finances.
As study shows, the recent re-reforms of funded pillars of pension systems in
CEE countries accompanied by parametric changes increased medium and longterm sustainability of their public finances. However, the reduction of public
spending on pensions in countries which decided to retreat from or reduce funded
pillars of their pension systems permanently will not be significant and put a pressure on the other age-related spending (health care and long-term care). In countries which decided to sustain funded component of pension systems (Latvia, Estonia), projected reduction of public spending on pensions will be higher than private
pension expenditures over the same period, what indicates that the overall effect
will be positive for fiscal sustainability.
32
Kamila Bielawska
As study shows, the recent re-reforms of funded pillars of pension systems in
CEE countries accompanied by parametric changes in overall effect increase medium and long-term sustainability of their public finances. However, the reduction of
public spending on pensions in countries which decided to permanently retreat or
reduce funded pillar will not be significant and put a pressure on other age-related
spending (health care and long-term care). In countries which decided to sustain
funded component of pension systems (Latvia, Estonia), projected reduction of
public spending on pensions will be higher than private pension expenditures over
the same period, so the overall effect for the sustainability of public finances will
be positive.
LITERATURE
Égert B., 2013, The impact of changes in second pillars on public finances in Central
and Eastern Europe: The case study of Poland, Economic Systems, 37(3), p. 473-491.
Eurostat 2004, Decision on Classification of funded pension schemes and impact on government finance, Luxemburg.
Fiscal Sustainability Report 2012, European Economy, 8/2012.
Identifying fiscal sustainability challenges in the areas of pension, health care and longterm care policies, European Economy, Occasional Papers 201, October 2014.
Oksanen H., 2009, Setting targets for government budgets in the pursuit of intergenerational equity, European Economy, Economic Papers, 358, April 2009, p. 12.
Price W., Rudolph P., 2013, Reversal and Reduction, Resolution and Reform. Lessons from
the Financial Crisis in Europe and Central Asia to Improve Outcomes from Mandatory
Private Pensions, World Bank.
Schwarz A., 2011, New Realities of Pension Policy in Central Europe, World Bank.
The 2012 Ageing Report, European Economy, 2/2012.
The 2015 Ageing Report, European Economy, 3/2015.
Olgierd LISSOWSKI
CHALLENGES FOR THE EUROPEAN SOCIAL MODEL1
Social security constitutes one of the key parts of the European social model(s) (ESM).
The article presents some basic controversies and conclusions of the political debate on the
ESM crisis and its modernization. ESM is primarily a normative model, which is based on
a request for social solidarity, convergence and the redistribution of wealth to socially acceptable levels. Public debate on remedies to the crisis is polarized along traditional lines of
political and doctrinal division. The views presented here are sometimes characterized as
“mechanisms of hope” rather than effective solutions. Polarization is also visible in methodological approaches to the issues of modernization. Practical anti-crisis measures are
dominated in the world by fiscal contraction. Political orientation within the EU is sometimes characterized as “liberal neo-welfarism”. Social security systems based on private
pension schemes can be in certain circumstances efficient for savers, but they offer little
space for social redistribution. The Treaties commit the EU to pursue a balanced political
approach in accordance with the principle of a social market economy. In recent EU strategic documents the social market economy is understood as such general objectives as: sustainable growth, partnership, shared value, synergy, involvement of stakeholders in decision making mechanisms, etc. Their operational content is open and subject to heated debate. There are (and will be) no simple and standardized ways of their translation into viable practical solutions. They can constitute the new (or the last) “mechanism of hope” anyway. So far these innovations have failed to stop the deterioration of social indicators and
the wave of Euroscepticism. The requests and expectations of major international transfers
of wealth constitute a part of public perception of the ESM but do not have any financial or
legal foundation in EU treaties (the problem of “constitutional asymmetry”).
The article presents some basic controversies existing in the modern political debate on
the crisis and modernization of the European Social Model (ESM) and characterizes the
general approach of the European Union to the problem, expressed in political and strategic

Poznan University of Technology, Faculty of Engineering Management, Chair of Entrepreneurship and Communications in Business.
1
The article discusses some problems more extensively described by the author
in Europejski Model Społeczny. Zagadnienia modernizacji instytucjonalnej (European
Social Model. Problems of institutional modernization) published in Polish in 2015 by the
Polskie Wydawnictwo Ekonomiczne, Warszawa.
34
Olgierd Lissowski
documents. Social security systems constitute one of the key parts of the ESM and share
its fate in European countries.
Key words: European Social Model, social market economy, liberal neowelfarism, redistribution of wealth
1. CONCEPTS
Irrespective of the great number of different definitions and practices of social
security systems existing in various countries, generally speaking social security
systems are defined in the legislation as a range of public financial and nonfinancial benefits aimed at the protection of citizens against social risks. The risks
and related benefits can include medical care, sickness benefits, unemployment
benefits, old-age benefits, employment injury benefits, family benefits, maternity
benefits, invalidity benefits, or survivor’s benefits [Social Security Convention
of 27 April 1955]. There is no single definition of ESM. ESM is primarily a normative model, which is based on the request for social solidarity, convergence and
redistribution of wealth to a socially acceptable level. The genesis of the ESM concept is primarily connected with different forms of the welfare state doctrine. The
doctrine assumed a broad range of welfare state responsibilities, i.e. for salaries,
working conditions and lives of citizens through a developed system of public services and benefits. Traditionally, in the normative dimension, this broad range
of public benefits and social security in social countries (ESM = USA +) has generally been emphasized. The egalitarian redistribution function and the related institutional mechanisms of creating social contracts, particularly the so-called social
dialogue and tripartite negotiations, are also significant elements of the welfare
state. Presently, in political and strategic documents of the EU the ESM concept is
used and promoted mainly with reference to European experience connected with
the idea of the simultaneous support of sustainable economic growth and social
cohesion [Jepsen and Pascual 2005, electronic source]. The Treaty and the constitutional principle of a social market economy are the key components of the ESM,
often treated as its synonyms. ESM imposes a permanent obligation on political
authorities to always look for optimal equilibrium in political decisions:
– regulatory mechanisms (market and state control),
– values/aims (economic growth and social justice),
– proposals of solutions connected with their implementation, formulated by
mutually opposing and influential doctrinal concepts (mainly neoliberal and
socio-democratic).
In the methodological dimension modern interpretations of a social market
economy are characterized by:
Challenges for the European social model
35
– transition from static models of equilibrium to dynamic models of sustainable
development,
– expansion of the traditional social problems of social market economy (social
policy, employment) to problems of environmental protection, as well as
culture, education, scientific and technological progress,
– transition from the traditional form of social adjustment of growth to the search
for mechanisms of coordination, which generates synergy effects and shared
values.
Because of significant differences in national models, the ESM must be treated
as a complex, pluralistic model, containing shared elements and differentiating
elements. For this reason, today next to the ESM concept (in singular) the concept
of European social models (in plural) or Europe’s unique social models, which can
be found in the Europe 2020 Strategy, are used [European Commission 2010,
p. 10]. So far integration of ESM in the entire EU is made by open coordination
and “smooth convergence” methods rather than consistent harmonization. At any
rate, there is no plan to create “the law of one institution” [Adnett 2001, p. 361].
2. CRISIS OF THE WELFARE STATE/ESM AND ITS DIAGNOSIS
The modern crisis phenomena of the welfare state model and ESM are subject
to a broad public debate. Their conclusions are not convergent and point to different reasons (or their hierarchy), both external (mainly economic and political) and
internal, resulting from the way in which the welfare state and ESM function, and
to independent social reasons which create an additional burden for the welfare
state. The most often identified external reasons include:
– globalization as the most important modern mega-trend leading to a relative
weakening of the position of governments and national states, changing
fundamentally the political, economic and social context of the development
and implementation of socio-economic policy,
– changes in the pattern of political powers in the global competition between
capital and labour, undermining the foundations of the compromise on which
the functioning of a welfare state was based,
– weakening of competitiveness and loss of many export markets by developed
western states, leading to the deceleration of their economic growth,
– public finance crisis generated by both the growing social burdens and
dysfunctions of international financial and banking systems,
– labour intensive character of technological and organizational progress
generating technological and structural unemployment.
The following are the most important internal reasons for the crisis of the
welfare state:
36
Olgierd Lissowski
– the welfare state has contributed to the overall growth of social security and
equality level but at the same time led to the weakening of motivation to engage
in economic activity, to save and invest,
– increased social security expenditure has led to the alienation of beneficiaries
compared to tax payers, which gave rise to moral hazards and to attempts to get
privileges and rent seeking,
– as a result a culture of dependence and learned hopelessness has developed,
incentives to occupational activity have weakened and unemployment has
grown,
– at the same time motivation to marry and have children has weakened, which
additionally contributes to the ageing of societies,
– a welfare state which generates high costs, tax burdens and public expenditure,
leads to a permanent imbalance of public finances,
– the greater is the resistance against higher taxes, the more governments go in
the direction of financing social rights with debt and inflation. At the same time,
the higher is the premium paid by governments for servicing debt and inflation,
the stronger are the factors, which restrict economic effectiveness and
competitive capability of the economy,
– the important role of institutional factors, which can significantly deform
assumptions of political programs is often emphasized [Hausner 2008, pp. 109,
110]2.
Some independent social reasons which undermine the capability of the model –
of a welfare state include:
– generational changes connected with the ageing of societies leading to growing
disproportions between money flowing into and out of the social security
system,
– appearance of new types of needs and social groups, which have so far not been
covered adequately by the existing model of public aid; discrepancy between
the so-called old and new social policy,
– changes of attitudes in relations between the society and state, development of
a pluralistic civil society, questioning of centralistic mechanisms of policy
development and implementation.
In reference to the present crisis situation the most important strategic and
political documents of the European Union [European Commission 2010,
European Parliament resolution of 20 November 2012, European Commission
Staff Working Document 2013, European Commission 2014] stress the key
importance of the following threats to the ESM and to the future of the European
Union as a whole:
– threats triggered by the crisis, which led to growing risks of poverty, social
exclusion and exclusion from labour markets in many countries. The number of
2
Hausner broadly discussed different economic and social aspects of the crisis of the
national welfare state in [Hausner 2008, p. 102-127].
Challenges for the European social model
–
–
–
–
–
–
–
–
–
37
people threatened with poverty and deprivation in the European Union has
grown from 114 million in 2009 to 124 million in 2012,
growing unemployment (from the start of the crisis in 2008 until 2013
unemployment in the EU-27 has grown from approx. 7% to 10.9%;
unemployment among young adults (15–24 years) in 2013 amounted to 23.3%,
i.e. one in five persons was unemployed; in some countries the unemployment
rate is higher than 50% (Greece, Spain),
growing differentiation between and within member states, regions, and sectors.
Differences in the distribution of income become evident – on average in the
European Union in 2012, 20% of the highest income population earned 5.1
times as much as the 20% of lowest income population (in Slovenia – 3.4,
Czech Republic – 3.5, Latvia, Greece, Romania and Bulgaria – over 6,
Spain – 7.2). Large differences in the availability of health service benefits and
their quality, life expectancy and life in health, which are the result of many
different factors that contribute to living and working conditions and lifestyle.
The deepening division between native and peripheral countries can become
a protected phenomenon,
average European rate of growth is lower than that of the EU’s main economic
partners, which mainly results from the gap in efficiency that has deepened
in the last decade,
serious damage to some European countries caused by the combination of such
factors as uncoordinated competitiveness, low growth potential, high
unemployment, deficit and public and private debts, which weakens the entire
euro zone,
accelerated demographic ageing of societies. The generation of demographic
boomers are retiring – starting in 2013/2014 the number of the professionally
active population in the European Union began to decline. The age median
is growing – 35.7 in 2001, 41.5 in 2012 and in 2050 it is forecasted to be 52.3.
The number of a 60+ population is presently growing twice as fast as before
2007 (by 2 million every year),
the combination of declining employment and a growing number of retirees
creates additional pressure on social security systems. Many member states,
including all member states in the eastern part of the European Union, have
recorded a permanent decline in the number of people in the last decade,
threats connected with climate change and natural resources depletion require
drastic action. Strong dependence on mineral fuels and ineffective use of natural
resources exposes consumers and enterprises to painful price shocks, which
pose risks to economic security and contributes to climate change,
a growing world population – from 6 to 9 billion – will exacerbate competition
for natural resources and lead to additional pressure on the environment,
crisis and severe restrictions on public expenditure has led to difficulties
experienced by some member states in financing basic transport and energy
38
Olgierd Lissowski
infrastructure necessary for the development of their economies and
participation in the single internal market,
– intergovernmental mechanism governing decision making in the European
Union and the decline of social trust in political institutions at national and
European levels,
– continually insufficient instruments necessary to solve the crisis in the euro
zone,
– the European Union may be forced to passively adapt to globalization
processes.
In view of these challenges critical comments about the ESM appeared in the literature, which question its continued existence or legitimacy of its formal separation.
However, it seems that this problem should be approached in a more differentiated way. Despite serious problems and partial changes of the concept and priorities of the socio-economic policy in the European Union and its member states, the
many social achievements of the welfare state have been maintained. The basic
institutional structure of the ESM has also been maintained. In the political and
strategic documents of the European Union the will to continue the implementation
of the basic ESM values and principles in new, more difficult conditions is expressed. Concepts of ESM modernization are or can be interpreted as modification
and extension rather than a comprehensive alternative to the traditional doctrine of
a welfare state. In particular, the state must at the same time support economic
growth in a competitive economy and democratically approved social correction of
the distribution of national income, in line with the principles of a social market
economy and democratic state of law and social justice. The dominant social forces, i.e. political parties and trade unions, do not question the importance of these
system principles, although they suggest an opposite direction of political correction to balance those system values.
3. FOR AND AGAINST THE POLICY OF SAVING
In most OECD countries temporary restrictions on public spending in such areas as health protection, education, social aid, public services, police, national defence, subsidized transport, and recreation have been introduced in response to the
financial crisis. The retirement age has been increased; real pay in the public sector
has been lowered, additional taxation introduced, etc. However, there is no single
detailed scenario of saving policies. McCann identifies 4 types of a more clearly
outlined response of governments to the financial crisis, defined as:
– “directing state” – trying to actively manage an economic crisis, for example by
extending guarantees to the banking sector and implementation of economy
stimulating packages;
Challenges for the European social model
39
– “hollow state” – withdrawing, accelerating neoliberal reforms and reforms in
the spirit of a New Public Management concept;
– “local communitarian state” – expanding the role of charity and engagement of
local communities in areas where public services have been financed from
taxes;
– “barely doping state” – in which reforms are postponed by as much as possible
and the government tries to struggle through difficulties with weakened but
basically unreformed systems.
A mixture of these approaches can be found at different levels and in different
forms of public administration [Lodge and Hood 2012, p. 79-101].
The introduction of saving measures in developed states has led to serious polarization of political discourse. Long term consequences of the policy in many
areas can hardly be foreseen. But it has direct financial consequences for social
state beneficiaries. The narration of these debates is heated and often has nothing to
do with rational discourse despite the use of rational terminology. McCann has
presented the polarization of approach to public debate on saving programmes in
the following way [Lodge and Hood 2012, p. 79-101]:
Table 1. Polarization of approaches to public debate on saving programmes
Criteria
Pro-saving approach
Anti-saving approach
Description of
causative factors
unavoidable necessity
ideological motivation
Immediate priorities
reduction of fiscal deficit and
restoration of economic
growth
maintenance of social “solidarity” and “acceptable” level of
public services
Political
measures
cuts in expenditure and loans,
softening regulations to stimulate growth, expanded use of
services provided by private
and third sector entities, reform of public administration
in the direction of “effective”
corporate models
resistance to expenditure cuts
and their postponement wherever possible, more restrictive
regulations, closing tax gaps,
progressive taxation, active
industrial policy
Support expected
from
enterprises, tax payers, capital
markets
public sector employees, public
service beneficiaries, “sensitive”
groups
Rhetorical
strength results
from arguments
in favour of
utilitarianism, thriftiness,
effectiveness, necessity
humanitarianism, honesty,
equality
40
Olgierd Lissowski
Table 1 cont.
Rhetorical sensitivity to accusations of
insensitivity, putting “profits
before the human being”, selfdestruction through cuts, dependency of politicians on
deep-rooted economic interests
lack of realism, unenforceability, lack of credibility for capital
markets, dependency of politicians on the deep-rooted interests of trade unions and the
public sector
Opinions on the
progress of the
present “saving”
phase
diminishing the scale of actually implemented saving
measures
emphasizing the large scale and
acute consequences of cuts
Opinions
on New Public
Governance and
best business
practices
will contribute much needed
effectiveness to the rickety
and overprotected public administration
corporate whims, not adapted
and not useful in the public
service environment
Expected saving
results
reforms will stimulate improvement through the liberation of market forces and
regained confidence of governments as borrowers
“cuts” prolong recession as they
dampen demand
Mechanism of
hope
markets, competition, entrepreneurship
government, regulations, ethos
of public service
Source: [McCann 2013].
McCann emphasizes that the opinions presented above can be simplified to the
counteraction of the adopted assumptions about the correctness and effectiveness
of market mechanisms or government activity. Furthermore, he notes that the presented rhetoric has another function, which he defines after Brunsson as the
“mechanism of hope” [Brunsson 2006]. Its role is to strengthen key ideas of reforms and confirm their rationality, often almost without any reference to perceived
effectiveness in the dimension of real implementation. Its role is also that of the
provision of moral justification and stirring hopes. On the one hand - as faith in the
effectiveness of market measures and entrepreneurship as a way out of stagnation,
on the other - as hope in non-market concepts and the humanitarian values of solidarity, honesty, and public interest. Both are rhetorically strong; however usually
hollow when they have to be translated into a specific policy [Lodge and Hood
2012, p. 79-101].
Challenges for the European social model
41
4. THE EUROPEAN UNION AND LIBERAL NEO-WELFARISM
The emerging long term doctrinal orientation of ESM modernization seen in political documents and in the practice of the European Union is characterized,
among other things, as “liberal neo-welfarism” [Ferrera 2013]. Ferrera is of the
opinion that gradual changes and reorientations in European policy after 2000 have
led to the departure from the one sided neo-liberal formula of welfare state transformation adopted in the 1980s. The new emerging formula will be an attempt at
a synthesis of basic liberal and democratic and socio-democratic values with elements of both traditions. Ferrera believes that the new approach legitimizes and
modernizes the old socio-liberal tradition (welfare-liberalism), commitment to
individualism, rationality, openness (also economic and market openness), and the
maintenance of a rational equilibrium between competitive values.
Liberal neo-welfarism is a valid ideological and political definition of the substance related with the implementation of the principle of a social market economy.
In EU’s political and strategic documents the following aims have top priority in
a modernized ESM:
– productivization of the social model rather than its treatment as a social
correction of growth and a means of national income division,
– activization of labour markets through the use of demand instruments,
– social investments through the concentration of expenditure on the development
of human capital and social innovation,
– corporate social responsibility and support of autonomous models of value
creation combined at the level of enterprises (shared value),
– restoration of the equilibrium to the economic and social dimensions of the
European Union, upset in recent years through excessive one sided involvement
in economic and financial problems of the euro zone.
Deterioration of the social situation in the European Union and one sided concentration of EU bodies on saving the euro zone against the consequences of the
financial crisis led to a significant decline of social support for the European Union. In order to restore the equilibrium EU authorities strive to strengthen the “social dimension of the European Union”. Strengthened mechanisms of the governance of the Economic and Monetary Union of the European Union actually restrict
a free definition of the level and ways of implementation of social aims at the national level (the problem of “constitutional” asymmetry). Arguments for the transformation of the structures of European integration towards a political union, in
a complementary social dimension, collapse because of no agreement about much
more important and compensatory financial transfers between EU states. Movement of the mechanism of politically agreed financial transfers through the budget,
which is the foundation of the egalitarian function of a welfare state, to the supranational level of the European Union, is presently unrealistic. However, such social
42
Olgierd Lissowski
expectations are widely spread and often considered to be the normative essence of
ESM and European Integration.
5. DEMOCRATIC STATE OF LAW AND SOCIAL JUSTICE
The European Union is the main promoter of ESM. However, social issues continue to be the domain of member states. It seems that at the EU level we can speak
in the contexts of Articles 3, 10 and 11 of the Treaty Establishing the European
Community about the principle of a democratic system of social justice, which is
the equivalent of the principle of a democratic and social state of the law, formulated in national constitutions. The principle is obviously complementary to the principle of a social market economy. This system principle supplements the social
market economy and requires a combination of the liberal model of formal democracy and a law-abiding state with its responsibility for the accomplishment of material standards of social justice, which in practice is affected mainly through the
mechanisms of ear-marked programmes. Identification of the present day weakness
of adequate representation of social interests through the institutions of representative democracy should be balanced through the development of mechanisms of
direct representation and coordination of group and individual interests within the
framework of new, participatory, partner and network mechanisms of decision
making. It is a direction convergent with the postulates of modern concepts of deliberative democracy. The restriction of available means for the implementation of
defined aims and social programmes should be partly compensated through improved efficiency of public governance and improvement of the models of intersectoral coordination of funds and actions. The development of the mechanisms of
the so-called administrative outsourcing, managerial management, and partnership
models of investments and public services, computerization, etc. should play an
important role in this area.
The corporationistic mechanisms of dialogue with representative social partners, presently operating in the EU, and the consultative mechanisms of civil dialogue with civil society organizations, both at the European and national levels, to
a small degree accomplish the postulates of modern theories of modernization,
i.e. strengthening of the role of the mechanisms of reflexive control, delegation of
powers to autonomous, decentralized forums of direct representation and the coordination of social interests, etc.
Challenges for the European social model
43
LITERATURE
Adnett N., 2001, Modernizing the European Social Model: Developing the Guidelines,
Journal of Common Market Studies, vol. 39, no. 2, p. 361.
Brunsson N., 2006, Mechanisms of Hope: Maintaining the Dream of the Rational Organization, Copenhagen Business School Press, Copenhagen.
European Commission, 2010, Communication from the Commission Europe 2020.
A strategy for smart, sustainable and inclusive growth, Brussels, 3.3.2010 COM(20120)
2020 final.
European Parliament resolution of 20 November 2012 with recommendations to the Commission on the report of the Presidents of the European Council, the European Commission, the European Central Bank and the Eurogroup ‘Towards a genuine Economic and
Monetary Union’ (2012/2151(INI)).
European Commission Staff Working Document, 2013, Evidence on Demography and
Social Trends – Social Policies' Contribution to Inclusion, Employment and the Economy, SWD(2013)38.
European Commission, 2014, Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee and The Committee of the Regions Taking stock of the Europe 2020 Strategy for smart, sustainable and
inclusive growth, Brussels, 5.3.2014 COM(2014) 130 final.
Ferrera M., 2013, Liberal Neo-Welfarism: New Perspectives for the European Social
Model, Observatoire social européen, opinion paper. Ose paper series, no. 14.
Hausner J., 2008, Zarządzanie publiczne, Wydawnictwo Naukowe SCHOLAR, Warszawa.
Jepsen M., Pascual A.S., 2005, The European Social Model: an exercise in deconstruction,
European Trade Union Institute, http://seeurope-network.org/homepages/seeurope/file_
uploads/jep_serr_1003.pdf .
Lissowski O., 2015, Europejski Model Społeczny. Zagadnienia modernizacji instytucjonalnej, Polskie Wydawnictwo Ekonomiczne, Warszawa.
Lodge M., Hood C., 2012, Into an Age of Multiple Austerities? Public Management and
Public Sector Bargains across OECD Countries, Governance, 25, 1, 2012.
McCann L., 2013, Reforming Public Services After the Crash: The Roles of Framing and
Hoping, Public Administration, vol. 91, issue 1.
Social Security Convention (Minimum Standards), 1 ILO C102, 952 (No. 102) Convention
concerning Minimum Standards of Social Security (Entry into force: 27 Apr 1955).
44
Olgierd Lissowski
Andrzej SOŁDEK*
ASSET ALLOCATION IN THE POLISH PENSION SYSTEM
The purpose of this article is to propose a method of managing pension savings to be
employed in solutions proliferating the third pillar in Poland. Asset allocation over the life
cycle is the most important factor in investment success. This article recommends optimizing the expected rates of return and risk at the level of total pension savings. It emphasizes
the significance of combining the phase of accumulating and consuming pension savings
having regard for the impact exerted by the form of disbursement on the method of managing savings accumulated for retirement. To implement the investment solution portrayed in
this article, the clients and suppliers of pension products must know the quantum and composition of accumulated assets forming the basis for future pension benefits. In the annual
information update clients should receive information pertaining to the allocation of savings to the main asset classes, and the suppliers of investment services should adjust their
investment strategies giving consideration to a client’s overall pension portfolio.
Key words: asset allocation, life cycle funds, pension funds
1. INTRODUCTION
The changes made to the pension system as of February 2014 diminished the
percentage of the compulsory capital pillar in the payment of pensions. The pension fund assets transferred by the slide rule to the ZUS Social Security Company
will be disbursed according to the same rules together with the benefits from the
first pillar.
These statutory amendments prompted a discussion focusing on a search for solutions that could materially grow the number of persons accumulating incremental
funds for retirement. The purpose of this article is to endeavor to define how assets
should be allocated to specific pension products in the new operating conditions to
*
Powszechne Towarzystwo Emerytalne PZU SA (General Pension Society).
46
Andrzej Sołdek
procure suitable combined pension benefits. The task at hand is to propose a method of managing pension savings to be employed in solutions proliferating the third
pillar in Poland and forming the topic of public discussion.
This article recommends optimizing expected rates of return and risk at the level of total pension savings. It emphasizes the significance of combining the phase
of amassing and consuming pension savings having regard for the impact exerted
by the form of disbursement on the method of managing savings accumulated for
retirement. One important conclusion is to avoid optimization at the level of the
constituent elements of a pension portfolio as this may lead to building an excessively conservative combined portfolio and failing to exploit the capital market
premium. Investment strategies are recommended for the various constituent elements in such a way so that the overall portfolio is invested effectively for every
person regardless of the number and type of components. To manage bad date risk
the recommendation is to diminish the percentage of risky assets in the preretirement period and maintain a minimum level of these types of assets from the
moment of retiring for the next few years.
To implement the recommended method of managing pension savings measures
must be taken at two levels. The first level consists of measures for clients. The
suggestion is to furnish compulsory information to the clients of various pension
products in their annual information statement pertaining to the allocation of their
savings to the major asset classes. Furthermore, this statement should contain information concerning the benchmark defining strategic asset allocation. Ultimately,
clients should receive a combined statement that would depict how pension savings
are invested in all products in conjunction with the state’s first pillar obligations.
Clients should also receive information on the estimated future pension amount.
The second level consists of measures to be taken by the suppliers of pension
products. For fund managers to propose an effective investment strategy they need
information from clients on other pension products, including the quantum and
composition of accumulated assets. Since only limited numbers of clients are capable of selecting the right strategy on their own, suppliers should offer more than
a single default option. They should be aligned to the various client segments defined by the quantum and allocation of assets amassed for retirement in the future.
2. RECOMMENDED ASSET ALLOCATION
Every person saving for retirement in Poland has an individual compulsory account managed by ZUS known as a Non-Financial Defined Contribution (NDC).
It is also possible to hold voluntary Financial Defined Contribution (FDC)
accounts managed by private entities. The contributions subject to revaluation and
recorded on an NDC account are the state’s obligations. These obligations may be
Asset allocation in the Polish pension system
47
treated as if they were non-market government bonds. These bonds accrue a rate of
return equal to the pace of growth of the salary fund or the average rate of GDP
growth. NDC and FDC accounts may be treated as the combined portfolio of pension savings.
The major objective of the pension system consisting of several pillars is to
provide for appropriate and persistent pension income. This system must focus on
producing benefits, not accumulating assets. In the capital portion of the pension
system one of the most important success factors is the rate of return generated and
the sequence thereof. Asset allocation exerts the largest impact on these investment
parameters. When defining the asset allocation glide path three conditions must be
taken into consideration: first, that asset allocation is important in capital systems
both during the asset accumulation phase and the benefit disbursement phase. Second, having multiple pillars affords benefits stemming from risk diversification by
making future benefits dependent upon different factors. Third, the deterministic
impact exerted by the method of disbursement on management in the final phase
of accumulation must be taken into consideration.
The pension formula 10:30:60 portrays the significance of capital earnings in
the phase of accumulating and consuming savings. The authors [Ezra, Collie and
Smith 2009, p. 43-54] who first popularized this formula point out that 1 zloty paid
out in the form of a pension originates from the following sources: 10 grosz comes
from the contributions paid, 30 grosz comes from profits realized during the accumulation phase and a full 60 grosz comes from profits in the disbursement phase.
They assumed savings for 40 years, a 25 year period of drawing benefits, an identical rate of return in both phases at the level of 7.5%, salary and premium growth of
4.75% and inflation of 3%. It is worth emphasizing that adjusting these parameters
leads to a different split of earnings and contributions; however, in all the scenarios
presented it is abundantly clear that the capital earnings generated markedly outstrip the contributions paid.
During the accumulation phase the fact that NDC and FDC hinge on different
drivers produces diversification benefits for savers. Differentiating the sources of
distributions attenuates the overall system’s risk and that is why it should be reflected in asset allocation in the capital portion. The revaluation of the NDC account is driven by the nation’s economic standing, including the labor market,
while the subaccount is driven by the pace of GDP growth. In addition, the rule
implemented in the first pillar that revaluation cannot be lower than the consumer
price index even if the salary fund declines during a recession reduces volatility in
the growth of savings recorded on the account. In turn, capital market savings depend on how investors price the prospects of public companies. This portion of
savings provides an opportunity to make the amount of future benefits dependent
on the economic standing of other countries through investments in a global portfolio. The higher cap on international investments in Polish pension funds implemented in 2014 provides an opportunity to tap into geographic diversification to
a greater extent. For this reason asset allocation in the capital portion to optimize
48
Andrzej Sołdek
the return and risk parameters should be pursued for the capital and state pillar on
a combined basis.
The form of consuming accumulated pension savings defines the effectiveness
of an investment strategy. In a program disbursement the pension benefit is driven
by the rates of return on invested capital. In a disbursement scheme based on lifetime annuities the rate of return in the decumulation phase is predetermined at the
time of converting savings into an annuity. That is why interest rate risk is very
important in this case and it should be managed by matching the portfolio’s duration during the final phase of accumulation to the duration of a typical portfolio in
insurance companies offering lifetime annuities. Attention should be drawn to the
fact that during the final period the composition of this portfolio changes on international markets on account of the low interest rates generated on investments in
government debt securities. The percentage of commercial paper and real estate in
insurers’ portfolios built to secure the disbursement of annuities is rising. One must
also remember about the effect observed on these markets of delayed changes in
asset prices and changes in annuity rates. Another way a saver may curtail conversion risk is to diversify the time of buying the annuity and buying annuities in several transactions. One noteworthy fact is that countries with a longer history of
defined contribution funds exhibit vast differentiation among their systems for
distributing the accumulated pension assets. Chile, Finland, the Netherlands and
Sweden stipulate the compulsory conversion of pension savings into a lifetime
pension. Program disbursements are prevalent in Australia and the United States.
The US market stands out with its tradition of investing funds on the capital market
during the decumulation phase. In addition, frequent changes to the method of paying out benefits are also observed. Canada, Ireland and the UK liberalized their
regulations and discontinued the practice of compulsorily converting assets into
a lifetime pension. In Poland the funds from pension funds and ZUS are paid out in
the form of a lifetime pension.
These interdependent factors indicate that a person saving for retirement should
optimize rates of return and volatility for his or her overall portfolio of pension
savings including the NDC account. During the final phase of accumulation the
method of management should incorporate the anticipated method of disbursing
benefits. These characteristics justify the necessity of jointly managing savings
during the accumulation and consumption phases.
The size of the various pillars, especially the public pillar affects asset allocation in the accumulation phase and the appropriate method of disbursing benefits.
When looking for inspiring examples of how pension assets are managed on other
markets one must have in mind the extensive differentiation in the percentage held
by the various pillars in the various pension systems across the world. In Germany,
85% of the benefit is paid from the state pillar. Spain is another example of state
sector domination with 92% of the pension benefit being paid from budgetary
funds. The United States has the lowest percentage of benefits paid by the state
with 45% being paid from state funds while more than half is financed using assets
Asset allocation in the Polish pension system
49
accumulated by company pension funds and individual retirement accounts.
In Poland, all the assets accumulated in the pension funds will be paid out in the
form of a lifetime pension.
The table below depicts the composition of the sources for paying pension benefits in various countries.
Table 1. Three pillar system
The
Netherlands
Germany
France
Italy
Spain
Switzerland
UK
US
% OF PENSION BENEFIT
Public
50
85
79
74
92
42
65
45
Company
40
5
6
1
4
32
25
13
Individual
10
10
15
25
4
23
10
42
Source: [Bovenberg, Mehlkopf and Nijman 2014, electronic source].
For instance, the UK NEST pension fund estimates that the percentage of benefits it disburses in the dependency rate of its members will range from approximately 50% for the eighth income decile to below 20% for the second decile.
These estimates were calculated under the assumption of transferring an 8% contribution to the fund for 35 years and generating a real rate of return equal to 2.5%
[NEST 2014].
It is well-known that on account of the differentiation in the factors determining
asset allocation there is no optimum default investment strategy. As has been
demonstrated when designating the allocation glide path, it is necessary to take into
account the level of the benefit from the state pillar, the level of the contribution to
capital pillars, the target dependency rate, the level of accepted risk and the available options for disbursement of benefits. OECD experts and the persons who created the Melbourne Mercer Global Pension Index to assess pension systems single
out a life cycle strategy entailing dynamic alignment to market conditions as the
one that best fulfils the function of capital protection while sustaining the potential
for appreciation of accumulated capital. Every lifecycle fund is characterized by
a specific level of allocation to various instruments according to the accepted glide
path. The purpose of the strategy is to define the maximum and minimum asset
exposure to various instruments. As the investment termination date approaches,
the level of the portfolio’s risk declines, and hence the percentage of equities declines in asset composition. There are different methods to reduce the exposure to
risky assets in various life cycle strategies. The following are used: linear decline of
equity exposure, step-wise reduction in equity exposure, constant equity exposure
up to a specific moment followed by piece-wise reduction. Dynamic strategies do
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Andrzej Sołdek
not assume a pre-determined glide path but are adjusted to market conditions and
market parameters.
OECD experts [Chłoń-Domińczak, Kawiński and Stańko 2013, p. 162-163]
have assessed the effectiveness of investment strategies depending on the method
of consuming accumulated pension savings. In the case of disbursing lifetime annuities, lifecycle strategies appear to be the best with piece-wise strategies for
changing allocation dominating over step-wise strategies. In turn, in program disbursements dynamic risk budget strategies perform better while lifecycle strategies
produce lower results. In the event of combining program disbursements with later
conversion to a lifetime annuity, blended lifetime and dynamic risk budget strategies appear to be better. However the experts do note that lifetime strategies produce the appropriate results when they maintain constant exposure to risky assets
during the bulk of the accumulation period and then rapidly switch to bonds in the
final decade preceding the moment of retirement. The advantage they have over
other lifecycle strategies is that they offer higher expected pension benefits at
a given level of risk.
In the process of managing the allocation of pension savings one very important
matter, regardless of the method of disbursing benefits is the management of bad
date risk. An immanent attribute of long-term savings is the dependence of the
result not just on the quantum but also on the sequence of the rates of return. Negative rates of return have a much larger impact on investment value at the time when
large assets have already been accumulated than for instance in an early period
when there is still a lot of time to make up for loss and offset negative results with
a larger contribution. At the time of commencing the disbursement of benefits, the
vulnerability to negative rates of return is still high on account of the value of accumulated savings remaining high. The necessity of disbursing benefits in a market
downturn compels one to sell assets at current prices and realize losses. One way to
manage bad date risk is to curtail exposure to risky assets as a saver approaches
retirement age. This strategy is followed in life cycle and target date funds. Though
experts and management institutions do concur that it is expedient to reduce the
share of risky assets in a pension portfolio as the saver’s age advances, the opinions
are divided on the level to which it should be reduced. Opinions are also divided
when it comes to asset allocation during the period of disbursing benefits. The debate on these subjects became particularly heated post 2008 when the value of
some US target date funds plunged by 30–40%. Such painful losses were sustained
by funds to which persons planning to retire within the next few years had entrusted their contributions. Advocates of greatly constraining the percentage of risky
assets to 10-20% and maintaining such a low level of exposure for the entire period
of paying benefits emphasize that on account of the quantum of accumulated assets, the overriding objective during the final phase of accumulation and for the
entire period of paying benefits is to protect capital. The trend toward greater longevity of life and thus the horizon over which the funds of retired persons are invested is the main argument used by advocates of pursuing greater equity exposure.
Asset allocation in the Polish pension system
51
According to this author, the opinions and research presented during the American
debate point to lifecycle strategies being more effective in providing a suitable
pension benefit. The recommended level of allocation for the phase of disbursements is to have a percentage of risky assets that does not exceed 10–20% of the
combined pension portfolio.
The proposals for third pillar development in Poland are similar to the solution
embraced during the most recent pension system reform in the United Kingdom.
For this reason, an interesting example for the target investment solution in Poland
is the pension savings management strategy followed by the NEST fund. This
fund’s objective is to manage the contributions of newly-established employee
pension programs consisting of employees whose employers did not administer
employee programs prior to the effective date of the reform. All the constituent
elements of the offer, including the investment strategy and the method of management were devised in the process of long-term public consultations harnessing
the knowledge and experience of a host of asset management institutions and experts. This fund selected a life cycle strategy, which it pursues through portfolios
with a retirement date in an annual interval. The savings period is divided into
three phases. During the first five years the posited exposure to risky assets does
not surpass 50%. This is the phase in which the fund’s limited volatility should
convince new clients to save with this fund and not to exercise the exit option in
which they are vested. Over the next 5 years the exposure to risky assets grows in
a linear fashion until it reaches the maximum level at which it is subsequently
maintained for 25 years. 10 years before retirement, allocation is adjusted by selling risky assets and replacing them with assets correlated with changes in the
prices of lifetime annuities. At the time of reaching retirement age the fund has
75% of its assets invested in instruments tracking movements in annuity prices and
25% in the most liquid assets. Figure 1 depicts the asset allocation glide path over
the investment cycle.
The NEST fund’s allocation is similar to the asset composition offered by defined contribution funds on the UK market. At the end of 2013, on average, they
held 81% of their assets in equities, 15% in bonds and the rest in bank deposits
[Schroder 2014].
Another very interesting example is the investment strategy pursued by an
American fund called Thrift Savings Plan [2015, internet source]. This fund manages the assets of federal employees and uniformed services. The default option
offered is called the life cycle strategy. The client selects a fund with an investment
horizon matching the date of the planned commencement of disbursing assets. This
fund offers strategies addressed to client groups planning to end their professional
activity in ten-year windows. It rebalances the strategy on a quarterly basis by reducing the percentage of risky assets. In the case of persons who plan to withdraw
assets after 2045, the fund in January 2015 had 25% of the portfolio invested in
equities from developed markets, net of the United States, 18% in small and medium companies listed on US exchanges, 42% in a diversified portfolio of large and
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Andrzej Sołdek
mid-cap stocks in the S&P500 index, 10% in short-term treasury bonds and 4% in
investment-grade, US corporate bonds. The total equity exposure in a fund investing client assets with a horizon of more than thirty years was 85%.
Fig. 1. Asset allocation glide path in the NEST fund
Source: NEST 2014, electronic source
Fig. 2. Composition of pension portfolios
Source: proprietary research
Asset allocation in the Polish pension system
53
US funds known as target date funds investing the assets of clients who are
more than 10 years from retirement have a similarly high allocation to risky assets.
In these funds the average allocation to risky assets in 2010 oscillated from 70
to 89%.
The pension portfolio composition on the US and UK markets has been computed by the percentage of the pillars in pension benefits presented in the table and
the allocation of defined contribution funds in these countries. The Polish example
is illustrated by the portfolio of a person transferring contributions from a Polish
pension fund to ZUS.
Comparing the composition of pension portfolios reveals that even when Polish
pension funds pursue an equity strategy, a Polish saver’s portfolio is more conservative than on more mature pension markets. The question on how this portfolio
should be augmented by third pillar assets remains valid.
3. SIMULATION
The analysis of the methods of managing savers’ assets for their retirement in
Poland using different pension products was conducted using the example of
a person entering the pension system after the statutory changes introduced in 2014.
An assumption was made that he/she earns an average national salary. The presented
savings compositions in the accumulation period were determined according to the
percentage of the contribution for individual components in total contributions.
During the asset accumulation period, these percentages change as a result of different growth rates in the individual components. The cumulative effect of these
differences is reflected in the savings composition as at the date of retirement.
A person who decides to transfer his/her full contribution to ZUS, pays in
19.52% of his/her salary, of which 12.22% is recorded on a ZUS account and 7.3%
on a sub-account. After reaching retirement age, all the funds are paid out in the
form of a lifetime pension indexed at the inflation rate plus 20% of the real increase of salaries in the economy.
A person who joins the system and chooses a Polish pension fund, transfers
a contribution of 2.92% of his/her salary to the fund; 4.38% is recorded on a subaccount, and 12.22% on a ZUS account. 85% of such a person’s pension savings
will consist of liabilities registered in ZUS, of which 22% will be recorded on
a sub-account and 15% will come from assets accumulated in a Polish pension
fund. An assumption was made that pension funds will have long-term allocations
in accordance with a benchmark in which 80% are equities represented by the WIG
index. The equities in the OFE portfolio are supplemented by corporate bonds and
deposits. This composition of OFE investments translates into a pension portfolio
in which the share of equities amounts to 12%, and 3% is invested in corporate
54
Andrzej Sołdek
bonds and deposits. The portfolio is dominated by public liabilities, which constitute 85%.
Fig. 3. Composition and allocation of pension savings
Source: proprietary research
The objective of the pension fund should be to maximize the assets with a set
risk budget. The bad date risk is managed using the slide rule, which involves
monthly transfer of 1/120 of the client’s assets to ZUS for 10 years before retirement. One should point out that this solution has the disadvantage of eliminating
the possibility of multiplying the accumulated capital in the capital market using
safe strategies. It also increases the client’s risk, making the future pension dependent only on the state’s solvency.
In the case of a person holding OFE and ZUS, an equity portfolio is an appropriate investment strategy that the pension fund should pursue [Sołdek 2014, p. 99].
An argument in favor of this strategy is the relatively low share of risky assets in
the total portfolio resulting from the proportion of distribution of contributions
between OFE and ZUS. The pension portfolio will be markedly more conservative
than in the case of funds managed in more developed pension markets – in the UK
or US. Another difference between the management methods of Polish and foreign
funds is the diversification of risky assets in comparable portfolios. In Poland investments focus on equities whereas UK and US funds are much more diversified.
In the equity asset class, they have more exposure to equities in developing markets. They also have exposures to alternative assets, such as real estate, hedge
funds and private equity funds, which are in the portfolios of Polish funds at a token level. An important argument for an equity strategy is the similar risk level of
the total portfolio for clients in the new conditions to the risk incurred by clients
saving money from the moment when the OFE pension funds were launched.
Additionally, due to the ban against investing in treasury bonds and the high
positive correlation between corporate bonds and equity prices, managers who
Asset allocation in the Polish pension system
55
would like to offer a lower risk strategy are not able to diversify their fund’s portfolio effectively.
To illustrate the investment parameters of the new composition, portfolio simulations were carried out in the market and economic conditions in place since the
beginning of 2000. In this period, the average revaluation rate in ZUS amounted to
6.7%, with a standard deviation of 4.3%. The sub-account would have grown at an
average rate of 8.3% with 3.2% volatility. The rates of return and volatility in OFE
were determined in accordance with the change of an index with 80% of it being
the WIG rate of return and 20% the WIBOR, with a 50 basis point margin. The
average YTD rate of return on this index was 10.5% with a 22.6% standard deviation. The total portfolio with new shares of OFE and ZUS would have yielded in
the analyzed period a result of 7.7% p.a. with 3% volatility. A significant decrease
in the volatility of the portfolio in relation to its components resulted from the negative correlation of the rates of return in OFE with the revaluation of ZUS and on
the sub-account on the respective levels of: –0.53 and –0.4. The correlation between the ZUS accounts was 0.4%. The figure 4 shows the rates of return and revaluation on individual components of the pension portfolio:
Fig. 4. Rates of return
Source: proprietary research
An illustration of the benefits of diversification is presented by the Figure 5
with the cumulative rates of return:
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Andrzej Sołdek
Fig. 5. Cumulative rates of return
Source: proprietary research
The results of the above simulation, even though there is no guarantee that they
will recur in the future, show the equitability of the assumption stating that there is
no correlation between the markets determining the growth of savings in both pillars and benefits for the client from risk diversification.
The next case will analyze a person whose employer pays a contribution of 7%
of salary to an employee pension plan (PPE). The only available data on the composition of PPE assets is the allocation of assets in employee pension plans. According to data from the Polish Financial Supervision Authority, the average exposure to equities and rights to equities as at the end of the various quarters of 2014
was 31.7%. Such a person’s pension portfolio would consist of the following: 26%
in PPE savings, while the equity allocation would constitute 17% of the total pension portfolio.
Such a person’s pension portfolio would have a low exposure to risky assets and
would be decisively more conservative than its equivalent in mature markets. Just
like in the case of open-end pension funds, it should be emphasized that the risky
assets in which foreign funds invest are much more diversified. The average allocation to equities in 2014 of 31.7% shows that employee pension funds offer stable
fund strategies, balancing the rates of return and the risk at their product level.
Asset allocation in the Polish pension system
57
When assessing the effectiveness of the selected strategy, one should remember
that the benefits of diversification of risk, described for a person holding a NDC
account and OFE, also go to the person who adds PPE to the portfolio.
Fig. 6. Composition and allocation of pension savings
Source: proprietary research
Disbursements from a PPE account can be made as a one-off payment or in installments if the employee files payment instructions after turning 60. So when
managing PPE assets, managers have the freedom to choose the instruments in the
final phase of accumulation and in the disbursement phase, because they do not
have to take into account the risk of converting savings into a lifetime annuity.
In addition to employee pension funds, there are PPEs on the market in the form
of group insurance or a mutual fund. The terms and conditions of asset management services are set in a contract between employers and financial institutions and
are not publicly announced. Therefore, they are not public. However, it is wellknown that mutual fund management companies (TFI) and insurance companies
offer their employees similar investment solutions as to individual retirement account (IKE) clients and these are published in the general contractual terms and
conditions or investment fund prospectuses. These are solutions based on the life
cycle concept under which client funds are allocated between different funds by the
investor’s age. Employees can choose an individual investment model, in which
they independently set the distribution of the contribution between sub-funds. For
persons who do not want to make this decision or cannot independently decide
about the choice of the investment strategy, suppliers offer a default option in
which the strategy is age dependent. Most of the strategies proposed by suppliers
call for steady reduction in allocation to equity funds with age, and a higher share
of safe funds. In one of the first programs of this type offered to IKE clients by TFI
PZU, payments are divided into 3 funds, while the percentage of equities is reduced every 5 years, according to the rule of deducting the client’s age from 90.
IKE based on this concept are offered also by TFI Skarbiec, BPH TFI and Legg
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Andrzej Sołdek
Mason TFI. [Analizy Online 2013, p. 1-2]. ING TFI was the first company to introduce target date sub-funds, where the client’s role comes down only to selection
of the appropriate fund. ING Perspektywa SFIO is composed of 6 sub-funds, separated by 5-year time intervals (starting from ING Perspektywa 2020, and ending
with ING Perspektywa 2045). As time passes, each of the sub-funds will allocate
funds to increasingly safe assets, reducing the risk level to the minimum toward the
end of the investment. The maximum equity exposure in the portfolio is 65%,
while the minimum is 9%. PKO BP offered 5 sub-funds with the investment completion date falling every 10 years (from PKO Zabezpieczenie Emerytalne 2020 to
PKO Zabezpieczenie Emerytalne 2060). These are funds with a longer time horizon and higher equity allocation than ING. The sub-fund, addressed to clients
planning to utilize their money for pension purposes around 2055, may have equity
exposure up to 100% for the first 20 years. A fund with a time horizon that is 10
years shorter is planning investments in equities up to 100% during the first 10
years. The path for reducing the maximum share of equities envisages reduction of
the maximum proportion of equities to 80, 60 and 30% in individual 10-year periods. In the last phase, 10 years before the planned withdrawal of the money, the
maximum share of equities is 10%.
The last analyzed example is a person who, in addition to OFE and PPE, puts
aside money individually in the third pillar. It is assumed that she/he pays into IKE
the same percentage of salary as the average contribution to IKE in 2013. The same
assumption was made for contributions to IKZE. The average IKE contribution in
2013 was PLN 3,128 and amounted to 7% of the average salary. In the same year,
the average IKZE contribution amounted to 2.5% of the average salary. Voluntary
savings constituted 27% of the total portfolio, PPE 19% and OFE 12%. The ZUS
account recorded compulsory liabilities constituting 42% of the portfolio and the
sub-account 8%. Just like in the case of PPE, in IKE/IKZE there are no market data
available on asset allocation in the products offered by eligible entities: TFIs, insurance companies, banks and brokerage houses. The Polish FSA publishes information on the rates of return and asset allocation only for voluntary pension funds.
The voluntary funds managed by PTEs invest client contributions in IKE/IKZE.
The average equity exposure at the end of the quarters from the beginning of voluntary pension funds till 30 September 2014 amounted to 57%. The remaining part
of the assets was invested predominantly in treasury bonds. In the total pension
portfolio of a person paying contributions to OFE, whose employer pays 7% to
PPE, and who independently puts aside 9.5% of his/her salary in a voluntary pension fund, equities accounted for 28%, treasury bonds, corporate bonds and deposits 26%, and public liabilities 46%.
The funds accumulated in IKE are disbursed after the client turns 60 and, in the
case of IKZE, 65. The disbursement may be made as a one-off payment or in installments. In the case of IKZE disbursements in installments, they are spread over
at least 10 years. If payments to IKZE were made for less than 10 years, the disbursement in installments may be spread over the period equal to the period over
Asset allocation in the Polish pension system
59
which the money was paid in. In voluntary pension savings, the investment horizon
should not end upon reaching the retirement age but the investment strategy should
take into account the whole life. Therefore, asset allocation in risky instruments on
the date of completion of accumulation, may be higher than in the case of accumulation of funds earmarked for disbursement of the life-time benefit under prevailing
pension schemes [Sołdek 2013, p. 222].
Fig. 7. Composition and allocation of pension savings
Source: proprietary research
In the Polish market, clients may choose products offered by TFI, insurance
companies, banks, brokerage houses and PTE. Clients choosing investment strategies on their own have the full freedom to choose strategies to satisfy their expectations regarding the expected rate of return and risk. For clients who do not independently choose how to invest the pension contribution, eligible entities propose
default lifecycle and target date funds, according to the same models as to employees in PPE. Lifecycle strategies are not offered by PTEs alone due to the fact that
they can manage only one voluntary pension fund. Having the possibility of proposing only one strategy, they offer a balanced fund policy, reserving the possibility of dynamic allocation dependent on the stock market situation [Sołdek 2013,
p. 233]. Another option selected by the managers of voluntary pension funds is the
absolute rate of return strategy, in which, regardless of the situation in the markets,
the funds should generate a positive rate of return. The single-strategy limitation
prevents them from offering strategies adapted to the investment risk levels
acceptable to clients. To improve the effectiveness and competitiveness of the
investment offering of voluntary pension funds, regulatory changes will be needed,
making it possible to propose solutions based on the lifecycle concept. Voluntary
pension funds should have the possibility of offering at least two sub-funds with
different investment portfolios. This seems to be increasingly urgent due to the
start of disbursement of client-accumulated funds in 2017.
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Andrzej Sołdek
Lifecycle strategies available in nearly all capital pension products allow for utilization of capital market potential, with simultaneous bad date risk management.
Optimization of rates of return and risk should be carried out for the total pension
portfolio and not for individual products separately. Predominance of lifecycle
strategies in TFI’s offering, with a step-wise reduction of allocation and a stable
fund strategy in employee pension funds indicate that managers prefer to limit risk
at the product level, rather than at the portfolio level.
4. CONCLUSIONS
The implementation of the investment solution presented in the article in the
third pillar requires that clients and suppliers of pension products know the quantum and composition of accumulated assets forming the basis for future pension
benefits. The above analysis points to a postulate that the annual statements sent to
clients should include data on asset distribution into the main asset classes. The
annual information statement should also comprise a short description of the investment policy and a benchmark defining strategic asset allocation. The Polish
FSA should gather, analyze and publish information about the investment methods,
portfolio composition and asset management performance for all pension products.
In the desirable target solution clients should be provided with annual information
statements about the level of contributions and assets, allocation into main asset
classes jointly for all pension accounts, including NDC accounts. The objective of
aggregating all information on the client’s pension assets can be attained by pension product managers offering an application fed with data on individual pension
portfolio components. In the annual statement, the client should receive forecasts
regarding the pension coming from all the components. The complexity and uncertainty of the assumptions should not form an excuse for avoiding this challenge.
Developing the desired communication with clients, it is possible to take advantage
of the solutions employed in other markets. The examples of the Swedish orange
envelope, i.e. delivery of information jointly for all the accounts an insured holds,
or the combined pension statements initiative in the United Kingdom, where information on the details from an employee pension fund is combined with information
on the NDC account are inspiring solutions.
Another conclusion is the necessity of education on how to assess correctly the
results generated by the individual components in a pension portfolio. The results
should be assessed for the whole portfolio, taking into account the diversification
effect. An important role in supporting client education in this respect should be
played by the new proposed format of the annual statement. Also asset management institutions, experts and institutions supervising the market should get involved in education on how to evaluate the investment results of pension products,
particularly following the statutory changes introduced in Poland in 2014.
Asset allocation in the Polish pension system
61
The information about the main asset classes to be provided to clients is also indispensable for suppliers to attain the objective of optimizing investments in the
entire pension savings portfolio. One should be aware that only a small group of
clients is able to make investment decisions independently using information concerning total asset allocation. Therefore, suppliers should propose more than one
default option, automatically assigning clients to a strategy, depending on the quantum of assets and contribution payment history. Another solution offering a measurable effect would be to modify the default option by adding an equity portfolio
or safe portfolio to the automatic strategy, depending on the assets and their composition in other products.
LITERATURE
Analizy Online, Porównujemy fundusze cyklu życia, 2013, p. 1-2.
Antolin P., Payet S., Yermo J., 2010, Assessing Default Investment Strategies in Defined
Contribution Pension Plans, OECD Working Papers on Finance, Insurance and Private
Pensions, no. 2, June 2010, OECD, Paris.
Bovenberg L., Mehlkopf R., Nijman T., 2014, The promise of Defined-Ambition Plans:
Lessons for the United States, http://netspar2.uvt.nl/research2. php?input_ author
=Roel%20Mehlkopf&input_keyword= &doctype= all&theme= all&year_ from =2005
&year_to = 2010&chkRefine=&chkRefineValue=0&chkExpand=&chkExpandValue=0
&chkNewSearch = &chkNewSearchValue = 1&yearMinimum = 2005&yearMaximum
=&allyears=1 [access: 22.05.2015].
Chłoń-Domińczak A., Kawiński M., Stańko D., 2013, System oceny i prezentacji wyników
inwestycyjnych kapitałowych systemów emerytalnych, Oficyna Wydawnicza Szkoły
Głównej Handlowej, Warszawa.
Ezra D., Collie B., Smith M., 2009, The Retirement Plan Solution: The Reinvention of Defined Contribution, Wiley Finance, p. 43-54.
NEST, 2014, The future of retirement. A consultation on investing for NEST’s members in
a new regulatory landscape, Nest Corporation, http://www.nestpensions.org.uk/
schemeweb/Nest Web/includes/public/docs/Investment-implementation-document, PDF.pd
[access: 22.05.2015].
Schroder, 2014, FTSE Default DC Schemes Report, issue 3.
Sołdek A., 2013, Polityka inwestycyjna dobrowolnych funduszy emerytalnych – analiza
i rekomendacje, in: F. Chybalski, E. Marcinkiewicz (red.), Współczesne zabezpieczenie
emerytalne. Wybrane aspekty ekonomiczne, finansowe i demograficzne, Politechnika
Łódzka, Monografie, Łódź.
Sołdek A., 2014, Post reform investment policy pursued by open-end pension funds, in:
M. Szczepański, T. Brzęczek, M. Gajowiak (red.), Systemy zabezpieczenia społecznego
wobec wyzwań demograficznych i rynkowych, Wydawnictwo Politechniki Poznańskiej,
Poznań, p. 99-116.
Third Savings Plan, 2015, Lifecycle Funds, http://www.tsp.gov/investmentfunds /lfundsheet/fundPerformance_L2050.shtml [access: 04.05.2015].
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Jeko MILEV*
PAY-AS-YOU-GO vs. FULLY FUNDED PENSION SYSTEM.
ALTERNATIVE OR COMPLEMENTARY COMPONENTS
IN THE PENSION SYSTEM?
THE CASE OF BULGARIA
Bulgarian pension system has been a classical three-pillar pension system for more of
a decade. A transformation was made during the last week of 2014 when the newly formed
governing coalition decided to counter the pay-as-you-go system to the funded one. That
was made possible by changing the legislation and giving an “opportunity” to all those
insured individuals who wish to close their individual accounts opened within the second
pillar of the system and to transfer the resources accumulated up to this moment into the
state social security system. In this paper, a research on Bulgarian pension system and on
some of the fundamental changes that have taken place in it for the last fifteen years is
presented. In addition some arguments supporting the thesis that the pay-as-you-go and the
funded system must not be considered as alternatives, are discussed. Funded pillars are
necessary for the Bulgarian pension system especially in the light of the aging of the population and the negatively changing demographic structure. Both pay-as-you-go and funded
systems are exposed to serious risks but these risks have different characteristics. In order
to establish a pension system which is capable of facing the challenges of the unknown
future, we need both of them.
Key words: Bulgarian pension funds, risks, pay-as-you-go, demographic structure
1. THE PENSION REFORM
Bulgarian social security system was reformed quite significantly in the late
1990’s and early 2000’s. The severe economic crises from the late 1990’s put under pressure Bulgarian policy makers. They realized the necessity of fundamental
*
University of National and World Economy, Sofia, Bulgaria.
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Jeko Milev
economic changes in almost every sphere of the society. In 1997, the newly elected
government initiated reforms which were significantly delayed in time. Decisive
measures were needed in pension system (the average pension benefits at that time
was at around 5 USD per month), health care and employment policy in order to
prevent these systems from total collapse. After the introduction of the currency
board on the 1st of July 1997 and the followed stabilization in inflation rates, the
government undertook important steps to restructure the aforementioned social
spheres. The most profound reforms were made in pension system since it was
absorbing the greatest part of the resources destined for social security. The system
was embracing many people whose pension benefits were greatly reduced as
a result of the hyperinflation. At the same time an adverse fundamental process was
taking place – the aging of the population. Its negative effect may hit the pension
system dramatically in the medium and long term.
In the early 1990’s two trends started to affect negatively the demographic
structure of the Bulgarian society – emigration and declining birth rates. After the
collapse of the communist regime the borders were opened and many young Bulgarians saw an opportunity to continue their professional careers abroad. At the
same time the economic difficulties in the country prevented lots of families
to give birth of more than one child. These two adverse tendencies have been continuing to exert pressure on the pension system for many years.
In the late 1990’s the social security system functioned solely on pay-as-you-go
basis so that the rising unemployment and emigration rates directly affected the
revenue side of the state budged and the possibility for paying adequate pension
benefits. Following the recommendations of the World Bank and the IMF, Bulgarian government started both parametric and structural reforms of the current pension system. The aim of the first type of reforms was to strengthen the financial
stability of the system in short term while the ultimate goal of the second type of
reforms was to improve long term prospects of the pension system in Bulgaria.
There was a clear vision at that time that the second and the third pillar were needed in order to complement and to support the first pillar of the system. That view
was easily explained to the public following the logic that risks facing the pay-asyou-go and the funded system are of different nature. The most serious risk that
concerns PAYG system stems from the aging of the population while the funded
components of the system were facing risks that are typical for any investor in financial instruments – low returns, high inflation rates, unsecure and often changed
normative rules.
The parametric reforms included the introduction of the so called point-based
pension system whose aim was to raise the legal requirements for receiving pension by the state social security. The insured individuals needed to meet both age
and contributory service criteria in order to obtain pension benefit. Before this
transformation the insured individuals had to reach only a predetermined specific
age – 55 for women and 60 for men. The point-based system, introduced in Bulgarian in 2000, required the sum formed by age and years of contributory service
Pay-as-you-go vs. fully funded pension system. …
65
of the insured individuals to be 98 for men and 88 for women. At the same time the
legal retirement age was raised by six months for both sexes – 55 years and
6 months for women and 60 years and 6 months for men. The adopted pension
legislation envisaged a gradual increase both in retirement age and in points required for both sexes. Each year beginning from 1st of January 2001 the age needed had to increase by 6 months until it reaches 60 years for women and 63 years for
men. At the same time the points required had to grow with 1 each year until they
reach 94 for women and 100 for men. In 2011 the point-based system in pension
insurance was eliminated and it was replaced by separately defined requirements
for age and years of contributory service – 63 years of age and 37 years of contributory period for men and 60 years of age and 34 years of contributory period
for women.
Other parametric reforms included the removal of some advantages designed to
benefit certain types of professions such as military servicemen, policemen and
people working in heavy labor conditions such as mine workers, metallurgists etc.
All these reforms undertaken and applied in Bulgarian pension system aimed to
relax the constantly rising financial burden on the state PAYG pension system. It is
well known that the return to PAYG systems depends on two factors [Davis 2006]
– dependency ratio (contributing workers to pensioners) and the growth of average
earnings which determines the growth in total contributions. A continuous deterioration in dependency ratio could put an increasing strain on pay-as-you-go system.
This negative trend is typical for many countries in the world but it has an extreme
character in Bulgaria (see Table 1).
Table 1. Number of contributing workers and pensioners for the period 2009-2014
(in thousands)
2009
2010
2011
2012
2013
2014
Number of contributing workers
3254
3053
2965
2934
2935
2981
Number of pensioners receiving
old-age pension
1696
1697
1696
1698
1667
1662
Dependency ratio
1,92
1,80
1,75
1,73
1,76
1,79
Source: National Social Security Institute, www.nssi.bg.
The dependency ratio in Bulgaria is less than 2 which means that the current
PAYG pension system exerts a severe pressure on public finance. However, the
average pension amount has been increasing constantly since 2000 mostly thanks
to the increasing contributory income of the working individuals. It is also worth
noting that contributory rate for pension insurance had been lowered several times
for the period 2000-2010. In 2011 there was a slight increase in this rate but
it could be interpreted as an exception that proves the rule.
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Jeko Milev
Table 2. Contributory income and contributory rate for pension for the period 2002-2014
Year
Average monthly contributory income (euro)
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
132.81
143.55
157.89
169.55
181.25
203.58
255.93
283.65
291.61
303.78
316.01
331.69
349.39
Rate of increase of average monthly contributory
income (in %)
Contributory rate
for pension
(in %)
8.09
9.99
7.39
6.90
12.32
25.72
10.83
2 .80
4.18
4.02
4.96
5.34
27
27
26
26
19
18
17
13
11
12.80
12.80
12.80
12.80
Source: National Social Security Institute, www.nssi.bg.
The average pension provision in Bulgaria has been increasing but it is still far
from adequate to the economic conditions. The average replacement rate equals
about 40% which means that Bulgarian retirees are facing a significant decrease in
their income just after retirement. It is not a surprise that all those pensioners who
have an opportunity to keep their jobs after retirement, decide to stay at work and
be active.
In order to improve the perspective of receiving a higher pension benefit and to
raise the average replacement rate, Bulgarian policymakers made also a very significant structural reform in the late 1990s. Following the recommendations of the
World Bank [World Bank 1994] they introduced a three pillar pension system. The
first pillar constitutes the state PAYG system. It continues to absorb the greatest
part of the resources but it has been complemented by second and third pillars
which have been functioning as a fully funded schemes. The second pillar is the so
called supplementary compulsory pension insurance and it embraces two types of
funds – universal pension funds and occupational pension funds. All insured individuals born after 31 of December1959 are obliged to pay contributions to one of
the universal pension funds. Insured individuals who work in heavy conditions
have to contribute in occupational pension fund as well. The undertaken change is
accepted as an important structural reform since its ultimate aim is to manage the
expected severe shortfall in the current PAYG system. The third pillar of the sys-
Pay-as-you-go vs. fully funded pension system. …
67
tem is of supplementary and voluntary nature. All individuals over the age of
16 years could make contributions to one of the pension funds. Both compulsory
and voluntary pension funds manage defined contribution pension schemes where
the investment risk is incurred by the insured individual.
2. CHALLENGES FACING THE FUNDED COMPONENT
OF THE PENSION SYSTEM
The introduction of a fully funded system was a serious challenge for the Bulgarian regulators. The implementation of a compulsory second pillar in a country
where the capital market has been just started with low liquidity and a few financial
instruments suitable for investment vehicles for this type of institutions imposes
many risks both on insured individuals and pension companies. The lack of traditions in pension insurance of this kind was also an obstacle with unforeseeable
consequences as no one was sure whether the public would support the reform. The
regulators had to reflect all these constraints into the rules supposed to govern the
newly formed pension insurance companies. So it was of a little surprise that they
gave a priority to strict investment regulation. During the first years of their existence, pension insurance companies from the second pillar of the system were
obliged to invest minimum 50% of their assets into government bonds. By adopting such investment limits the legislator was clearly trying to prevent pension companies from assuming risky investments in their initial years of operation. At the
same time these rules were aiming to convince the insured individuals for the financial security of the system. The last was very important because many people
suffered huge money losses from their “investments” in some financial pyramids,
very popular in the mid 1990’s in Bulgaria. This type of investment regulation was
reasonable for the first years of operation of the Bulgarian pension funds. But it is
well-known from financial theory that low-risk instruments are associated with low
return. Pension funds are long term investors and they have some comparative
advantages in investments on capital markets. Variable income assets are more
volatile in value than fixed income instruments but their yield tend to exceed that
of bonds especially in the long term.
One of the most important risks that face insured individuals in a funded pension system is the inflation risk. If pension funds were not able to compensate the
insured for the lost purchasing power of their accumulated savings they would not
serve the aim for which they were established. That’s why it was very important
Bulgarian pension funds to extend their investments in corporate instruments such
as equities and bonds in order to increase their chances of achieving a positive real
return in the long horizon. In 2006 some very important changes were introduced
in pension fund investment regulations partly because of the upcoming member-
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Jeko Milev
ship in European Union in 2007. Many of the limits were relaxed and the existing
minimum requirement for investment in government debt was removed.
All these changes used to have a positive impact on pension funds. They were
able to restructure their asset portfolios short after the implementation of the new
regulations. The portfolio share of government bonds was significantly reduced on
account of that of corporate instruments. Before this alteration some funds used to
invest almost 80% of their resources into government debt. This could be assumed
as a shortcoming because the pension system was changed in order to supplement
the PAYG system with some funded components. But if pension funds predominantly invest in government debt many of the advantages of the funded pension
system could be seriously undermined in the long term. The restructuring of the
asset portfolios in the late 2006 and during the whole 2007 coincided with the extreme price increases at the Bulgarian stock exchange.
Many portfolio investors not only pension funds but also banks, insurance companies and mutual funds located in the country were eager to put some money into
the fast growing Bulgarian equity market. In 2007 pension funds were able to realize a double digit return which was varying between 13.51% and 24.91% for the
different universal pension funds. The average officially announced yield was
17.19%. This was a huge number which was possible only because of the investments made on the capital market that year. The asset price balloon was clearly
formed and when the financial crises hit the country in the following year the results were devastating. The main stock exchange index (Sofix) plunged with some
80% and the losses reported by pension funds for 2008 were great. The stock market crash swept away more than 20% of the savings amount accumulated by the
insured individuals. The average announced loss was –21.14% for all universal
pension funds as one of the funds published –29.31%.
These disappointing results marked the development of the pension funds in the
next years. The insured individuals realized that their savings were not guaranteed
and they bore significant risks [Blake 2006]. The problem was the most serious for
those individuals insured in a voluntary pension fund whose retirement was coming
close. The pension funds were having no chance to compensate them for a year or
two. The insured had to make a tough choice – pension amounts should be reduced
or otherwise they needed to work some extra years. The insured individuals in universal pension funds were having the advantage their retirement to be in a more
distant future. The first who are going to get pension from this type of funds are
those born in 1960 whose retirement is planned for the years after 2020.
The crises showed clearly that pension funds in Bulgaria should be allowed to
construct asset portfolios with different risk profiles. The so called multifund system has been established in a number of countries in Latin America (Chile, Peru,
Columbia, etc.) and in Central Europe (Slovakia, Poland, Hungary until 2012), but
not in Bulgaria. The crises demonstrated that the risk that faces individuals with
long and those with short investment horizon is different. If the insured has planned
his or her retirement for the next 2 or 3 years the portfolio portion invested in se-
Pay-as-you-go vs. fully funded pension system. …
69
cure instruments should be much larger than it used to be in 2008. At the same time
those insured that have just started their professional carrier should have the opportunity to invest more aggressively in a portfolio containing variable income instruments whose yield is more likely to exceed the inflation rate in the long term.
3. WHAT WILL BE THE FUTURE
OF THE BULGARIAN PENSION SYSTEM?
All these facts demonstrate clearly that pension funds in the country have problems that should be addressed as soon as possible. However, the voted changes in
pension legislation at the end of 2014 would have some controversial effects. The
newly formed governing coalition decided to change the basic normative act that
regulates pension legislation and to give right of all those that are insured within
a universal pension fund to exit the second pillar of the pension system and to pay
their contributions only into the first pillar of the system. The formal reason behind
this decision was to give an opportunity to those insured individuals that are born
after 1960 to freely choose whether to contribute into both – first and second pillar
of the system or only into the first one. According to the current pension legislation
the insured individuals within the second pillar of the system will obtain a reduced
pension amount by the first pillar. It is absolutely possible an insured individual
within the first and the second pillar of the system to get pension amount that is
lower than the amount received by an individual insured only within the first pillar
of the system. This amendment is quite favorable for those individuals that have
missing insured periods (periods without paying contributions into a pension fund).
They have a strong motive to transfer their accumulated savings into the state social security system and to receive their pension only from the first pillar of the
system. Unfortunately by adopting this change in pension legislation the policymakers made a reform that actually counters the first and the second pillar of the
system. The informal motive behind this decision was to reduce the current huge
deficit in the PAYG system (about half of the resources needed for paying current
pension amounts come from the general taxation and not by the pension contributions paid into the state social security). The government currently needs to attract
some future pensioners with real money accumulated into their pension fund accounts and not just those that have merely nothing. So it was not a surprise that
some politicians from the ruling coalition started a negative campaign towards
pension funds in the country. They tried to explain how much expensive and how
badly pension funds have been managing the savings of the future retirees. In this
way they totally ignored the demographic crises in the country and the consequences it would have on the state finances in the long term. So the real reason
behind this decision was dictated by the short financial horizon so typical for poli-
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Jeko Milev
ticians not only in Bulgaria. They tried to find resources to reduce the current deficit in the PAYG system neglecting the fact that this might have a devastating effect
on the whole pension system in the country in more distant future.
All changes made were consistent with the regulations of the European Union.
Unfortunately some other very important reforms were delayed in time; some others have been stopped. For example in 2011 the ruling party adopted a regulation
that stipulated a gradual increase both in pension age and contributory service required for retirement. As a result the age needed for receiving pension benefit was
planned to increase by 4 months each year until it reaches 65 years for men and
63 years for women. The required contributory service was also planned to increase by 4 months each successive calendar year until it touches 40 years for men
and 37 years for women. This normative rule was in force only for two years (2012
and 2013). This gradual increase was stopped and it was not operative for 2014 and
2015. A new discussion has been started for increase both in statutory pension age
and contributory service required but only by 2 months per year. Another reform
which is still subject only to hot discussions is the introduction of the multifund
system within the second and third pillar of the pension insurance. The establishment of several asset portfolios with a different risk profile is an important measure
that will underpin the pension funds in Bulgaria and will reduce the risk that faces
insured individuals in the long term. At the same time the introduction of such
system will involve the insured much deeper in the process of accumulating assets
for retirement. Currently three portfolio options have been discussing – a conservative, balanced and aggressive one. They will differ by the portion invested in variable income instruments. Having a choice, the insured must take the responsibility
for their pension savings. One of the serious problems of the system today is that
young persons are not interested in their future pension benefits and they have left
the decisions of this type totally to the state. Multifund system has the potential to
change this disturbing feature of today’s working generations. Of course, the normative rules in this area must be constructed carefully in order to prevent the insured from taking decisions that can harm and not protect their interests.
All these fragmented decisions in pension sphere in Bulgaria show how difficult
is to implement painful reforms and how much important is to vote such changes
only in the presence of widespread public support. It is crucial for the success of
any long term decision to be accepted by all participants in the political life in the
country. Pension system requires long term rules otherwise it is doomed to failure.
The aging of the population in Bulgaria will put under severe pressure the PAYG
system in the next years. It will have an adverse effect on the funded system as
well but it is widely considered that these unfavorable consequences are much
more manageable than those for the PAYG. The reform made in the late 1990’s
tried to address this issue by introducing the funded component within the pension
system in the country. The funded pillars should supplement the pay-as-you-go
system and not to counter it. The right regulation concerning this component of the
pension system has a crucial importance. Some significant reforms were delayed
Pay-as-you-go vs. fully funded pension system. …
71
in time and this is an important reason why the accumulated resources within he
pension accounts of the insured individuals are not so massive as to satisfy their
expectations. It was not a big surprise that instead of continuing the reforms the
politicians started to look for solutions only to short term problems and to undermine the pension strategy adopted in the late 1990’s. The demographic challenges
are great and they should be faced with enough courage otherwise the future generation retirees in Bulgaria will have the same unfortunate destiny as the current
ones.
LITERATURE
Blake D., 2006, Pension Finance, Wiley Ltd., UK.
Bulgarian financial supervisory commission, www.fsc.bg.
Bulgarian stock exchange, www.bse-sofia.bg.
Davis E.Ph., 1995, Pension Funds Retirement Income Security and Capital Markets.
An International Perspective, Oxford University Press, UK.
National Social Security Institute, www.nssi.bg.
National Statistics Institute, www.nsi.bg.
Social security code, promulgated State Gazette, No. 110/17.12.1999, effective 1.01.2000.
World Bank, 1994, Averting the Old Age Crisis: Policies to Protect the Old and Promote
Growth, Oxford University Press, New York.
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Jeko Milev
Jaroslav VOSTATEK
CHILD PENSION AND FREE-RIDER TAXATION
Child pension projects refer to tax-financed universal pensions for parents with children, usually with three benefit rates according to the number of children, to be constituted
as a new pension pillar. People with less than three children have to take part in a mandatory private pension scheme because they are free riders. The pure child pension model shall
not be replaced by a differentiation of the old-age pension insurance premiums according to
the number of children raised but this “solution” is under discussion in Czechia; aiming at
increasing the income of families with children immediately. The parents’ pensions might
be increased by surcharges according to the number of children as well, additionally to the
existing child-care credits. Promoters of the child pension and its derivatives require a substantial change in the ruling intergenerational contract – it shall be extended from a contract
of two to three generations; public pensions need enough children to finance the old-age
pensions. An expert solution should respect the welfare regimes, the general pension and
tax theory and policy, with no prejudice that non-parents free-ride off parents.
Key words: child pension, welfare regimes, pension reform, personal income
tax, public pensions
1. INTRODUCTION
The basic demographic parameters significantly affect pension systems of all
countries. Various studies were prepared, especially in Germany, that require
a major reform of the existing pay-as-you-go (PAYG) scheme and introduction of
child pensions as a new pillar. The Czech Pension Commission has been discussing
alternative proposals that reflect parenting within the public pension financing.

University of Finance and Administration, Head of Centre for Economic Studies
and Analyses, Prague, Czech Republic.
74
Jaroslav Vostatek
The objective of this paper is to analyze child pensions and similar proposals,
focusing on the German and Czech pension systems. The analysis of the existing
“intergenerational contract” also comprises the issues related to valorization and
indexation, as well as stabilizing mechanisms of a modern PAYG scheme.
2. CHILD PENSION PROJECTS
Child pension refers to a PAYG financed social/political project of providing
full old-age pensions to parents with three or more children. Child pensions are
drawn up as universal, not earnings-related benefits. Parents with one child are
eligible to one third, parents with two children to two thirds of this pension. Childless pensioners get nothing, as they did not invest into having and raising children.
Child pensions represent the central building block of the relevant pension reform,
which is to eliminate the way families and children are disadvantaged within existing PAYG schemes of social pension insurance [Werding 2014, electronic source].
Advocates of the child pension concept strive for a full or maximum possible
reimbursement of parents’ cost of raising children (“human capital investments”)
from the public pension system. They assert that social pension insurance, specifically in its present PAYG form, unilaterally redistributes from young to old generations. Consequently, today’s young people will pay much more into the PAYG
scheme than they eventually receive from the scheme in the form of future pensions. This “fiscal contribution” to the pension insurance scheme made by a German citizen born in 2000 amounts to EUR 77,600 [Sinn 2013, electronic source].
This results from lower fertility, sharp decline in the number of children born
in Germany and many other countries.
A PAYG system inherently reduces the investment in human capital; however,
according to Sinn [2004], it may be reduced to a sufficiently small scale. This is
why he prefers a pension reform to (further) increase in government expenditure in
favor of families with children. At the same time, this “facilitates” the pension
reform proposed by him: the German point-based system of social pension insurance may continue to exist “only” if the insurance premium payments and government subsidies are frozen at today’s level; taking into account the ongoing ageing
of the German population, this will lead to considerable reduction of old-age pensions – in 30 years, their replacement ratio will go down by fifty percent.
With regard to parents, the replacement rate reduction should be eliminated
by means of child pensions.
According to supporters of the child pension concept, childless citizens should
use compulsory private insurance as old-age security; this should not be a problem
for them, because – compared to parents raising children – they do not incur any
cost of raising children in the widest possible sense, including opportunity costs as
Child pension and free-rider taxation
75
a result of limited earning opportunities. Sinn [2013] assumes basic insurance contributions – for childless employees – at about 6 to 8% of wages. The “standard”
within the concept of this compulsory private insurance shall be three children –
i.e. parents with three children will not pay any insurance premium. According to
his concept, when the first child is born, the insurance premium rate will be reduced by one third and one third of existing savings will also be paid out to the
given client. The payment of (one third of) the savings may thus be used to finance
the needs of the child. Analogical process will be applied when a second/third child
is born. The compulsory private old-age insurance for people with less than three
children is the third pension pillar under the German child pension project.
Werding [2014] relies on the same child pension concept; however, uses more
detailed arguments. Reforms are to eliminate today’s wrong motivation against
starting a family; in this regard, the author analyzes two reform alternatives: introduction of child pensions and “fair” construction of the social pension insurance
premium. Werding concentrates on arguments in favor of child pensions; in terms
of the second alternative, he simply assumes that the construction of state tax support of children, as used for income taxes, would be taken over. According to
Werding, introduction of tax deductions into the pension insurance premiums represents an immediate encouragement for families with dependent children; however, it does not deal with the fundamental construction flaw of the PAYG pension
system. Therefore, instead of tax deductions, we could consider universal family
allowances. Similarly, it is also possible to expand the services offered to families
– in daytime facilities of all types, including all-day schools.
With regard to compulsory private pension insurance, Werding assumes the
basic insurance premium rate of 9% (with 6% for two children, and 3% for one
dependent child). According to Werding, the existing social old-age insurance
should be transformed into basic pension, which could also mean a transition to the
“US Social Security” concept (with major emphasis on redistribution in favor of
low-income clients) or even the application of a universal pension [Werding 2014,
electronic source].
In 2004, a Czech ING team recommended gradual replacement of the existing
Czech public pension pillar by two new pillars of approximately the same significance: child pension and compulsory private pension, with rates similar to Werding
[Hyzl et al. 2004]. In 2011, the think tank CESTA suggested a modification of the
existing PAYG system to a “Child & Contribution PAYG” system: the existing
“pension insurance premium” should be differentiated based on the number of
supported children, for example as follows: basic rate – old-age pension insurance
premium for childless people – would amount to 18% of wages; reduced rate for
parents with one supported child would amount to 13%, 9% for two children, 6%
for three children, and 4% of wages for four or more children. At the same time,
it is proposed to differentiate the percentage rate of old-age pensions for each year
of insurance (currently at 1.5%) based on the number of raised children [Rusý,
Zborník and Fiala 2011]. Hampl [2013] recommends starting with a social assess-
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Jaroslav Vostatek
ment of child-rearing expenses and “mending” natural economic relations between
generations. This goal is to be fulfilled using two approaches: deduction of “investments in human capital” from an income tax base and from public insurance
premiums; increase of the parents’ pension, e.g. by 30% for each child. In December 2014, the Pension Commission rejected the differentiation of the pension insurance premium rates proposed by Hampl (childless: +2%, parents with two children:
–2%, with three or more children: –4% of wages) but he continues to push
it through.
Slovakia is the only country to have differentiated the old-age pension insurance
premiums based on the number of supported children, from 2004. The reduction
per each child – only applied for one parent – amounted to 0.5% of wage (up to 4%
for all children). The reduction was introduced on the basis of an MP´s proposal,
in spite of opposition by the respective Ministry. It had been annulled two years
later, with concurrent increase in the income tax credit per child. The insurance
premium differentiation ended as a useless and unfair complication of the support
system for families with children.
The mentioned proposals for introducing the differentiation of pension insurance premium rates based on the number of children or for introducing child care
credits in assessing these premiums may only be viewed as an effort to reduce fiscal costs for families with children at any cost – irrespectively of any pension
scheme and income taxation. With refundable child tax credit under the personal
income tax currently existing in Czechia, it would be absurd to introduce the same
credit for pension insurance premium, as we can simply increase the existing income tax credit to achieve the same objective. In case some members of the Czech
Pension Commission (with personal interests in the given solution) proposed differentiation of the pension insurance premium rates based on the number of supported children, it is clear that they are unhappy not only with the Czech tax credit
amount, but also with its construction – with universal absolute credit amount (differentiated for first, second, and third child as of 2015) – and in fact they require
higher and earnings-related tax base deductions. Certainly, this can be advocated
by conservative ideology. However, it is absolutely unsystematic to deform insurance premiums according to any income tax model.
The child pension concept does not fit into any basic welfare regime [Vostatek
2014]. Child pensions do not exist anywhere. We have no choice but to analyze the
arguments of authors of the child pension project irrespectively of welfare regimes.
3. INTERGENERATIONAL CONTRACT AND CHILD PENSIONS
Some form of a social intergenerational “contract” lies at the heart of all welfare
regimes. In European welfare states, the social contract is primarily a public pen-
Child pension and free-rider taxation
77
sion contract between age cohorts [Walker 1996, p. 13]. We can often come across
a simplified interpretation of the term intergenerational contract – as a characteristic of a PAYG system. On the other hand, a fully funded (FF) system is often characterized as a system, where pensions depend solely on client’s contributions, even
though practical applications of FF systems show significant differences in the
intergenerational redistribution. Furthermore, we cannot ignore the effect of wars,
crises, and other incidental events. This does not exclude certain suitability of the
origin of the term generational or intergenerational contract, e. g. in connection
with the West German pension reform of 1957. It could have been a cogent, transparent political or ideological characteristic of the reform. However, the key question today is whether such an intergenerational contract represents a major problem
in today’s Germany that should be addressed by the child pension introduction.
Different social and private old-age insurance products lead to different intergenerational redistribution. Leaving aside exceptional events, we could generally
say that a FF defined contribution (DC) pension with no tax advantages will not
redistribute across generations. “That, however, is itself a distributional choice. The
central point is that a decision that a system should be funded rather than PAYG
is also and necessarily a decision about the intergenerational distribution of income. Inescapably, some people are better off and some worse off” [Barr and Diamond 2008, p. 118].
In terms of a model, original social pension insurance systems were defined
benefit (DB) systems, without pension indexation, under the conditions of overall
price stability. New systems were also DB systems; however, with pension indexation, under the conditions of systemic growth of consumer prices. Old-age pensions
increased significantly, being paid out for a longer period of time. At the same
time, the pension calculations under a DB system typically relied on final salary –
this did not “matter” too much in the past; however, it inherently resulted in significant increase in pensions under the new, inflationary conditions. Several decades
later, the situation in this regard has also changed considerably in terms of the level
of redistribution within an intergenerational contract. To further impair the matter,
birth rates have declined. All this has, once again, stirred up discussions about
social old-age insurance and its parameters.
With regard to social old-age insurance, insurance elements, particularly relation to earnings or paid contributions, have gained importance in the past two decades. Instead of the final salary, average lifelong salary is now used – as the base
for calculating pensions in a DB system. The big question is how to draw up the
valorization of pension claims and the indexation of already awarded pensions. It is
the problem of valorization and indexation that may, to considerable degree, involve the issue of a potential intergenerational contract update. In this context, we
have also seen the formation of new public pension insurance products, such as the
so-called point system and notional defined contribution system (NDC).
Germany has had its point system since 1992; a model advantage of the point
system is the integrated valorization and indexation as well as high transparency.
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Jaroslav Vostatek
Most OECD countries with a DB system apply 100% valorization of clients’ earnings for the purpose of the pension calculation and combined indexation of pensions based on the development of consumer prices and average nationwide wages,
and this is not systemically logical. The valorization and indexation based on the
development of average wages – in respect of the intergenerational contract –
means that the economically active generation “shares” the increase in the standard
of living with the generation of pensioners. Insurance premium payers would not
have to make this sacrifice; they could claim that pensions should correspond to the
level of wages at the time insurance premiums were paid: the valorization and indexation could only be carried out in line with the development of consumer prices.
Generally speaking, the decision is taken by public choice.
In an ideal point system of social pension insurance, both valorization and indexation should be carried out according to the development of nominal average
nationwide wage. This is the most generous alternative for pensioners – from this
perspective, it would be an ideal and transparent DB system. However, (even)
Germany cannot afford such system, just taking into account the demographic development. Moreover, a PAYG system is very sensitive to economic development,
which is immediately reflected within its revenue. From this perspective, it is necessary to use a PAYG system reserve fund. Germany has modified the point system
by introducing correction coefficients – to such extent that German researches
changed the classification of the German social pension insurance from a DB system to a DC system following the 2001 reform [Schmähl 2002, p. 111]. The longterm research of World Bank experts has resulted in the recommendation (among
others) that the basic pension pillar should be an NDC scheme [Holzmann, Palmer
and Robalino 2012].
The above mentioned “fiscal contribution” to the pension insurance scheme
made by an average German citizen born in 2000 amounts to € 77,600. This cannot
be the case under an NDC model. The question is what is wrong. Sinn [2013] states
that it is a discounted value with rate of 3.5% per year in real terms. This may be
a major problem itself, since, from the perspective of seniors, the lowest limit is to
have pensions derived from real wages, from which they paid respective insurance
premiums. This would correspond to the discount rate of 0% per year in real terms.
Another question is, whether a similar problem is in the extrapolation of the present
German point system with its correction coefficients that were in fact subject to
significant modifications, even on a yearly basis.
Schneider [2011] concluded that the level of intergenerational redistribution is
very high in Czechia, at the expense of young generations. Schneider claims that,
for example, men born in 2008 can expect to contribute to the system three times
(297%) as much as they receive pensions; the number is slightly lower for women
(203%). Schneider does not provide any calculation methodology. The Czech Ministry of Labor and Social Affairs has loudly objected to the Schneider’s calculations. It claimed the study is of poor quality and largely misleading. The Ministry
describes the relation between insurance premiums paid and old-age pensions using
Child pension and free-rider taxation
79
an internal rate of return, which exceeds the inflation rate (2%) foreseen by the
model; consequently, the payment of insurance premiums under the existing payas-you-go system is a profitable “investment” [Ministry of Labor and Social Affairs 2011). The demographic situation and prognosis is only slightly better
in Czechia than in Germany. I thus presume that the German social pension insurance system is also sustainable and does not need to be replaced, even partially, by
private pension savings.
An intergenerational contract, as a symbolic expression of the contents of
a PAYG scheme, has been subject to parametric changes due to demographic and
economic developments in the past years and it is safe to expect such changes
in the future as well. An NDC scheme – as a modern social old-age insurance system with mechanisms ensuring its stability – is much more suited for the new conditions. It is not necessary to make efforts at drawing up a three-generation contract
that would also comprise child pensions as a new pension pillar.
Fig. 1. Different “circles” of family policies
Source: [Letablier et al. 2009, p. 40]
The sharing of costs of raising children is very important in most European
countries. The childless adults share these costs in different ways. The question is
about the effectiveness of policies to support parenthood. The pension policy is not
the main instrument of the family policy. In the core of the modern EU family policy there are family and maternity benefits, and childcare and preschool support –
see Figure 1. They are much more transparent and effective – and paid by the
childless adults via the public budgets. Family supplement in the pension regimes
is an adequate measure to reflect the raising of children, contrary to the child pension and tax-like insurance premium constructs.
80
Jaroslav Vostatek
4. CONCLUSIONS
Child pension projects may represent an attractive idea of the solution to the
demographic problem under some countries’ pension schemes. However, this solution is more than problematic – just by considering the existing pension welfare
regimes, e.g. in Germany or Czechia. A systemic approach to selecting pension
pillars requires first the analysis of the entire pension system in the given country.
An NDC scheme is a modern product of social old-age insurance; its full-fledged
version also features an automatic stabilization mechanism that reacts to demographic trends and fluctuations as well as to economic developments of the given
country.
The national family policy and the entire system of rights, services, and benefits
for families with children are significant for positive population development. The
selection of an adequate welfare regime is also important in this context, and this is
also reflected in the income tax construction. The construction of the social pension
insurance premium is determined by the concept of the insurance – it shall not be
deformed by population aspects. Proposals for the differentiation of insurance premiums based on the number of raised children and proposals for introducing child
care credits in assessing such insurance premiums may be fully implemented within the area of income taxes. Childless adults are no free riders in pensions, they pay
for the family policy measures with their taxes in a transparent way.
ACKNOWLEDGEMENT
This paper was supported from the University of Finance and Administration
research project „Review of the Czech pension system“ in 2015 (No. 7765),
financed from a grant to scientific institution.
LITERATURE
Barr N., Diamond P., 2008, Reforming Pensions. Principles and Policy Choices, Oxford
University Press, Oxford.
Hampl O., 2013, Společenské ocenění nákladů na děti a odstranění disproporce na
trhu práce. Narovnání přirozených ekonomických vztahů mezi generacemi a v rámci
celé společnosti, in: Proceedings of the KaP seminar, Velehrad, http://hkap.cz/prilohy/
velehrad_2013/html/2_so_03_hampl.html [access: 29.03.2015].
Holzmann R., Palmer E., Robalino D., (eds.), 2012, Nonfinancial Defined Contribution
Pension Schemes in a Changing Pension World. Volume I: Progress, Lessons, and Implementations, The World Bank, Washington.
Child pension and free-rider taxation
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Hyzl J., Rusnok J., Řezníček T., Kulhavý M., 2004, Penzijní reforma pro Českou republiku. (Inovativní přístup), ING Czech Republic and Slovakia, Prague, http://
www.skvara.cz/__cw_files/d%C5%AFchodov%C3%A1%20reforma/ing_navrh_penzij
ni_reformy/.69/.66/.742c52d81bf40ba8e83d9c38d1aefaa81121206669/INGnavrhpenzij
nireformy.pdf [access: 29.03.2015].
Letablier M.-T., Luci A., Math A., Thévenon O., 2009, The costs of raising children and
the effectiveness of policies to support parenthood in European countries: a Literature
Review, European Commission, Brussels, http://europa.eu/epic/docs/eu_report_
cost_of_children_final_11-05-2009.pdf [access: 29.03.2015].
Ministry of Labor and Social Affairs, 2011, Reakce na studii myšlenkového centra IDEA
„Penzijní dluh: Břímě mladých“, Prague, http://socialniporadce.mpsv.cz/files/
clanky/278/reakce.pdf [access: 29.03.2015].
Rusý P., Zborník P., Fiala T., 2011, Návrh penzijní reformy: verze se zohledněním výchovy
dětí v průběžném systému, CESTA Center for social-market economy and open democracy, Prague.
Schmähl W., 2002, Alterssicherungspolitik in einer alternden Bevölkerung. Anmerkungen
zur Situation in Deutschland, Politische Studien, vol. 53, p. 106-127.
Schneider O., 2011, Penzijní dluh: Břímě mladých, Economics Institute of the Czech Academy of Sciences, Prague, http://idea.cerge-ei.cz/documents/Studie_2011_02_Penze.pdf
[access: 29.03.2015].
Sinn H.-W., 2004, The pay-as-you-go pension system as fertility insurance and an
enforcement device, Journal of Public Economics, vol. 88, p. 1335-1357.
Sinn H.-W., 2013, Das demographische Defizit – die Fakten, die Folgen, die Ursachen und
die Politikimplikationen, Ifo Schnelldienst, vol. 66, no. 21, https://www. familienhandbuch.de/wp-content/uploads/2003/04/ Das-demographische-Defizit-HW-Sinn.pdf [access: 29.03.2015].
Sinn H.-W., 2014, Land ohne Kinder – die Fakten, die Folgen, die Ursachen und die Politikimplikationen, Vortrag vor der nordrheinwestfalischen Akademie der Wissenschaften, Düsseldorf, https://www.cesifo-group.de/ifoHome/events/individual-events
/Archive/2014/vortrag-sinn-lmu-20141215/ main/05/text_ files/file/document/VortragSinn-2014-Land-ohne-Kinder.pdf [access: 29.03.2015].
Vostatek J., 2014, Designing Old-Age Pensions, in: M. Szczepański, T. Brzęczek, M. Gajowiak (eds.), Social security systems against the challenges of demographics and market,
Publishing House of Poznan University of Technology, Poznań.
Walker A. (ed.), 1996, The New Generational Contract. Intergenerational Relations, OldAge and Welfare, UCL Press, London.
Werding M., 2014, Familien in der gesetzlichen Rentenversicherung: Das Umlageverfahren
auf dem Prüfstand, Bertelsmann Stiftung, Gütersloh, http://www.bertelsmann-stiftung.
de/cps/rde/xbcr/
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[access: 29.03.2015].
82
Jaroslav Vostatek
Marek SZCZEPAŃSKI*
BARRIERS AND DRIVERS OF DEVELOPMENT
OF OCCUPATIONAL PENSION SCHEMES IN POLAND
The article presents an analysis of the factors determining the development of occupational pension schemes in Poland. The starting point for the analysis is to identify the nature
of the impact of demographic, macro-economic and social conditions for development of
supplementary pension plans in Poland and the characteristics of occupational pension
plans in other countries of the European Union. The general conclusion, based on the analysis of the current development of occupational pension schemes in Poland, can be formulated as follows: throughout the whole period of the functioning of OPS (1999-2014)
factors predominated that could be evaluated as barriers to growth. Economic incentives for
employers and employees interested in creating and participating in occupational pension
schemes were too weak or badly addressed. Without radical changes in the legal and institutional framework of OPS and the introduction of more attractive economic and fiscal
incentives, the development of occupational pension schemes is not possible.
Key words: public pension systems – occupational pension schemes – barriers
and drivers of development of workplace pensions
1. INTRODUCTION
Contemporary pension schemes are subject to changes which result from demographic, economic and social shifts. The ageing population is integral to the economic development of the modern population. This applies to the majority of societies in the developed economies, especially in European societies. The problem
*
Poznan University of Technology, Faculty of Management Engineering, Department
of Economic Sciences.
Article prepared within the framework of the statutory research at the Faculty
of Management.
84
Marek Szczepański
of an ageing population also applies to Polish society. Since the beginning of the
1990s, the median age of the average inhabitant of Poland increased by almost
7 years and in 2013 was nearly 39 years. A statistical forecast published in
November 2014 shows that the share of the population above the age of 65 years
will more than double: from 14.7% in 2013 to 32.7% of the total population of the
country in 2050 [GUS 2014]. In many EU countries, for example in Germany, the
process of the demographic ageing of the population has already gone further than
in Poland. Economists and demographers predict that as a result of this process, the
population of Europe, which now accounts for 10% of the world's population, may,
in 50 years, be reduced by up to 50% [Komisja Polityki Senioralnej 2014].
Of course, the fact that more and more people live up to retirement age is in itself a positive phenomenon and is the result of the progress of civilization (including advances in the field of medicine, improved working conditions, etc.). On the
other hand – it results in the fact that public (statutory) pension systems cannot
guarantee the level of benefits and financial security in old age as was possible
in the 1980s and 1990s.
With people living longer in many parts of the world, the cost of providing pension benefits in pension systems is increasing because those benefits have to be
provided for more years [Turner 2014, p. 13-14]. Despite the reforms introduced in
most EU Member States at the turn of the 20th and 21st centuries and subsequent
adjustment measures (e.g. the extension of the statutory retirement age in most EU
countries, including Poland), the level of pension benefits offered by public pension systems has been decreasing and will continue to decrease in the next decades
of 20th century – this will also occur in countries more affluent than Poland.
For example, the main findings of the report “Current and Prospective Theoretical Pension Replacement Rates” prepared for the EU, indicate that “if career
lengths remain unchanged over the next 40 years, the theoretical replacement rate
calculations show a decline in many countries across Europe. The drop is more
pronounced in statutory pension systems, and in nearly half of the EU Member
States a double-digit percentage point decline in replacement rates can be expected
from these schemes” [Updates… 2014]. Therefore, in future retirement a significant share of savings accumulated in additional (supplementary) pension schemes
is needed. Occupational pension schemes (plans) can play an important role in
providing additional income in old age. In the future the overall sources of income
for retirees in Poland and other UE Member States may be similar to the current
US system which offers relatively low replacement rates from the statutory scheme
(Social Security). In spite of differences in pension systems design, all developed
countries are facing the same problem – how to create a supplementary system that
provides the needed income.
The primary role of occupational pension systems, whose origins date back to
the industrial revolution, was to bind employees with the workplace, strengthening
their loyalty to the employer by offering them additional support in the form of
non-wage benefits (“golden handcuffs”). They play a different role than public
Barriers and drivers of development of occupational pension schemes in Poland
85
(statutory) pension systems, which provide economic security in old age – this is
achieved through consumption smoothing, insurance, poverty relief and redistribution [Barr and Diamond 2010, p. 27]. This loyalty theme has remained valid, despite the changes in the labour market in the 20th and 21st centuries. Nowadays,
the supporting and supplementary role of occupational pension schemes in relation
to public pension security systems, is becoming increasingly accentuated.
The variety of forms of occupational programmes and the principle of portability become important features in benefit programmes in the event of a change of
employer, and even working in another country. This approach, can make occupational schemes more flexible and able to meet new challenges in the labour market
and social security systems.
The assumptions of the systemic pension reform introduced in Poland in 1999
predicted the development of additional voluntary pension schemes (“the third
pillar of the pension scheme”). Also, some authors and reform leaders, for example
Marek Góra, do not see the necessity of tax incentives for additional (supplementary) pension schemes and insist that the additional pension schemes should be
treated as any other form of private savings [Góra 2013]. But most authors argue
that state support for supplementary pension schemes in the form of economic and
fiscal stimulus is justified [Szumlicz 2005, p. 268]. This also applies to occupational pension schemes.
In the years 1999-2004 (until the introduction of individual retirement accounts
– IRAs) the only form of saving for retirement, benefiting from certain (relatively
modest) economic and fiscal incentives from the state, were occupational pension
schemes (OPS), which were operated in Poland under the name “pracownicze programy emerytalne” (employee pension plans). However, the current development
of OPS in Poland has been very slow – only a little more than 1,000 employers
offer their employees the opportunity to participate in pension schemes (about
2,3% of working population). In this respect Poland does not compare favourably
with other EU countries, including some former socialist states (e.g. Slovakia and
the Czech Republic), where occupational pension schemes are more prevalent.
The aim of this publication is to describe and analyse the development of occupational pension schemes in Poland between 1999 and 2014, and to identify the
main barriers and opportunities for the development of group savings for retirement in the workplace. The article is a continuation of earlier studies on the determinants of occupational pension schemes in Poland.
2. OCCUPATIONAL PENSION PLANS ACROSS THE EU
The starting point for reflection on occupational pension schemes in Poland will
be a brief characterisation of occupational pension schemes in selected European
Marek Szczepański
86
Union countries. Occupational pension schemes, apart from Poland, exist in all
Member States of the European Union (EIOPA 2014]. Depending on the method
of classification, they belong to the second or third pillars of the pension scheme
(see Table 1)1.
Table 1. Taxonomy of pension plans according to the World Bank, OECD (applied
in European Union) and International Labour Organisation (ILO), and the place of
occupational pension schemes in pension systems
1st
pillar
2nd
pillar
3rd
pillar
OECD (the EU)
The World Bank
Publicly managed
pension
schemes
with defined benefits and PAYG
finance,
usually
payroll tax
Privately managed
pensions which are
provided as part of
an
employment
contract
A
relatively
small
(means tested, minimum
pension guarantee or flat
benefit), publicly managed PAYG, defined
pillar
A privately managed
(personal savings plan or
occupational
plan),
mandatory
regulated,
fully funded, defined
contribution pillar
Personal
pension
plans in the form of
saving and annuity
schemes
Voluntary,
individual
account (personal savings plan or occupational plan), privately managed
International Labour
Organisation (ILO)
A minimum, anti-poverty
pension, universally available
but means tested, financed
possibly directly from general revenues and indexed
A mandatory PAYG social
insurance pension which
would provide a reasonable
replacement rate. It would be
fully indexed against inflation. Also, it would be subject of a ceiling
A fully funded contribution
scheme, perhaps privately
managed, which would supplement the public scheme.
This would include occupational as well as individual
schemes. Their operation
would need to be closely
monitored and regulated.
Source: [Kawiński, electronic source].
Pension systems vary extensively across Member States and there are significant differences not only in their structure but also in the terminology used.
In broad terms, individuals can draw retirement income from:
(1) public (statutory) social security schemes;
1
Different taxonomies of the occupational pension schemes are available in the following publications: Gillon [1999], The ILO and pensions [1999], Averting the old-age crisis
[1994], Yermo [2002].
Barriers and drivers of development of occupational pension schemes in Poland
87
(2) occupational pension schemes (OPS) – in American English occupational
pension plans – that are linked to an employment contract; in many countries OPS
are based on collective agreement (for example in the Netherlands and Sweden);
(3) individual pension savings contracts with financial service providers, linked
to voluntary, individual decisions.
It is difficult to obtain complete, comparable data on the level of participation
and the resources of the occupational pension schemes in EU Member States. The
same applies to comparative data on other supplementary pension schemes. The
following opinion, given in the report prepared for the European Commission in
2009, is still valid: “a lack of agreed measures, combined with contrasting systems
and the possibility of double counting (when coverage from various sources is added) means that at present there are no readily comparable international data sets in
this field. It is therefore difficult to accurately determine coverage and contribution
levels” [European Commission 2009, p. 6].
Most workers – understandably – participate in occupational pension schemes
in those countries where they are mandatory or quasi-mandatory (e.g. employers
are obliged to create an occupational pension scheme pursuant to collective bargaining agreements mainly of specific industry character). For example, in the
Netherlands, Sweden and Denmark, the level of participation in an OPS hovers
around 90%. In countries where participation is voluntary, the level is very diverse.
For example, in Germany it is 56.4%, in Great Britain 30.0% and in France only
16.5% of working population [Pensions at a Glance 2013]. Poland (with 2.29%
participation of employees in OPS) is one of the countries with the lowest share of
workers covered by an OPS.
In view of the aforementioned demographic and economic challenges, the European Commission promotes the implementation of a comprehensive strategy
which, among other adjustment measures (e.g. the extension of the statutory retirement age in public pension systems, increasing the rate of employment – particularly among women and older workers), provides for the development of supplementary pension schemes, including occupational schemes [Uścińska 2001]. Programme documents of the European Commission state that “the EU can provide
stronger support for OPS within general pension schemes in the Member States and
contribute to reducing the cost of pensions” [European Commission 2012, p. 9].
The supplementary pension schemes, including collective savings in the form of
occupational pension schemes, should be developed “in order either to improve the
overall adequacy of pension provision by adding private components to the scope
of public provision, or to compensate for reductions in the future replacement rates
of public schemes resulting from reforms” [European Commission 2009, p. 6].
The goal of the EU is to introduce the new EU directive on occupational pension schemes aimed at, inter alia, facilitating the creation of cross-border programmes and supporting the financial stability of occupational schemes. EU
experts assume that a common EU strategy for the development of occupational
pension schemes and the introduction of the new directive and the relevant eco-
88
Marek Szczepański
nomic and fiscal incentives in the Member States will lead to a significant increase
in the level of participation in an OPS in the next 40 years (cf. Figure 1).
Fig. 1. Current and projected levels of participation in occupational pension schemes
in total retirement security in 2046 compared to 2006, based on studies of 16 selected EU
Member States
Source: [European Commission 2014]
These EU projections seem overly optimistic. They indicate, however, how
large a role can be played by occupational pension schemes in the 21st century.
3. THE DEVELOPMENT OF THE OPS MARKET IN POLAND
(1999-2014)
According to the latest data from the Polish Financial Supervising Authority,
1070 occupational pension schemes operated in Poland at the end of 2013, including [Pracownicze programy emerytalne 2013].
 718 implemented in the form of a contract with an insurance company,
 314 implemented in the form of a contract with an investment fund,
 38 implemented with an employee pension fund (a fund which is managed internally in the company by pension fund society – a joint stock company, not by
external financial institution (pension plan provider); such employee pension
funds function only in very few big companies in Poland).
Barriers and drivers of development of occupational pension schemes in Poland
89
The average value of assets per a statistical OPE participant as of 31.12.2013
was PLN 25. 700 (about EUR 5,976). To compare: the average monthly salary in
Poland is about 3.400 (about 1000 EUR). The number of participants was 375.000.
The coverage of the occupational pension schemes in Poland was very small –
only about 2.3% of the working population.
The current development of occupational pension schemes in Poland can hardly
be called a success story. In the period 1999-2004 and until the introduction of
individual retirement accounts (IRA) occupational pension schemes were the only
form of additional savings for retirement and benefited from specific economic and
fiscal incentives from the state. In the first period of OPS activity, regulations then
in force and the associated restrictive practice by financial regulators did not favour
the development of such schemes. The employers running pension schemes did not
hold the right to suspend their activity in the event of the deterioration of the financial condition of a company and the de facto liquidation of the programme was
possible only under the condition of a company’s bankruptcy. If we add to this
very strict penalties for formal irregularities in the conduct of the programme and
the lack of sufficiently strong incentives to create programmes aimed at employers
and also those encouraging employees to participate in the pension schemes, it is
hardly surprising that the development of OPS in this period was very slow, and
only small numbers of employers were involved in the creation of pension schemes
for employees.
Some progress in the development of OPS came along with the Act on Occupational Pension Schemes of 20 April 2004, which reduced the risk associated with
the formation of such schemes for employers by allowing for the suspension, and
in certain cases even the abolition, of a scheme in the event of the deterioration of
an employer's financial situation2. Restrictiveness has also decreased and procedures have been simplified in the field of the OPS market monitoring conducted by
the state. Simultaneously, there was an introduction (at the end of 2005) of a requirement for previously functioning group life insurance to be transformed into
occupational pension schemes acting in accordance with the provisions of the 2004
Act. This represented a significant impetus for the development of the occupational
pension scheme market: the number of programmes at the end of 2005 (906) tripled when compared to the end of 2004 (342), and the number of participants in
this period increased by 100%. But it was only a limited incentive to transform
group insurance arrangements into occupational pension plans. Such a negative
incentive existed only one year (from 2004 till the end of 2005). Afterwards the
situation moved to a previous state: most companies in Poland offer some kind of
group insurance (in most cases connected with an insurance against accidents at the
workplace) but only very few of them run pension plan in form of group insurance
2
Journal of Laws no. 116, item 1207, as amended; Journal of Laws of 2005, no. 143,
item 1202.
90
Marek Szczepański
which fulfils the requirements of Act on Occupational Pension Schemes of
20 April 2004.
In subsequent years, growth in the number of programmes was slow and
in 2013 the number of active programmes even decreased. There was stagnation in
the development of OPS, with just over 1000 active programmes to which contributions were paid (cf. Figure 2).
Fig. 2. OPS market development in the years 1999-2013 – number of active occupational
pension schemes
Source: [Pracownicze programy emerytalne 2013, own elaboration]
The main source of funding for the programme was the basic contribution paid
by the employer. The size of additional contributions, paid voluntarily by employees, did not exceed 4–6 per cent (cf. Figure 3). All employees of an employer who
has OPS have the right to make voluntary contributions but only few of them make
use of this right.
The number of OPS participants is relatively very low in relation to the labour
force in Poland, as it is (as of 2014) approximately 2% of total employment.
The increase in the number of participants has been slow; the only significant
quantitative leap occurred in the period 2004-2005, and was connected with transformation of some former group life insurance into occupational pension schemes
(see Figure 4).
Barriers and drivers of development of occupational pension schemes in Poland
91
Fig. 3. The amount of basic contributions and additional contributions paid to OPS
in the years 1999-2013 (in PLN)
Source: [Pracownicze programy emerytalne 2013, own elaboration]
Fig. 4. The number of OPS participants in Poland in the years 1999-2013 (in thousands)
Source: [Pracownicze programy emerytalne 2013, own calculations]
Note the systematic increase in the number of participants. However, in 2012
and 2013 a fall in the nominal number of existing programmes was recorded.
The participation rate in occupational pension schemes (in this very few, about
1000 companies in Poland which run such a plan), defined as the ratio of the number of participants for whom contributions are paid in relation to the number of all
employees of a given company, was 73.6% at the end of 2013. In previous years
this figure was also in excess of 70%. This shows that where such programmes are
offered by the employer, the vast majority of workers use them.
Marek Szczepański
92
Analysis of the investment efficiency of different forms of occupational pension
schemes in Poland is difficult because of the lack of data concerning the structure
of the fees charged in various forms of OPS and of their investment results (such as
rate of return in nominal and real terms, etc.). Only the data on the investment performance of OPS operated in the form of an employee pension fund (PFE) are published regularly (see Figure 5). In contrast, the actual fees charged by the investment fund, insurance or asset management company that supports an employee
pension fund are included in company contracts and not reported to the Polish
Financial Supervision Authority.
20,00%
15,00%
10,00%
5,00%
0,00%
-5,00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-10,00%
-15,00%
-20,00%
PFE "Nowy Świat" 2000-02-29
PFE TELEKOMUNIKACJI POLSKIEJ S.A. 2001-11-30
PFE NESTLE POLSKA 2003-12-15
PFE UNILEVER POLSKA 2003-12-31
PFE Słoneczna Jesień 2005-12-30
2 okr. śr. ruch. (PFE TELEKOMUNIKACJI POLSKIEJ S.A. 2001-11-30)
Fig. 5. Investment efficiency of PFE in the years 2000-2013 (average for the market,
and the annual rate of return for each PFE).
Source: [Pracownicze programy emerytalne 2013]
4. BARRIERS TO THE DEVELOPMENT OF OCCUPATIONAL
PENSION SCHEMES IN POLAND
The above characteristics of the development of the OPS market suggest that
it has been taking place very slowly (except for the sharp increase in 2005 due to
statutory changes) and definitely does not reflect the scale of the need for an additional, group form of saving for retirement, which may be more effective (if only
Barriers and drivers of development of occupational pension schemes in Poland
93
due to economies of scale and the ability to negotiate lower fees for the operation
of the programme by financial institutions) than individual programmes, which
should nonetheless be supported and disseminated much more within the third
pillar. It is enough to just compare the number of 375 thousand participants with
the figure of 15 million working individuals to demonstrate that the scope of participation in occupational pension schemes in Poland is negligible. The ratio of assets
accumulated in OPS compared with GDP is the same (less than 1%).
Thus, a question arises: what are the main barriers to the development of
OPS? Do they lie in the design of the programmes, or in the weakness of economic
and fiscal incentives targeted at employers and employees associated with OPS, or
in the attitudes and motivations of employers (who are reluctant to take additional,
long-term commitments regarding their employees) and employees (who prefer
wage increases instead of additional saving for retirement in the workplace)?
Or perhaps external factors have had a decisive influence – macroeconomic ones
(e.g. structural unemployment sustained throughout the whole period after the
transformation of the economic system in Poland) and political ones (e.g. the instability of government tax policies for enterprises)?
Previous studies suggest that the barriers to the development of OPS stemmed
from the whole complex of interrelated factors, both external as well as internal
in relation to enterprises [Szczepański 2010].
The main reasons for the low participation in occupational pension schemes are:
1. The poor economic and fiscal incentives for employers.
2. The inability to diversify the level of premiums for different groups of employees.
3. The lack of tax exemption and the informal ban on OPS contribution in public
sector.
4. Macroeconomic causes – e.g. continuing throughout the period of the PPE relatively high, double-digit unemployment rate, which is not inclined employers to
take additional, long-term commitments to employees (in Poland, the main
source of funding for occupational programmes is the basic contribution paid by
the employer).
5. The lack of strong pressure for the creation of pension schemes in the workplace, both on the part of employees and unions representing their interests (the
employees prefer higher wages rather than supplementary pension plans).
6. Very restrictive regulations in force in the first period of the EPP (1999-2004),
including inability to suspend or terminate the programme in the event of a deterioration in the financial condition of the employer.
As the employer plays a crucial role in the whole process of setting up and running the occupational pension scheme, the factors which impact the employer’s
decisions should be regarded as the most important ones. This was also confirmed
by empirical studies conducted on a representative sample of 100 out of approx.
1,000 companies engaged in occupational pension schemes in Poland [Szczepański
2010].
94
Marek Szczepański
Detailed analysis of all macro- and microeconomic, social, legal and institutional determinants of the development of occupational pension schemes are beyond
the scope of a single article. Therefore, this article will focus on the barriers that
could be relatively quickly removed. These include the introduction of more effective economic and fiscal incentives directed at entrepreneurs and workers, and also
legal and institutional changes that could accelerate the development and increase
the coverage of occupational pension schemes in Poland.
The experience of many countries shows that, despite its voluntary nature, the
level of participation in occupational pension schemes could reach 40-50% of
the working population [Pensions at a Glance 2013, p. 189]. This suggests that
economic and fiscal incentives that the government addresses to the participants of
the programmes remain critical.
The incentive for employers in the form of is very poor. The basic contributions
to OPS (paid in Poland by employer) are exempted from contributions to social
insurance. So it would cost less to pay for example 100 PLN into OPS than to pay
100 PLN higher wages with obligatory contributions to social insurance. But such
motivation addressed to employers is relatively weak. It is difficult to expect more
employers to obtain greater tax relief in this respect.
In Poland employees paying additional contributions to OPS are exempt from
capital gains tax (the “Belka tax”) up to a specified annual contribution limit. It is
a relatively weak and distant time incentive (OPS assets can be withdrawn after the
age of 60). It would be worth harmonising fiscal incentives used in the Individual
Retirement Accounts (IRA) and OPS. The participants of IRA (which is currently
the best form of additional saving for retirement, with a relatively high exit rate
before the age of 65) face a strong incentive in the form of annual IRA payment
exemption (up to a certain limit, a flat rate, currently amounting to little more than
PLN 4,000 per annum) from the PIT (personal income tax) tax base lump sum,
a relatively small tax (10%) paid only upon the receipt of additional pension capital
accumulated on IRA. Meanwhile, paradoxically, OPS participants not only lack
any annual tax relief, but must pay tax on additional income in the form of basic
contributions made to the scheme by their employer. For many people this is
a disincentive to participation in an OPS.
The employers cannot individualise basic contributions to different groups of
their employees to motivate the better workers) (currently legal regulations require
employers to pay the contributions for all OPS participants on the same basis – at
a uniform premium rate of salary, in the same amount or percentage of the coverage limit). That is why the OPS cannot be used as an instrument of an effective
human resources management policy. Another important barrier to the development of occupational pension schemes is the lack of appropriate implementing
provisions in the Act on OPS of 2004, which would facilitate the creation of OPS
in numerous public sector units. The exceptions here are universities that can allocate part of their welfare fund to contribute to OPS. It is true that the creation of
a pension scheme in public finance sector units is not prohibited, but it has never
Barriers and drivers of development of occupational pension schemes in Poland
95
had any assets isolated in its budgets. Moreover, informal activities have recently
been undertaken to eliminate the few operating OPS in this sector (badly conceived
savings on investments in human capital).
5. CONCLUSIONS AND RECOMMENDATIONS
The general conclusion, based on the analysis of the current development of occupational pension schemes in Poland, can be formulated as follows: throughout
the whole period of the functioning of OPS (1999-2014) factors predominated that
could be evaluated as barriers to growth. Economic incentives for employers and
employees interested in creating and participating in occupational pension schemes
were too weak or badly addressed. Without radical changes in the legal and institutional framework of OPS and the introduction of more attractive economic and
fiscal incentives, the development of occupational pension schemes is not possible.
The question remains – what changes are necessary to encourage
employers to create occupational pension schemes and improve participation
of employees in OPS.
An interesting solution, successfully used in the UK, is the automatic inclusion
of every newly recruited employee to OPS (automatic enrolment), with an exit
option (the ‘opt-out’ option) at their request [Sieczkowski 2004]. Such a solution
could also be introduced in Poland, at least for large companies (those with more
than 250 employees). The basic contributions to OPS could be divided between the
employer and the employee (e.g. at 1% of gross wages). The part paid by the employer could be financed from the company social fund (such a possibility exists to
date in public universities. Social fund is obligatory created in companies in Poland
to finance for example summer holidays for employees and their families (but only
to some upper limits – caps) or some benefits (for example fitness activities). Low
income workers can receive a little more support from this social fund in company.
It may be an obstacle against using some resources from this fund to finance supplementary pension plans. But from the other point of view, such solution could be
cheaper for employer.
In Polish conditions it would perhaps be easier (and also not violate the principle of voluntary participation in the third pillar) to replace tax benefits for OPS
participants with specified cash bonuses (e.g. PLN 500 per year). The experience
of many countries (including Germany and the Czech Republic) shows that extra
saving for retirement becomes more attractive when participants receive cash instead of tax relief (although the financial costs of both solutions may be identical).
However, the problem with the introduction of such a solution may be related to
the cost to the state budget. The cost of such a cash bonus dedicated to the participants of occupational pension schemes in Poland can be estimated by comparison
Marek Szczepański
96
with a similar proposal concerning individual retirement accounts. According
to the estimates, depending on the size of participation (10–50%, with the exception of those making payments of more than 120% of the average wage), the cost
of such a solution for the state budget would be at a level of PLN 2.3–4.6 billion.
The disadvantage of this solution may be too weak an incentive for medium and
higher incomes which will mean that the participation in these groups will not be
very high [Dodatkowy system emerytalny w Polsce 2014].
Of course, creating more attractive incentives to gather additional savings for
retirement in occupational pension schemes requires additional cost. However,
these inputs can be treated as an investment, which will reduce the future cost of
pension contributions to the public pension system. Future retirement benefits from
the public pension system, according to the number of simulations, will be very
low, which may mean that future retirees will have to use, for example, social care
support.
What's more, many people with middle and lower incomes will not be able to
fulfil this requirement. To receive the minimum pensions from Polish Social Security men have to pay contributions from their benefits at least 25 years and women
20 years. This involves the disruption caused by unemployment and other factors
(e.g. the care of children or elderly parents)3.
It is hard to disagree with the opinion of T. Szumlicz, who suggests that if the
state is not able to provide an adequate level of retirement benefits, it should support the development of supplementary pension schemes, including through their
creation and by increasing incentives (mainly tax incentives) [Szumlicz 2005,
p. 268].
A campaign promoting the establishment of OPS conducted by state institutions
could also be of use, as the modest information activities undertaken in this regard
by the Polish Financial Supervision Authority have been insufficient, and they do
not reach the majority of employers in Poland. There are no limites on the ability of
mutual funds and insurance companies to promote the OPS. The should be interested in doing so (as the mutual investment funds in other countries, for example
in the US. But it is not the case of Poland. May be private occupational pension
schemes providers will be more active on this market when the State creates better
tax incentives for sponsors and participants of the OPS.
The aforementioned proposals do not exhaust all the possible solutions for
stimulating the development of OPS. One thing is certain: so far the factors determining the development of OPS are still overwhelmed by barriers (counterincentives) rather than stimulators. Only the joint effort of state authorities (both legislative and executive), experts and those private financial institutions interested in the
3
Simulations carried out by A. Jajko-Siwek show that the minimum pension surcharge
will be necessary for people who, during their careers, have received low income or those
receiving their average salary and pension premiums by discharging after less than 31 years.
Cf. A. Jajko-Siwek [2014, p. 194].
Barriers and drivers of development of occupational pension schemes in Poland
97
development of OPS, will be able to change this. Otherwise, the OPS market in the
current legal and institutional framework (as of December 2014) is doomed
to stagnation and, in the longer term, regression.
LITERATURE
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item 1207, as amended; Journal of Laws, 2005, no. 143, item 1202.
Averting the Old Age Crisis 1994. A Word Bank Policy Research Report, Word Bank,
Oxford University Press, Washington DC.
Barr N., Diamond P., 2008, Reforming pensions: Principles and policy choices, Oxford
University Press, New York and Oxford.
Barr N., Diamond P., 2010, Pension Reform. A Short Guide, Oxford University Press,
New York.
Blake D., 2006, Pension Economics, Wiley, Chichester.
Blake D., 2006, Pension Finance, Wiley, Chichester.
Bovenberg L., Ewijk C. van, E. Westehout (eds.), 2012, The Future of Multi-Pillar
Pensions. Cambridge University Press, Cambridge.
Dodatkowy system emerytalny w Polsce – diagnoza i rekomendacje zmian, 2014, Report
prepared by a team under the direction of Joanna Rutecka, composed of: Kamila Bielawska, Ryszard Petru, Sylwia Pieńkowska Kamieniecka, Marek Szczepański, Maciej
Żukowski, Towarzystwo Ekonomistów Polskich, Warszawa.
EIOPA, 2014, Data Base, EIOPA-BoS-13 059/24, https://eiopa.europa.eu/fileadmin
/tx_dam/files/publications/Pensions_Register/EIOPA-BoS-13-060_Database_of_ pension_plans_and_products_in_EEA_Statistical_Summary.pdf [access: 21.11.2014].
European Commission, 2012, White Paper. An Agenda for Adequate, Safe and Sustainable
Pensions, Brussels.
European Commission, 2014, Memo. Revision of the Occupational Pension Funds,
Directive – frequently asked questions, Brussels.
Gillon C., 1999, The ILO and pensions, Social Security Department, ILO, Geneva.
Góra M., 2013, Głos w dyskusji, in: IV debata emerytalna z cyklu „Bezpieczeństwo
dzięki zrównoważeniu”, Ministerstwo Pracy i Polityki Społecznej, http://www.mpips.
gov.pl/ aktualnosci-wszystkie /art.5539.6315.debata-emerytalna-przyszlosc-iii-filara.
html. [access: 5.11.2014].
GUS, 2014, Sytuacja demograficzna osób starszych i konsekwencje starzenia się ludności Polski w świetle prognozy na lata 2014-2050, GUS, Warszawa, http:stat.gov.pl
[access: 15.11.2014].
Holzmann R., Hinz R., 2005, Old Age Income Support in the 21st Century, The World
Bank, Washington, DC.
Holzmann R., Hinz R., Dorfman R., 2008, Pension Systems and Reform Conceptual
Framework, Social Protection Discussion Paper 0824, The World Bank, Washington, DC.
Jajko-Siwek A., 2014, Między wewnątrzpokoleniowa redystrybucja dochodowa, in:
M. Szczepański, T. Brzeczek, M. Gajowiak (eds.), Social security systems against the
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challenges of demographics and market, Publishing House of Poznan University
of Technology, Poznań.
Kawiński M., How to present performance of pension funds to the future pensioners?,
http://www.social-policy.org.uk/lincoln/Kawinski.pdf.
Komisja Polityki Senioralnej, 2014, Full record of the meeting, No. 9, Chancellery
of the Sejm, 7th term of office, http://orka.sejm.gov.pl /zapisy7.nsf/0/
A56164FC59965652C1257D95005036C5/%24File/0393307.pdf [access: 15.12.2014].
Muir D.M., Turner J.A. (eds.), 2011, Imaging the Ideal Pension system. International Perspectives, Michigan: W.E. Upjohn Institute for employment Research, Kalamazoo.
Pensions at a Glance 2013, OECD and G20 Indicators, 2013, OECD Publishing, Paris.
Petelczyc J., 2014, Pracownicze programy emerytalne w Unii Europejskiej, Ubezpieczenia
Społeczne. Teoria i Praktyka, 1/118, dwumiesięcznik Zakładu Ubezpieczeń Społecznych.
Pracownicze programy emerytalne w 2013 roku, Urząd Komisji Nadzoru Finansowego,
Warszawa, http://www.knf.gov.pl/Images/RAPORT_PPE_w_2013_tcm75-38451.pdf
[access: 15.12.2014].
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Sieczkowski W., 2004, Reforma systemu emerytalnego w Wielkiej Brytanii, Wiadomości
Ubezpieczeniowe, nr 2.
Szczepański M., 2010, Stymulatory i bariery rozwoju zakładowych systemów emerytalnych
na przykładzie Polski, Wydawnictwo Politechniki Poznańskiej, Poznań.
Szczepański M., Turner J.A. (eds.), 2014, Social Security and Pension Reform. International Perspectives, Michigan: W.E. Upjohn Institute for Employment Research,
Kalamazoo.
Szumlicz T., 2004, Zabezpieczenie emerytalne w systemach zabezpieczenia społecznego,
in: T. Szumlicz, M. Żukowski (red.), Systemy emerytalne w krajach Unii Europejskiej,
Twigger, Warszawa.
Szumlicz T., 2005, Ubezpieczenia społeczne. Teoria dla praktyki, Oficyna Wydawnicza
Branta Bydgoszcz–Warszawa.
The ILO and pensions, 1999, ILO: Social Security Department, Geneva.
Turner J., 2014, Social Security and Pension Trends around the World, in: M. Szczepański,
J.A. Turner (eds.), Social Security and Pension Reform. International Perspectives,
Michigan: W.E. Upjohn Institute for Employment Research, Kalamazoo, p. 13-14.
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&further News=yes [access: 10.11.2014].
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OECD, Paris.
Żukowski M., 2006, Reformy emerytalne w Europie, Akademia Ekonomiczna w Poznaniu,
Poznań.
Marcin WOJEWÓDKA*
THE IMPACT OF TRADE UNIONS
ON OCCUPATIONAL PENSION SCHEMES IN POLAND
The article rises the issue of employee representations (trade unions) during the process
of implementation and while operation of an occupational pension schemes, according to
the Polish act of 20 April 2004 on Occupational Pension Schemes. In general, reaching
agreement between employers and employee representations (trade unions) is a prerequisite
to establish company pension scheme agreements and, as a consequence, an occupational
pension schemes. What is more, the role of employee representations (trade unions)
is essential for modification of functioning schemes. Schemes’ liquidations can be conducted
unilaterally by employers, nonetheless consensus with employee representations (trade
unions) facilitates the process. In the following paragraphs the author explains the definition of employee representations (according to the act on Occupational Pension Schemes)
and their influence on implementation, modification and liquidation occupational pension
schemes in Poland.
Key words: trade unions, occupational pension scheme, employee representation, company pension scheme agreement
1. INTRODUCTION
An employer is entitled to introduce unilaterally medical benefits or insurance
for employees working at the company. In general Polish law does not restrict employer’s one sides decisions when they are beneficiary for employees. However,
in the case of an occupational pension scheme is opposed. This benefit cannot be
established without cooperation between the employer and employees. In order to
implement such a scheme, the employer must cooperate with the representation of
employees, conclude all negotiable provisions and settle the relevant agreement.
A stipulation of the company pension scheme agreement is a prerequisite for registration the particular occupational pension scheme by the Polish Financial Supervi*
„Wojewódka i Wspólnicy” Sp.k. Kancelaria Prawa Pracy.
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Marcin Wojewódka
sion Authority. Despite the fact that the employer initiates this additional benefit
and covers its costs, he must obtain employees approval (at least at form of the
company pension scheme agreement).
Additionally, when it comes to an occupational pension scheme, cooperation
with employees is needed not only while initiating, but also while modifying
or adjusting its provisions. Employees’ participation is also useful in the process
of scheme’s liquidation. In general, success of the particular occupational pension
scheme depends on cooperation between the employer and the employee representation.
2. NEGOTIATIONS ON BEHALF OF EMPLOYEES
Parties to the company pension scheme agreement are: employer (according to
the article 3 of the Labour Code: an organisational unit even if it has no legal personality or individual provided that it employs employees) and representatives
of employees. On behalf of employees, negotiations and work on the company
pension scheme agreement are leaded by the representation of employees formed
from all company trade union organizations active in the company, according
to the article 11 section 2 of the Act on Occupational Pension Schemes (further: the
Act). Here regulations expressed in the Polish Labour Code (article 24125a) connected with representative enterprise trade union do not apply. From the practical
point of view such regulation can lead to complications: non representative enterprise trade unions can preclude or delay work on occupational pension scheme.
However, according to the article 11 section 8 of the Act, if the company pension
scheme agreement is not concluded within two months from the day on which the
employer presents the employee representation with the scheme proposal as due to
the parties’ failure to agree upon the terms and conditions of such agreement, the
employer may enter into a company pension scheme agreement with representative
trade union organisations (within the meaning of article 24125a of the Labour
Code). According to this regulation, exclusively the situation when the agreement
is not concluded, delivers the employer possibility to cooperate with representative
trade unions instead of the whole employee representation. Such situation is not
possible when, for example, the employer failures at least to try to negotiate with
non - representative enterprise trade unions. Thus, the employer can negotiate with
representative enterprise trade unions only when he has previously presented the
scheme proposal to the whole employee representation (formed from all company
trade union organizations active in the employer’s company) and after two months
period, the company pension scheme agreement was not concluded as the result of
lack of consensus.
The impact of trade unions on occupational pension schemes in Poland
101
According to article 11 section 3 of the Act, if there are no trade union organizations active in the employer’s company, employee representation must be elected. Elections must accord with the applicable procedure adopted by the employer.
The employer himself cannot indicate directly employees for the representation.
The procedure (instruction, ruling) must be determined by indication the number of
employees included in the representation, the representation demands (e.g. the
number of signatures needed for the agreement).
Correctness of the procedure is examined by the Polish Financial Supervision
Authority while registration particular occupational pension scheme. If the procedure (instruction) is not approved, the Polish Financial Supervision Authority calls
upon the employer to correct application. The Authority refuses to register
a scheme if the correction is not made by a fixed deadline. Thus, such procedure is
examined in the subsequent stage of registration.
The set time limit for the authorization of the employee representation expires
24 months after the election date. After this period, for the sake of the occupational
pension scheme new elections must be conducted. What is more the authorization
expires before the 24 months period in cases when at least half of the persons included in the employee representation cease to be employed by the employer
and/or a trade union organization starts operating at the employer’s company. After
occurrence of the first situation new elections for employee representation must be
held. In the second situation, newly established trade union organization becomes
the employee representation. It results from the above, that trade union organizations always prevail over elected employee representation. Thus, for the purposes
of the Act trade union organizations (if existing) or elected employee representation act on behalf of employees. From the practical point of view, if there are enterprise trade unions operating at the employer’s company their agreement is essential to conclude company pension scheme agreement and, as a consequence, the
occupational pension scheme in general. What is more, in the large majority of
cases the employees’ party is represented by trade unions, so in practice all regulations demanding cooperation with the employee representation, require in fact cooperation with enterprise trade unions.
3. INITIATION OF WORK
ON OCCUPATIONAL PENSION SCHEME
In general, it is the employer who initiates talks on occupational pension
scheme. However, the idea of implementing this employment bonus might be
caused by corporation’s ruling or employees’ demand. As the Occupational Pension Scheme is relatively expensive the employer must consider whether he can
afford to open the scheme. Among costs of the occupational pension scheme the
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Marcin Wojewódka
majority of expenses basic contributions (covered by the employer) and administrative costs (the biggest companies need to employ additional employees for an
occupational pension scheme services as the scheme requires accuracy in documentation). Thus, according to the Act, the employer initiates consideration on
occupational pension scheme and its possible terms. The employer is obliged to
present the employee representation proposal of occupational pension scheme containing draft of the company pension scheme agreement, the terms and conditions
of a preliminary agreement with a financial institution, or the articles of association
of the pension fund company and the pension fund, or their drafts. The validity
term of the proposal may not be shorter than three months. According to the Act,
employer is not obliged to negotiate the form of a scheme, the managing party
(financial institution), the amount of the basic contribution and others with the
employee party. However, employee’s participation at this stage is beneficial for
the occupational pension scheme because it gives an actual sense of agreement for
both parties, which is undoubtedly useful for elaborating other negotiable provisions of the agreement. In this way, parties are treated equally. The representation
of employees can express their opinion not only by confirmation the draft of the
company pension scheme agreement but also by negotiating general provisions of
occupational pension scheme, the terms and conditions of an agreement with
a financial institution and finally, the draft of company pension scheme agreement.
In practice, the opinion of the employee representation is presented at least by confirmation of included in the company pension scheme.
According to the article 11 section 7 of the Act, in order to enter an occupational pension scheme the employer presents a scheme proposal containing draft company pension scheme agreement and terms and conditions of a preliminary agreement with a financial institution. Formally, this is the first obligation towards the
employee representation. As a result of this regulation, the employer must invest
time and financial resources for the sake of the offer only. More precisely, at this
stage at least draft company pension scheme agreement and preliminary agreement
should be prepared which is already demanding.
If the employee representation refuses to conclude a company pension scheme
agreement in general, then the employer’s efforts will be unavailing. What is more,
if the employer concludes the preliminary agreement with a financial institution
consequences expressed in the articles 389 and 390 of the Polish Civil Code are
applied accordingly. In extreme cases when the company pension scheme agreement is not concluded and, as a consequence, the occupational pension scheme
agreement cannot be registered, the managing institution is entitled to demand
remedy of any damage they suffered by counting on the execution of the final
contract.
Thus, in order to save effort and avoid losing funds by the employer, the employee representation should be engaged in the whole process from the beginning.
The most convenient option is consultation the idea of the scheme and the decision
making with the employee representation. Important decisions include for example:
The impact of trade unions on occupational pension schemes in Poland
103
the form of the scheme, the managing institution, the amount of basic contribution,
the minimum supplementary contribution amount or prohibition of declaring such
a contribution. Theoretically, the employer presents the a draft of company pension
scheme agreement which must contain all provisions listed in the article 13 of the
Act. The employee representation (trade unions) may agree or not to the proposal.
Lack of consent implies failure of the occupational pension scheme. Here the company pension scheme agreement resembles adhesion contracts. Practically, if the
employee representation is powerful employees can negotiate and change provisions and, as a consequence, constrain the employer to adjust provisions of the
agreement with financial institution. Stronger employee representation, bigger influence on the agreements and the occupational pension scheme’s final form and
provisions.
4. MODIFICATIONS OF AN OCCUPATIONAL PENSION SCHEME
The occupational pension scheme can function only within form resulted from
agreements – registered by the Polish Financial Supervision Authority. Particular
scheme receives its own number in the registry and is constantly supervised. Every
change to the scheme requires official supervision and registration. Modification of
company pension scheme agreement and/or agreement with financial institution are
prerequisites for changes in the official register. Every adjustment, change or annex
to the agreements oblige the employer to negotiate new ideas and provisions with
the employee representation. If the employees’ party is not willing to cooperate and
settle the agreement for changes, the employer cannot act unilaterally. When
agreement for changes is not concluded, the provisions of already registered occupational pension scheme are still binding.
The employer may act unilaterally only on the basis of competences given by
the Act (modified by the company pension scheme agreement when possible).
According to the Act, without approval of the employee representation, the employer is entitled exclusively to: suspend the allotting of basic contributions, temporarily reduce the basic contribution amount by defining the rules for calculation
of the basic contribution which will be applied during the period of reduction. The
aggregate period of unilateral suspension may not exceed three months within
twelve consecutive calendar months. However, when the company prison scheme
agreement enables, time may be extended up to six months. Here, employer’s decision is unilateral but it must be preceded by approval of the employee representation expressed in the company pension scheme agreement. Upon the lapse of
a suspension period as referred above, the employer may, exclusively if such
a measure is justified by the employer’s financial condition, enter into an agreement with representatives of employees (trade unions). If parties conclude consent,
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Marcin Wojewódka
the calculation and allotting of basic contribution may be suspended or the amount
of basic contribution may be temporarily reduced by way of defining the rules for
calculation of the basic contribution, which will be applied during the period of
reduction. Within 48 consecutive calendar months, the aggregate term for an
agreement cannot exceed 24 months, unless further calculation and allotting of
basic contributions would result in the filing of a petition of the bankruptcy. The
above mentioned agreement comes into force solely after proper registration by the
Polish Financial Supervision Authority. The registration includes: the date conclusion, the effective date, the expiry date of the agreement, the basic contribution
amount during term of the agreement. Convenience for the employer is possible
only after agreement with the employee representation (trade unions).
On the other hand, if the employee’s party initiates changes (e.g. augmentation
of the basic contribution), the employer is not obliged to negotiate and accept
the offer.
5. LIQUIDATION OF AN OCCUPATIONAL PENSION SCHEME
The idea of opening the occupational pension scheme reflects employees’ need
to accumulate and invest resources for the future pensions. In general, employers
open the scheme for unlimited time, without considering necessity of liquidation
the scheme. Nonetheless, economic situation of the employer may fluctuate or
deteriorate for longer periods, thus, liquidation of the occupational pension scheme
may be inevitable to optimize costs and keep the company functioning. For these
reasons, initiation of liquidation the scheme is possible at any time. The employer
is entitled to begin the process unilaterally, without the approval of employee representation. However, liquidation of the scheme may be conducted more agile and
effective when is proceeded by the employer and employee representation consent.
Moreover, the Act divides provisions of liquidation into two groups where gives
different roles for the employee representation. Fulfilling provisions of the first
group makes liquidation mandatory in the situation when employee representation
refuses to conclude new provisions of the company pension scheme agreement.
Those situations are diverse for different forms of the occupational pension
scheme. According to the article 40 section 1 of the Act this group includes: placing into liquidation the insurance undertaking, unless the rights under the agreement executed by the employer and the undertaking are transferred (assigned)
to another insurance undertaking, grounds for dissolution are fulfilled and, as
a consequence, all the investment funds are liquidated (in which contributions
under the scheme were accumulated), unless any of the investment funds is taken
over by another investment fund company, the pension fund is placed into liquidation, unless the fund is taken over by another pension fund company, operating
The impact of trade unions on occupational pension schemes in Poland
105
more than one scheme simultaneously where it acquires another employer or an
organised part of its enterprise, or acquires shares in a pension fund company or in
the event of a merger of employers operating schemes and finally terminating
agreement with the employer by the financial institution. If one of conditions is
fulfilled, the agreement with new financial institution must be concluded which, at
the same time requires changes in the company pension scheme agreement. Here
cooperation between the employer and the employee representation is inevitable.
If representatives of employees do not agree to change the company pension
scheme agreement, the occupational pension scheme must be liquidated.
In most of the cases the section 1 of the article 40 indicates situation related to
the financial institution, whereas the section 2 indicates situations related to other
conditions, for example: the employer’s situation, law infringement, the value is
decrease of the assets accumulated in the scheme below the amount defined in the
company pension scheme agreement. Here, the employee representation has an
authentic influence on liquidation initiated by the employer in two situations. The
employer can liquidate the occupational pension scheme with or without the
approval of the employee representation. However, cooperation with the employee
representation makes the process of liquidation undoubtedly cheaper, quicker and
as a consequence more convenient for the employer. The employer resolves to
liquidate the scheme provided that he concludes a relevant agreement on termination of the company pension scheme agreement. The employer’s and the employee
representation’s mutual consent on immediate liquidation the scheme is invalid.
Even in case when the representatives of employees agree on liquidation, the termination notice period must be observed. The length of termination notice result
from the company pension scheme agreement mutually achieved position. If the
employee representation does not agree to liquidation, the employer may act unilaterally. The employer may resolve to terminate the company pension scheme
agreement by his one-sided decision, subject to at least 12 months’ notice, if basic
contribution allotting has been suspended, or the amount of basic contributions has
been reduced, for at least three months. Here the employer may terminate agreement (observing the notice period) only under conditions of previous suspension of
allotting the basis contribution or reduction the amount of the basic contribution for
at least 3 months. The termination notice results from the company pension scheme
agreement and cannot be shorter than 12 months.
6. CONCLUSIONS
Despite the fact that employees can collect and invest money within the occupational pension scheme voluntary – there is no legal obligation to participate in the
scheme, opening this benefit requires consent of the employer and the employee
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Marcin Wojewódka
representation (unlike other benefits which can be introduced by employer’s unilateral decision). In most of the companies, the employee representation consists of
active trade unions. Theoretically, the representation’s approval is essential only
for concluding the company pension scheme agreement, practically it is useful in
every action connected with the occupational pension scheme. Among these actions implementation, functioning and liquidation can be distinguished. In the process of implementation, the employee representation and the employer must conclude the company pension scheme agreement with its all essential provisions.
Because the company pension scheme agreement must accord with the agreement
with the financial institution, if the position of trade unions is strong enough, they
can influence the employer to adjust agreements to employees’ requirements (within the limits of the law). What is more, mutual consent of the employer and the
employee representation is a prerequisite to change or adjust the functioning
scheme. If the employer initiates changes and the employee representation does not
approve them, the employer can solely accept the state and conduct the scheme
exclusively on the existing conditions or initiate liquidation of the scheme. Liquidation of the scheme is possible to conduct unilaterally by the employer. Such regulation is caused by economic reasons, as this benefit is relatively expensive.
However, cooperation with the employee representation facilitates the whole process. Consent enables to optimize costs and time of liquidation. Hence, this option
is more convenient for the employer.
LITERATURE
Ciemniewski M., 2000, Programy emerytalne. Korzyści dla pracowników i pracodawców,
Przegląd Ubezpieczeń Społecznych i Gospodarczych, nr 6.
Czechowska M., 1999, Pracownicze programy emerytalne jako III filar systemu emerytalnego, Prawo Pracy, nr 4.
Kopeć A., W. Maciejko, M. Wojewódka, 2008, Świadczenia emerytalne, C.H. Beck, Warszawa.
Kopeć A., Wojewódka M., 2005, Pracownicze programy emerytalne. Komentarz do ustawy
z dnia 20 kwietnia 2004 r., C.H. Beck, Warszawa.
Piątkowski J., 2005, Uprawnienia zakładowej organizacji związkowej, TNOiK „Dom
Organizatora”, Toruń.
Sierocka I., 2003, Strony zakładowej umowy emerytalnej, Praca i Zabezpieczenie Społeczne, nr 1.
Sierocka I., 2000, Pracownicze programy emerytalne, Temida 2, Białystok.
Sierocka I., 2005, Uczestnicy programów emerytalnych, Administracja Publiczna, Zeszyty
Naukowe Wyższej Szkoły Administracji Publicznej w Białymstoku, nr 1(5).
Szczepański M., 2010, Stymulatory i bariery rozwoju zakładowych systemów emerytalnych
na przykładzie Polski, Wydawnictwo Politechniki Poznańskiej, Poznań.
The impact of trade unions on occupational pension schemes in Poland
107
Wojewódka M., 2004, Najpierw trzeba zawrzeć umowę przedwstępną, Gazeta Prawna,
nr 221 z 12–14 listopada.
Wojewódka M., 2007, Kompetencje rady pracowników a uprawnienia innych reprezentantów pracowników w zakładzie pracy, Praca i Zabezpieczenie Społeczne, nr 10.
Warszawa.
Żukowski M., 2008, Reforma zabezpieczenia emerytalnego w Polsce – założenia i stan
obecny, Polska Izba Ubezpieczeń, Warszawa.
Polish acts
Ustawa z dnia 20 kwietnia 2004 r. o pracowniczych programach emerytalnych, Dz.U.,
nr 116, poz. 1205 ze zm.
Ustawa z dnia 26 czerwca 1974 r. Kodeks pracy, Dz.U., 1974, nr 24, poz. 141 ze zm.
108
Marcin Wojewódka
Magdalena GADOMSKA*
MANAGEMENT THROUGH THE EMPOWERMENT
IN THE CONTEXT CHANGING
THE POLISH LABOUR MARKET
Empowerment is one of the concepts of human resource management, leading to the
strengthening of employees, to enable them making many important decisions. Despite the
fact that the management strategy of empowerment was born after 1990 and is increasingly
being perceived as the best method used to build effective and intelligent organization, it is
still not known in many organizations in Poland. Since the transformation Polish labor
market is more dynamic. This created new employment opportunities for people who until
89 year worked in only one or just a few companies through all their lives. There started to
become changes in managing people, the appearance of the empowerment was affected to
the change of the relationship between worker and boss. Work efficiency was changed
because of strengthening the role of employees in the company. This situation has its advantages and disadvantages. Empowerment of staff has also influenced the formation of
new businesses, the creation of new dependence on the labor market, and also affects the
personal lives of employees.
Key words: empowerment, labor market, systemic transformation, entrepreneurship
1. THE SITUATION OF THE WORKERS FROM
THE TRANSFORMATION AND THE EMPOWERMENT PROCESS
The term empowerment is derived from the English word. It is “a process in
which individual business units or groups of employees are empowered and themselves determine the scope of their duties and responsibilities. To control them*
University of Economics in Poznan, Faculty of Economics, Department of Labour and
Social Policy.
110
Magdalena Gadomska
selves and to define their duties in the company” [Koźmiński 2004, p. 58].
“This is” reflected in the formation which is called “flat” structures within the
company, which in the classification structure of the company is characterized by
a smaller number of intermediate levels between the top and bottom of the hierarchy. The advantages of engineered structures such is the flexibility of setting multiple managerial tasks and deadlines for their implementation, as well as innovation. In such conditions only serve as heads of strategic command, providing expert
support to their employees. ”In recent years, many organizations undertook steps
towards empowering employees with the expectation that it will increase the efficiency of their operation and innovation” [Boudrias et al. 2009, p. 625].
Empowerment in such structure requires more from the employees. It means
that workers have a way to deal with the virtual supervisor and “implement actions
based primarily on their knowledge, competencies, skills and experience”, but also
on the basis of an idea as to approval or non-approval of the supervisor”
[Filipowicz 2004, p. 17]. This staff determines who enter into partnerships to meet
specified targets. This division of roles makes changes to the role of the boss. In
the “flat” structure of management, the boss is a specific ideal to which they refer
not only decisions made by employees, but also activities geared towards building
an individual position within the company. These activities are implemented
through the prism of “what the boss would think” about the steps taken by the
workers. Empowerment in the enterprise necessitates change of attitude superior to
their subordinates and accept the fact that they do not control ad hoc and permanent
motivating and strengthening employees the decisions taken form the company’s
success.
2. TRANSFORMATION OF THE SYSTEM – PROVATISATION
AND INFLOW OF FOREIGN CAPITAL INTO POLISH MARKET
The process of transformation, privatization of polish state-owned enterprises
began in August with the introduction in 1988 of the Wilczek Act of economic
activity. It marked the beginning of profound changes in Polish enterprises. This
Act made it possible for every citizen taking up and pursuit of an economic activity
on an equal footing. In early 90s started dynamic economic changes in Poland.
System transformation was also the beginning of the privatization of Polish stateowned enterprises, which is not enough that redefined the notion of property was,
it's still they had to face the open competition coming from foreign markets. The
beginning of the 90s in Poland is not only a time to redefine the dynamically developing entrepreneurship but also the time, which forced the employees accustomed to working in one, or at most a few companies. Lifelong have to demonstrate a commitment and activity in search of employment. The employer and em-
Management through the empowerment in the context changing …
111
ployee from the early 90s certainly did not expect that entrepreneurship and the
role of the employee in the company will be so diametrically exchange.
3. ENTERING THE EMPOWERMENT
TO THE POLISH MARKET
Despite the fact that the concept of human potential and empowerment already
has more than half-century tradition and is used in market practice, it found
no Polish version of its definition.
The human potential in the 70s of the twentieth century, wrote GS Becker. His
concept of talking about the fact that this most important element of any organization is the man quickly gained in importance and became the foundation for the
creation of human capital theory. Becker claimed that, “the money paid to raising
the professional qualifications of employees are considered an investment, and not
in terms of cost, as it did before” [Moczydłowska 2014, p. 71-78]. Investment in
human capital by Assoc. Joanna Moczydłowska is “all activities that affect the
physical and monetary income, and an increase of resources inherent in the people
that lead to changes in the value of accumulated employee and as a result the ability to change the quality of their work” [Moczydłowska 2014, p. 139]. For the purposes of human capital adapted in this article to the competence of belonging to the
human potential in organizations they are also classified as personality traits and
predispositions individual employees. This approach stresses the need for investment rather than a cost approach to the issue of human potential in the organization. In Polish market reality we are dealing with entities implementing such thinking into practice. Perhaps if such an attitude to the role of the employee in the
company accompanied by transforming the early 80s polish businesses, including
not accompanied by changes of block exemptions on a massive scale and need for
retraining even for extremely different professions.
4. AREAS IN WHICH EMPOWERMENT FUNCTIONS
– THE LABOUR MARKET, SOCIAL POLICY
AND EDUCATION
The concept of empowerment affects not only the role of the employee in the
enterprise as such. Just as the labor market of empowerment said in the context of
social policy (for example in relation to people leaving the various types of addictions, and thus somehow acquiring control of your life) and in education (for
example in the transfer of responsibility for student for academic performance).
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Magdalena Gadomska
The concept of empowerment affects not only the role of the employee in the enterprise as such. Just as the labor market of empowerment said in the context of
social policy (for example in relation to people leaving the various types of addictions, and thus somehow acquiring control of your life) and in education (for example in the transfer of responsibility for student for academic performance).
Empowerment of teachers, in turn, depends on providing them with a certain acquiescence in the decisions on how to teach, to determine how to operate a school.
This results in a considerable increase in the motivation of action, willingness to
solve problems, and thus empowerment affects self-improvement school staff.
It has its positive sides in the scale of the entire school, builds mutual trust between
the participants of school life, building a climate of genuine cooperation allows to
develop a pattern of work, activities or choice of professional activity. In this area
you can share experiences, to confront the effects of actions, which will create
a safe environment not only for reflection but also to share their opinions, suggestions. “Innovation positively affects the efficiency of the functioning” [Keskin
2006, p. 396-417].
5. EMPLOYER-EMPLOYEE RELATIONSHIP-EMPOWERMENT
THE ROLE OF THE EMPLOYEE IN THE ENTERPRICE
CHANGING WORK EFFICIENCY
In order to achieve company goals are necessary information from all employees, as well as their commitment and energy. In the first decade of the twenty-first
century companies they operate in an uncertain, complex environment, in the face
of changes are difficult to predict. Just behind the change in customer profile tries
to keep up with the changing profile of seller services or products. Companies are
trying to make your picks match up to even very specific customer needs. “In most
companies are currently used computer systems to help in a more efficient collection, processing, storage and use of information. In many of these companies are
used are also totally new production methods or services. Application of advanced
business information systems led to a general improvement of the efficiency
of businesses, as well as a substantial reduction in costs. If we add the new possibilities of the Internet, we obtain the image of radical changes that have occurred in the
business environment in just a few years. In companies engaged employees are
needed who make best use of advanced technologies. In companies engaged
employees are needed who will discover new ways to improve products and services” [Smith 1996, p. 35].
Management through the empowerment in the context changing …
113
6. AN EMPLOYEE IN THE ROLE OF THE MANAGER’S
OWN CAREER IN THE CONTEXT OF SECURITY TRAINING
(SELF-EMPLOYMENT)
Workers managers for a long time repeated that people are their most valuable
resources, but until recently few of them operated in accordance with this belief.
Companies began to realize that their successes and the future is largely dependent
on owned real estate, buildings, their equipment but from which employ workers
from the talents of their pupils and their intelligence, commitment to your duties.
They became the so-called “intellectual capital, a new source of wealth”. Traditional sources of wealth, such as land, raw materials, technology, and even unskilled labor as you need to win. The need for transfer of power to workers – but
you can’t do without people who know how to properly use these sources of
wealth. Obtained material resources alone are not able to influence for the better
provision of services or raise their quality without employees. There will also
affect the improvement of the company. The aim of empowerment is to use the
minds of employees, their cleverness and intelligence, not just their muscles.
Another aspect of change lies in the fact that workers nowadays are very different
from those of the mid-twentieth century. Blue-collar workers are now a minority;
most workers perform jobs that require them to something much more than an ordinary manual ability, and people performing physical work have much higher
requirements for employers than their predecessors. In addition, more and more
employees have shares in the companies they work for. Such persons have an additional incentive to take responsibility for the overall operation of the company.
An important psychological changes that occurred among employees and not only
increase awareness about their right to meet up. Contemporary employees have
dreams and aspirations that go far beyond the modest expectations of their parents
and grandparents. It is less likely that automatically will count with the government
or that unreservedly submit to discipline. It should motivate them, using material
rewards or bonuses. Employees become, generally speaking, less prone to the concept of “orders from above-reaching” and the consequences of ignoring their demands and expectations can be serious. But it would be a mistake to treat this attitude as a problem – on the contrary, such employees is a valuable workforce,
whose potential can be used.
7. EMPOWERMENT IMPACT ON THE PERSONAL LIVES
OF EMPLYESS. EFFICIENCY VERSUS FREE TIME
Jobs contemporary managers (both in Poland and in other countries) is a strong
intermingling personal and professional life. Most managers devotes a significant
114
Magdalena Gadomska
portion of time dedicated to work and often free time on routine tasks or solving
current problems or to intervene during a crisis situation when they should deal
with planning and tasks related to the development of companies that are most
important for her success in the long term.
Table 1. Consequences perform routine tasks by managers
P
1
2
3
Consequences
Consequences descriptions
Waste
of potencial
Managers are wasting their potential. If you spend time on the
above-mentioned tasks, they do nothing for the development
of personal potential or are not engaged in planning long-term
development of the company. Managers at all levels should
be involved in setting the strategy and the improvement of
products and services, as well as” innovation management
and analysis of changes in the environment pose a threat
or opportunity for the company” [Mavondo, Chimhanzi and
Steward 2005, p. 1235]
Stress which has
strong influence
in the management
Managers are exposed to enormous stress. It happens that in
order to cope with the management of your business, they
work to fifty or more hours a week. Furthermore, they must
cope with constant changes regarding the process of production and services and distribution systems and management.
All this takes place in the face of declining resources,
a steady increase competition and higher expectations about
the quality of our products and services, as well as to the
amount of profits
Achieving less
favorable results
of the action
Companies are less favorable results of operation. Even if the
targets are achieved (at the expense of the health and wellbeing of people that have), it is almost certain that greater
productivity and higher profits can be achieved by devolving
powers to employees and leaving yourself time to perform
a different role
Source: own calculations based on [Smith 1996].
Empowerment is the transfer of responsibility to the workers carrying out assigned responsibilities and at the same time reducing the need to control others.
“Empowerment of superiors has a positive impact on their innovation” [Spreitzer,
Janusz, Quinn 1999, p. 511-526]. Profits from the introduction of this management
method allows both workers and superiors to focus on:
– For long-term planning,
– Stimulating employees and developing their skills,
– To support workers and providing them with assistance,
Management through the empowerment in the context changing …
115
–
–
–
–
–
The creation of new ideas,
For managing customer relations,
The organization of integration with other teams and departments,
For engaging in special projects,
To develop their skills and expand knowledge.
The introduction of empowerment in the company allows, among others:
1. Increased job satisfaction;
2. Increased chance of recognition among colleagues and superiors;
3. New look and learn new skills;
4. Career development on a scale not only short-term but mostly long-term.
By prof. Olszewski it is “important to draw attention to the fact that different
people have different life activity and the ability to work due to the individual
course of biological rhythm. This has the effect of capitalizing on the opportunities
that arise from the nature of the human body” [Olszewski 2013, p. 56].
After 89 years, the Polish economy, privatizing state-owned enterprises and
creating new free-market companies have had to cope not only with the consequences of political changes but also from foreign competition, which also extorted
more and more new strategies for soliciting clients, orders, etc. The current situation of companies, working in these market competition and look different.
“To succeed in today's world, you should see changes in it and properly deal with
them before they start to have a negative impact on your business. Manual operations must be carried out in such a way as to rotate the risks of changes to the advantage of, and use them as opportunities of its development. For the full success
of the company will not be possible without the full involvement of its crew.
The fully involved in the life of company employees is not everything. In applying
enterprise management through the empowerment does not prove themselves “traditionalists managers” – the whole construction management company must work
together like sailors on a ship that knows where and in what conditions the liquid.
LITERATURE
Boudrias J.S., Gaudreau P., Savoie A., Morin A., 2009, Employee empowerment: From managerial practices to employees’ behavioral empowerment, Leadership & Organization
Development Journal, vol. 30, no. 7.
Filipowicz G., 2004, Zarządzanie kompetencjami zawodowymi, Polskie Wydawnictwo
Ekonomiczne, Warszawa.
Keskin H., 2006, Market orientation, learning orientation, and innovation capabilities in
SMEs. An extended model, European Journal of Innovation Management, vol. 9, no. 4.
Koźmiński K.A., 2004, Zarządzanie w warunkach niepewności, Wydawnictwo Naukowe
PWN, Warszawa.
116
Magdalena Gadomska
Mavondo F.T., Chimhanzi J., Steward J., 2005, Learning orientation and market orientation: Relationship with innovation, human resource practices and performance, European Journal of Marketing, vol. 39, no. 11/12.
Moczydłowska J.M., 2014, Empowerment – nowe spojrzenie na aktywowanie potencjału
ludzkiego organizacji, Uczelnia Łazarskiego, Katedra Zarządzania i Marketingu,
ZS WSH Zarządzanie (1).
Olszewski J., 2013, System pracy w warunkach globalnego społeczeństwa informacyjnego,
Wydawnictwo Uniwersytetu Ekonomicznego w Poznaniu, Poznań.
Smith J., 1996, Empowerment. Jak zwiększać zaangażowanie pracowników, Wydawnictwo
Onepress, Warszawa.
Spreitzer G.M., Janasz S.C., Quinn R.E., Empowered to lead: The role of psychological
empowerment in leadership, Journal of Organizational Behavior, vol. 20.
Agnieszka MORAWIAK*
NEW CHALLENGES.
KNOWLEDGE AND AGE MANAGEMENT
IN A MODERN ENTERPRISE
The 21st century can be named the era of information civilization where knowledge has
become a specific type of resources of multiple organizations and also an integral part of
each employee. Quickly occurring political, social, and economic changes, and above all,
technological changes force today's business organizations to search for the correct direction of development and the right mode of management. Demographic processes are one of
the essential factors stimulating economic growth. The inverted demographic pyramid
as a result of ageing society, poses a risk to businesses since there has been noticed a lack
of workforce disposability. The observation of these changes and the search for innovative
solutions can be grounds for the increase in one’s own competitiveness. Thus, organizations
have increasingly introduced knowledge management and fledging age management into
their development program. Investing in older staff, enterprises not only adjust to the market needs but also prevent the exclusion of the elderly from the job market. Such an attitude
leads to a multicultural dialogue and changes to the organizational culture.
Key words: knowledge management, age management, innovation, organization development, age group 50+
1. INTRODUCTION
Human aging is not only inevitable, but also a natural process occurring in all
societies. It has also become a key factor influencing the job market situation. In
highly developed economies, this process has become a challenge to be faced by
*
Poznan School of Banking, Department of Finance and Management, Institute of
Management and Marketing.
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Agnieszka Morawiak
modern organizations. Employers have long recognized that well-trained staff for
performing their duties is the greatest asset of any organization.
Demographic changes that have already occurred, and also the forecast ones
force the use of innovative changes in the enterprise both towards the employees
and management methods. The third wave, described by Toffler, presents the world
with the importance of information, new technologies, digitization, electronic institutions, and refers to the mental resources [Toffler 1997, p. 44]. Companies that do
not recognize or ignore the occurring phenomena are doomed for failure. Management is a dynamic field that requires tracking changes taking place in the enterprise
and its environment. Changes are multi-faceted and relate to the economic, political, technological, organizational, but also to the social sphere.
The progress of civilization and cultural changes pose new challenges to the
elderly including older workers. One of the challenges is the need for continuing
education and the adaptation to new conditions. Regardless of human’s age and
health, there is in every individual the power to create and the strength of spirit to
allow to go beyond what is achievable. Development can occur at any stage of
human's life if only he or she has the right motivation to take action.
In the twentieth century economics primarily dealt with two factors of production: capital and labour. Currently, the knowledge oriented towards shaping of
appropriate behavior of employees becomes almost the most important resource of
an enterprise. The modernization process started in the twenty first century has
caused people to be liberated from the social forms of industrial society. There are
several stages of development, in the evolution of a society, in the process of reaching a knowledge-based economy:
– revolution lasting thousands of years,
– the creation of an industrial society taking about 300 years,
– the third wave, which brought a new lifestyle, based on differences, renewable
energy sources, new production methods and electronic village [Toffler 1997,
p. 44-45].
The world has entered an era where the conscious acquisition and processing of
information are the key to success. Information has become an intangible asset, an
element of economic and social activity, an integral part of each employee's work
and is the carrier of the value of the company [Kiełtyka 2002, p. 18]. Enterprise
investing in its employees’ capital through knowledge and age management (of its
workers) leads the enterprise to the competitive advantage and its workers over
50 years old to activation. It also constitutes the protection of employees against
being left out of professional development.
Adjusting the company’s organizational structure and management methods to
new challenges and information progress determines the development of the company. Knowledge is perceived as a means of maintaining competitiveness, but also
as a tool of setting company’s own goals of development and growth [Rutkowski
and Mruk 2002, p. 181]. Realizing the value of intellectual capital has caused it to
become more important than physical assets of the company. Potential of
New challenges. Knowledge and age management in a modern enterprise
119
knowledge was already pointed out by ancient philosophers with Plato on top.
According to them, knowledge was a state of consciousness and wisdom, which led
to the achievement of a state of perfection [Harari 1994, p. 58]. Knowledge has
always been at the center of particular interest of thinkers and in the twentieth
century it became the key to success in the business and economy.
2. KNOWLEDGE MANAGEMENT
AS AN ORGANIZATIONAL DEVELOPMENT OPPORTUNITY
AND A STIMULATION FOR EMPLOYEES OVER 50
The area, real estate, equipment, raw materials, finance, workforce of a company cease to be a criterion of its production capacity. The revolution and development of telecommunications technologies made knowledge itself become the essential asset of the company. “Knowledge resources and competence at the disposal of mankind have grown over the centuries following the course of the exponential function. It took 300 years since the invention of the Gutenberg printing press
for the humanity to double its knowledge resources. Today, this will only take five
years. There were as many books printed in the 70,s of the twentieth century,
as many there had been issued during the 500 years after the invention of printing”
[Probst, Raub and Romhardt 2002, p. 17]. Knowledge resources are the intellectual
assets of an organization. It is the sum of knowledge of individual employees and
entire teams. It also includes data and information from outside of the company,
based on which the company's success is built [Probst, Raub and Romhardt 2002,
p. 35]. “Knowledge-based economy is an economy in which the production, distribution and use of knowledge are the driving engine of growth, creating, wealth and
employment along all industries” [Herman 2003, p. 140].
Enterprise knowledge management leads to the creation of an intelligent organization, promotes the growth of competence of the worker also the older one, leads
to openness to new ideas, serves pro-development expectations of employees,
allows for individual development, helps to identify the strengths and weaknesses
of the staff [Morawski 2005, p. 203].
The institution investing in knowledge capital focuses on competence, creativity
and culture of the company. According to these assumptions, those are people who
determine the success – they are the dynamic capital of an enterprise [Kisiel 2013,
p. 29].
Organisations intending to succeed must use innovations in management. One
of them is to invest in older workers through age management and skillful
knowledge management. Let us note knowledge management. Due to the interdisciplinary nature of the phenomenon, there are many definitions of knowledge management. Davenport and Prusak in 1998 believed “that knowledge management is
120
Agnieszka Morawiak
to utilize the resources that the organization probably already has – wellfunctioning solutions in terms of information systems management, organizational
change and human resources” [Jashapara 2006, p. 27]. In 1999, Skyrme believed
that it is “deliberate and systematic management of fundamental knowledge and
processes of creating, gathering, organizing, universalising and using for the purpose of achieving the organization's objectives” [Jashapara 2006, p. 27]. As noted
by Mikuła “Knowledge for management purposes is variously defined”. It is most
commonly treated as:
– linking information with its understanding
– the effect of the mental processing of information and experience as well as
learning
– general human knowledge
– the reflection of the state of reality in human's mind
– confirmed conviction [Mikuła 2007, p. 113].
Based on the definitions of knowledge management, there have been a number
of models of the holistic approach to this matter. One of the concepts was presented by Jashapara Ashok exposing an aspect of learning processes and a technological aspect.
Knowledge
management
Strategies
Intellectual
capital
Systems
and technologies
Organisational
learning
Efficiency and
organizational
effectiveness
Culture
Management
of change
Knowledge
searching
Universalisation
of knowledge
Implementation
Knowledge
usage
Fig. 1. Integrated model of knowledge management
Source: [Jashapara 2006, p. 366]
Knowledge management is the exchange of views, looking into the matter from
a different perspective, the use of a human mind to draw conclusions and to make
decisions. This is a spark of intuition that leads to innovation, but also the use of
new technologies or informal norms and habits prevailing in the enterprise; as well
as stories and anecdotes which employees share with one another [Evans 2005,
p. 11-12].
New challenges. Knowledge and age management in a modern enterprise
121
Knowledge management instruments include:
knowledge-based mission and competitive strategy,
socio-cultural instruments,
economic and financial instruments,
institutional and legal instruments,
technological and informational instruments [Koźmiński 2005, p. 109].
Acquistion, creation, storage, processing and using of knowledge in these areas
lead the company to the competitive advantage. The company uses its own
knowledge potential but also the knowledge of customers and other companies,
along with social, political and administrative knowledge generally available. The
knowledge management system may be supported by a number of techniques, tools
and methods. The literature of the subject gives (used for this purpose), e.g. mentoring assuming continuous and closely linked learning. It is the process of taking
care of an employee from the moment of hiring to achieving his or her professional maturity. Employees with higher competence teach the newly employed. This
cooperation is to strengthen, develop self-awareness and self-fulfillment. It teaches
a broader view of the problems and allows to acquire proper skills to problem solving [Ziębicki 2007, p. 273]. Employees participating in mentoring (thanks to the
support) adapt to new challenges and responsibilities more easily. The cooperation
of mixed-age workers increases productivity, enhances motivation among the staff,
and it combines experience with creativity. In addition, mentoring allows the employer to reduce costs associated with external training as well as helps to create an
atmosphere open to changes in the company.
Another useful tool in knowledge management is benchmarking, that is a search
for effective methods of activity allowing to achieve the competitive advantage. It is
a process of continuous learning from the best, and also a search for the implementation of solutions tested in other organizations. It allows for increased innovation,
efficiency and continuous development of the organization. However, this process
requires broad knowledge, extensive experience and realization time. It is a systematic analysis of the actions taken by competitors. “Its application allows to track
standard processes inside and outside the organization, to undertake sustained cooperation with other companies (...), stimulate innovation, determine precisely
one’s own market position, impact the staff by motivation” [Ziębicki 2007, p. 257].
The essence of coaching, on the other hand, is to take into account the activities
of an individual without first imposing earlier solutions upon him or her. It also
enhances the willingness to learn, provided that coaches are carefully selected for
that. These people, besides knowledge, should have great observation, diagnosis,
and counselling skills and a sense of responsibility for the company [Ziębicki 2007,
p. 271]. Coaching is like individual training tailored to the individual's abilities
using the knowledge and experience of the coach. It is a two-way development
process of company's employees providing feedback [Parsloe 1998, p. 10].
Combining the above methods may contribute to the effective development of
employees, the increase in their identification with the company, the development
–
–
–
–
–
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Agnieszka Morawiak
of team work forms and may enable to lead the organization through the turbulent
process of demographic change.
Therefore, knowledge management is to improve the organization and lead to
an increase in its intellectual capital. One of the first models of a knowledge-based
organization is a learning organization. It is believed that it came into existence
in 1988, but it was widely spread in 1990 [Mikuła 2007, p. 144]. A learning organization has evolved from the basis that knowledge empowers the attitude towards
knowledge sharing, from irregular to continuing education training from focusing
on experts to the concentration on all employees. A learning organization prefers
the customer orientation, celebration of cooperation, full access to knowledge and
information [Galata 2006, p. 58].
A higher form of a learning organization is the intelligent organization, whose
“essence is the system creating and using collective intelligence, a knowledgebased strategy to seize opportunities, the structure of symmetrical networks of
teams and employees (...), its main process is – the management of knowledge and
intellectual capital, (...) a source of synergy – synergy as a result of teamwork,
employee teams, communities and employees, the knowledge and cooperation with
external partners” [Mikuła 2005, p. 86].
Demographic changes taking place in society force companies to invest in older
workers and embracing them in accordance with the strategy of knowledge management and continuing education. A human learns throughout his life and still has
the capacity to adapt to new conditions. The generation of employees over 50 has
landed in a unique position, moving from the analogue era in their professional
activity, they must face challenges of the digital age and digital economy. Employers often overlook their experience considering it irrelevant to the prevailing
economic conditions. The 50+ generation has a lot to offer and a company focused
on its development should take advantage of its potential in human resource management. Thus during the progressive changes in the age structure of society the
company should strive for competitiveness. An aging society will require more and
more expenditure and care. A reverse demographic pyramid shows that the professional activity of workers should be extended. It is a mistake to push older workers
out of the job market. Stereotypes that an older worker brings a loss, that he or she
is ill, slow, less efficient, closed to changes, that staff in pre-retirement age are the
ballast for the company must be broken.
They are accused of incompetence associated with modern technologies, having
habits acquired from the previous system and that they do not work well as part of
a young team [Diagnoza dobrych praktyk 2013, Internet resource]. Among the
factors limiting the employment of the elderly Barbara Sztur-Jaworska points out:
– the economic and social orientation, such as unemployment, ageism, pension
systems encouraging relatively early completion of the professional career
– work organization and technology, the pace of work, the need to acquire new
skills and qualifications, lack of training for employees
New challenges. Knowledge and age management in a modern enterprise
123
– characteristics of the elderly such as low education, health status, unwillingness
to adapt to new conditions, the fear of competition coming from young people
[Sztur-Jaworska 2005, p. 21].
Thus, counting on this group of workers is very important. Older people should
be invested in because forecasts show that the percentage of people in the 50+
group will grow significantly. The GUS (Central Statistical Office of Poland)
Report from 2010-2011 shows that the number of elderly people (in an older
production age) is constantly increasing in relation to young people starting their
professional life. The balance of this exchange becomes smaller every year. The
study shows that in 2002 there were 337,000 people, in 2007 there were 187,000
and in 2010, there was a negative number of 9,200 people [www.stat.gov.pl 2014,
Internet source]. Thus, there is a smaller number of the generation of young people
on the job market every year. This will result in staff shortages on the job market.
It should be noted that the use of knowledge management tools can promote
labour activation of this group of workers because nearly half of a man's
knowledge is stored in the human mind. Not only does an elderly use his work
knowledge, but it can also pass it on to younger workers through the mechanisms
of mentoring. Employees aged 50 and over do not only possess a wealth of
knowledge but also years of experience, therefore, they can do well at trainings
(organized by the company) as good mentors of younger workers. An innovative
company does not only invest in teaching new technologies to older workers, but
also helps them fulfill the new professional roles. Through shaping new qualities,
attitudes and skills among the elderly the company gains teachers of the younger
generation, as well as business development tool. It also turns out to be advantageous to have senior staff due to the consumer market, and this benefits the company for two reasons. Firstly, the elderly is a huge group of consumers which,
if properly prepared, will benefit from innovative products and services. An increasing elderly population requires enterprises to equip that social group in the
ability to use modern goods. Therefore, not only creators but also consumers are
taught new technologies. Secondly, older staff is characterized by honesty, patience, precision and the ability to communicate with customers, which is a valuable resource for the company.
3. AGE MANAGEMENT – A CHALLENGE FOR THE ECONOMIC
AND SOCIAL SECTOR
Population aging, low birth rate and negative replacement of older workers by
young staff make job market policy objectives slowly change. The decline in the
labour force may result not only in the lack of staff but also in the collapse of the
pension system. Therefore, employers must reject the negative stereotype concern-
124
Agnieszka Morawiak
ing the senior staff of employees. Following the path of innovation within the company they must implement age management. Building work teams of different ages, experience and outlook will create the right environment in which each employee will grow [Kuciński and Rutkiewicz 2012, p. 32, 33]. The company's success may largely depend on its staff. Age management is one of the methods to
prevent the negative trend of workforce aging and its low professional activity.
This is a relatively new method of management developing only recently over the
last few years in the United States. This method has gained popularity in Poland
over the last 3 or 4 years, due to the actions of the Academy for Development of
Philanthropy. Age management is an approach aimed at mature workers, where
employee aging is the natural course of things to the employer and which should
benefit the company. Age management uses aspects and tools of people management (human resources). It consists in such personnel management so to achieve
work synergy of age diversified staff. The basis for the introduction of such management policy is aimed at economic and social targeting of the enterprises as well
as following the way of progress.
Age management is nothing else but taking advantage of all staff qualities,
managing of diversity and using human resources in order to increase effective
growth. Age management is variously interpreted, according to the authors of
„Vademecum z zakresu zarządzania wiekiem” (“Handbook of Age Management”)
“The goal of age management is to upkeep employment of older workers until
retirement age and beyond it by taking advantage of strengths and making weakness less important to ensure the profitability of their employment” [Leśniewska
et. al. 2011, p. 10]. Age management is a specific approach to the management of a
team
of employees of different age. Through the appropriate use of available human
resources management tools, the employer may use the potential of an age diverse
team of employees.
In addition to the aging workforce and low labour force participation of older
people another reason for the introduction of age management in companies is:
– prevention of discrimination on the grounds of age
– adapting to changes in the state policy of employment
– benefiting from the diversity of employees
– the need to maintain the resource of competence at the appropriate level
[Litwiński and Sztanderska 2010, Internet source].
In addition, age management allows to reduce labour costs by reducing absenteeism of older workers through preventive medicine applied to the 50+, reducing
costs through statutory solutions such as complete exemption from the obligation
of the employer to pay contributions to the Labour Fund and Employee Benefits
Guarantee Fund for female workers over 55 years, male workers over 60. Such
a solution reduces the fluctuation of employees, as a rule, each mature staff is loyal to the company, which in turn reduces the costs associated with personnel re-
New challenges. Knowledge and age management in a modern enterprise
125
cruitment. Another advantage of this solution is the possibility of obtaining funds
from the European Social Fund under the Human Capital Operational Programme
[Zarządzanie wiekiem 2014, Internet resource].
Age of workers in many cases is an asset to the employer and gives opportunities for business growth, here is why:
– Good knowledge of the company – older workers usually know well the company's organizational culture – its values and expectations, which allow for the
smooth functioning within the structure.
– A stable family situation – older people are usually not involved in the raising
of children, thanks to which they may be more flexible and are less likely to use
e.g. sudden absence. On the other hand, smaller financial requirements (no need
to maintain a large family) also allow them to take up part time jobs. Furthermore, they have a wealth of work and life experience, and contacts that can pay
off in professional work.
– The transfer of knowledge from older to younger workers – older workers may
pass on their knowledge and experience to younger colleagues, thereby raising
the efficiency of less experienced staff, while it affects the strengthening of the
team.
– Contacts with clients from 50+ categories – given global demographic trends,
an increasing percentage of services recipients are mature people. These customers may prefer to contact the representative of the same age, and demographic similarity can foster building relations, mutual understanding and a better sense of needs of the customer.
– The increase in the company's prestige – properly maintained and promoted age
management policy allows to build a positive image of the organization in the
market and identify it with the specified values [Diagnoza dobrych praktyk
2013, Internet source].
Age management is important from many points of view, as it reduces the cost
of social benefits, because people over 50 have work income, and increases
measures affecting the budget for contributions to health and social insurance.
It limits the scales of social exclusion in this age group. Furthermore, it breaks
stereotypes about the capabilities and behaviour of the elderly. Age management
and, in fact, measures taken in this direction also aim at improving the working
environment and the possibility of job performing, with a focus on the age group
[Mól 2008, p. 6].
One should also mention age management tools, what important role is played
by training dedicated for this age group. The subject matter and the form should be
tailored to the needs of the employee and they should include staff development
paths. An important tool is flexible forms of employment, taking into account the
needs both of the employer and also the employee. Age management system, as
previously mentioned, also includes restoring and promoting health, and developing programs to prepare for retirement giving the employee a possibility to choose
further professional activity. It is also important development within the company,
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Agnieszka Morawiak
as well as carrying out the evaluation of undertaken activities and estimate of the
effectiveness of implemented projects. The employer must also take care of the
retiring employee so that he leaves his knowledge and experience at the company.
“According to the European Code of Good Practice, developed in 2000 by Eurolic
Age, age management should include seven areas:
– recruitment
– learning, training, development and career promotion
– promotion and internal transfers between job posts
– flexible forms of employment and work modernization
– designing a workplace and health prevention
– termination of employment and retirement
– changing attitudes towards older workers” [Szcześniak 2013, p. 20].
The awareness of management staff of the risks posed by an aging workforce
dictates searching development opportunities in the process. It is, therefore necessary, to invest in solutions that go beyond the standards of employees management.
A capital diverse workforce should be invested in, responding to their needs, building the development strategy of the organization with them.
4. CONCLUSIONS
We are living in significant times of fundamental and even revolutionary
changes in our civilization. An aging population and a low employment rate
of older people outline before mankind the economic crisis caused by shortages of
staff. Employers recognize the problem of the growing elderly population which
makes them also realize the need for activation of people aged over 50. In order to
meet the demands of the market today we must implement appropriate measures
to minimise the number of older workers collecting social benefits. Companies
seeking far-reaching development recognize their opportunity in new management
technologies and thereby they may stop hampering economic growth and even
prevent the financial or social crisis. Mature workforce is a valuable asset of any
organization. They are trustworthy, loyal and the dynamics of young colleagues
substitute for experience and wisdom acquired over decades of work. The use of
modern information technology – ICT plays an important role in achieving organizational effectiveness and success of the company. The dynamically changing
market under the influence of demographic processes requires a conscious use of
the strengths of individual employees. The implementation of knowledge and age
management strategy in the company will not only enable a realistic approach to
the problem of old age. It will also influence the improvement of quality of the
organization functioning through the transfer of knowledge among employees and
allow the company to keep up with galloping technological progress. Knowledge
New challenges. Knowledge and age management in a modern enterprise
127
and age management will not let the 50+ generation be reduced to the role of
extras, but will equip them with skills needed to navigate the digital world of the
twenty-first century. The initiative must also stem from the attitude of the interested 50+ so that not to be excluded from speeding economic and social progress.
They must have a life motivation and the desire to improve their own lives, they
must be at the disposal of the employer, if only he leads the company in the direction of smart growth.
LITERATURE
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Galata S., 2006, Sztuka zarządzania organizacjami, zasoby, sposoby, perspektywy, Wydawnictwo Difin, Warszawa.
Mikuła B., 2005, Organizacyjne uczenie się, in: K. Perechuda, (red.), Zarządzanie wiedzą
w przedsiębiorstwie, Wydawnictwo PWE, Warszawa.
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Mikuła B., 2005, Organizacyjne uczenie się, in: K. Perechuda (red.), Zarządzanie wiedzą
w przedsiębiorstwie, Wydawnictwo PWE, Warszawa.
Mikuła B., 2007, Wprowadzenie do gospodarki i organizacji opartych na wiedzy, in:
B. Mikuła, A. Pietruszka-Ortyl, A. Potocki (red.), Podstawy zarządzania przedsiębiorstwami w gospodarce opartej na wiedzy, Wydawnictwo Difin, Warszawa.
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Wioleta DĘBCZYŃSKA, Tadeusz ZABOROWSKI
SOCIAL RESPONSIBILITY OF INSURANCE COMPANIES
The aim of this paper was to draw attention to the issue of social responsibility in the insurance sector. Insurance companies are essential part of developed financial market.
Due to the nature and scope of insurance providers’ activity based on public confidence, the
insurance industry is particularly well placed to implement the principles of social responsibility. Moreover, this article presents results of study on social responsibility of insurance
companies which includes information about the insurers’ adverse reaction, the values that
guide the insurers to the socially responsible actions, the instruments of social responsibility used by insurance companies and the motivators that stimulate the social responsibility
of investigated entities.
Key words: insurer, insurance providers, insurance company, insurance providers, insurance, social responsibility, CSR
1. INTRODUCTION
In recent decades, the idea of corporate social responsibility (CSR) has been
under permanent development and gaining popularity. The dynamic development
of CSR is mainly due to changes in the perception of the role of companies in their
environment. More and more frequent, it is thought that the business has no only to
carry out the essential part of its activities, but also has to take action to improve
the conditions of the society. Moreover the companies should have a positive impact on environment in which they operate.
The article takes into the reflections on the role of social responsibility in the
context of the insurance sector. The entities of that sector – insurance companies
make a significant contribution to the financial system of any country. Moreover

Poznan University of Technology, Faculty of Engineering Management.
130
Wioleta Dębczyńska, Tadeusz Zaborowski
they are institutions of public trust which obligates them to conduct their activities
with the highest degree of integrity and in full compliance with all applicable
standards. Insurers have to offer products (insurances) as the component of social
responsibility, as the authors has indicted in this paper. Therefore, the concept of
social responsibility should be inherent part of insurance business.
In addition to theoretical contemplations on social responsibility of insurers, this
article has been also presented research results conducted among selected insurance
companies.
2. NOTION OF CORPORATE SOCIAL RESPONSIBILITY (CSR)
The theoretical scope of corporate social responsibility includes many definitions and different proposals intended to define the precise practical meaning
of that interdisciplinary therm. It is highly difficult to provide a standard definition
because, concept of CSR appears as form of social, ethical and environmental
commitment or public reaction that the insurance companies provoked [Sułek and
Świniarski 2001, p. 208].
L. Zbiegeń-Maciąg has defined corporate social responsibility as the moral responsibility and obligation to account for its activities to the public, especially internal groups (the owners and employees) and external groups (stockholders, customers, suppliers, contractors, public administration, local authorities, pressure
groups, environmental organizations) [Zbiegień-Maciąg 1991, p. 48-49].
Corporate Social Responsibility is a field whereby conducting business activity
is based on creating transparent and lasting relationship with all stakeholders and
implementing every projects taking into account the legal, ethical, social and environmental aspects [Dębczyńska 2013, p. 67].
Social responsibility can be interpreted as commitment to transparent, ethical
and legal business activity in accordance with principles of the sustainable development. The companies should conduct activity taking into account the expectations of stakeholders and seeking to theirs higher standards of living and wellbeing.
Inclusion of stakeholders’ expectations and creation of added value for them can
lead to social balance which is necessary to reduce uncertainty in business activity
[Adamczyk 2009, p. 10].
Corporate social responsibility applies to the responsible implementation of the
every functions in company’s activity (going beyond the operations in conformity
with law) and creation of added value for all stakeholders. Furthermore, CSR requires companies obligation to bear the positive and negative consequences of
theirs activity and meet the needs of internal and external company’s stakeholders.
There is certain probability that the company which undertake socially responsible
actions in consciously, planned and coordinated way, can gain the trust of its key
Social responsibility of insurance companies
131
stakeholders. It can also cause creating effective and long-lasting relationship
with customers, achieving appropriate position on the market [Sokołowska and
Topczewski 2010, p. 150-161].
Increasingly, questions are being asked about the responsibility of entities of
various economic sector (including insurance sector) [Lenort 2007, p. 123].
Business communities which include individual entrepreneurs, micro, small,
macro companies and financial institutions have a growing impact on their environment. Market operators as insurance companies essentially effect on almost
every aspect of customer’s life. This situation indicates that the insurers should
take on greater responsibilities for each action [Piechowiak 2012, p. 108].
3. ACTIVITIES OF COMMUNITY INSURANCE
AND SOCIAL RESPONSIBILITY
Among the entities of demand side of insurance market and potential customers
of insurance companies, there are natural persons and legal persons as business
entities, state entities, non-governmental organizations [Hadyniak and Szumlicz 2010,
p. 76]. In the considerations of the condition, trends and prospects of development
of the insurance market in Poland, there are references to many external conditions
(opportunities and threats in closer and more distant surroundings) and internal
conditions (the strengths and weaknesses related to the functioning of the supply
side). In this perspective, the insurance market development depends on insurer’s
ability to implement the action strategy that will take advantages of opportunities,
expose the strengths while eliminating weaknesses. Simultaneously, it is important
the vision of insurance market development which aims to stimulate the demand
side. Instead of transferring the clients, that approach can bring the effective macro
growth in sales of the insurance policies.
Therefore at the same time it is necessary to search for effective marketing instruments which are adapted to specificities of insurance sector and also explore
market niches, identify and meet insurance needs [Pazio 2001, p. 128-136].
Observation of insurance market confirms that the insurance companies in their
marketing strategies are mainly focused on activities consisting of “buying” clients
from competition by promises of lower prices of insurance. Insurers only occasionally engage in activities aimed to raise the insurance awareness and build trust
in insurance institutions.
In business practice, it is difficult to identify companies that implement
the transparent model of corporate social responsibility.
In achieving competitive advantage the insurance companies should be primarily based on creating and managing the nonmaterial resources. The intangible nature
of many insurance products obligate the insurers to particular concern for client
Wioleta Dębczyńska, Tadeusz Zaborowski
132
whose cannot be left by agents without reliable, comprehensive and fair information on current and future conditions of implementation of insurance contracts
[Sokołowska and Topczewski 2010, p. 153]. Therefore, that scope of responsibility
affects many areas of the insurance company’s activity.
Social responsibility could apply as well to members of organization, as its external partners, so CSR can be considered in the internal and external dimension
[Sokołowska and Topczewski 2010, p. 155]. The selected internal and external
stakeholders of insurance company are presented in Figure 1.
media
insurance
intermediares
financial institutions
(banks)
employees
academic
community
local organizations
(Polish Insurance
Association)
Stakeholders
of insurance
company
international
institutions
(International
Monetary Fund)
customers
owners
suppliers
NGOs
state government
authority (Polish
Financial Supervision
Authority; Ministry
of Finance)
competition
local
government
authority
Fig. 1. Stakeholders of insurance company
Source: own elaboration on the basis of: [Iwko 2014, s. 7]
Social responsibility considered in internal dimension is addressed to internal
interest groups of the company, which include the owners (stockholders, shareholders), managers and other employee groups and unions.
The internal responsibility of insurance companies is also related to insurance
agents (insurance intermediaries) who are not employees of those companies but
they act in their name and on their behalf.
Social responsibility considered in external dimension is addressed to external
interest groups of the company functioning in the closer and more distant surroundings, namely: customers, suppliers, competitors, financial institutions, creditors,
investors, international institutions, state and local government authority, social and
economic organizations, non-governmental organizations (NGOs), local communities, and media.
Social responsibility of insurance companies
133
The structure of external social responsibility of insurance companies is apparently very close to companies from other sectors, but it is commonly thought that
the insurance company’s activity is under special public supervision. Therefore, the
insurers should avoid actions that can contribute to an increasing lack of public
confidence and must act due to responsibility and in full accordance with the public
requirements.
4. RESULTS OF THE STUDY
Organizations with manufacturing or service activities are encouraged to take
account of the impact of stakeholders and support the environment in which the
entities operate. This scope of responsibility has a particular expression in the area
of insurance.
In order to achieve the established objectives, companies should take account of
the expectations of social groups which participate in the entity’s activity. The
economic freedom does not mean reaping the benefits unilaterally from the environment where the entities operate. In addition, companies should support the
stakeholders in solving problems and develop a sense of social responsibility. This
approach can help company build and maintain a high level of customer confidence.
Unfortunately, company’s efforts do not always result in positive outcome and
in many case it is still considered that entities do not take care of internal and external stakeholder’s needs. As a result, that kind of entity’s behaviour may create
conflicts between the organisation and its stakeholders. In this regard, it is necessary to maintain the corporate governance, which can be achieved by socially responsible approach. This raises question of whether the insurance companies implement the corporate social responsibility principles and whether the insurers recognize the need of corporate governance. In order to obtain answers to those questions, the authors conduct the research.
During investigations carried out by the questionnaire method, information was
collected about 27 insurance companies in Poland. A full questionnaire was forwarded to 850 randomly picked respondents in Poland. The responses received has
been coded and analysed statistically. 812 persons replied to the questionnaire unmistakably, what representing 95.53% of the respondents.
The analysis of research results has indicated that the insurance company’s
treatment of stakeholders is not satisfactory As shown in Figure 2, 10–12% of insurers extend the period of proceeding, over 10% of insurance company do not
cooperate with stakeholders, 6–8% of insurers ignore the needs of interest groups.
134
Wioleta Dębczyńska, Tadeusz Zaborowski
Fig. 2. The conduct of insurance companies in relation to theirs stakeholders
Source: own elaboration
The average value of indicator of insurer’s adverse reaction (Figure 3) showed
that nearly 6% of insurance companies commit unlawful acts, 5% of insurers do
not apply to final court decisions, 16% of insurers do not cooperate with theirs
stakeholders, over 8% of insurance companies adopt unlawful decisions, over 14%
of insurers ignore the needs of interest groups and extend the period of proceeding.
Therefore, it can be considered that the insurers have different approach to theirs
stakeholders. It is highly important to identify and characterise those approaches
for improving and stimulating an appropriate relationship between organisation and
their interest groups.
Social responsibility of insurance companies
135
Fig. 3. The average value of indicator of insurer’s adverse reaction
Source: own elaboration
Fig. 4. The values that guide the actions of insurers
Source: own elaboration
The insurance providers guided by their specified values where honesty, openness, transparency and respect (Figure 4) are particularly important for implementing and maintaining the socially responsible approach. Unfortunately insurers do
136
Wioleta Dębczyńska, Tadeusz Zaborowski
not fulfil their commitments. Only few insurance companies are open and cooperative significantly. The level of honesty and transparency of selected insurance providers is also unsatisfactory in terms of the specifications of offered products. The
average value of indicator of the values that guide the actions of insurers (Figure 5)
has showed that the respect to clients is relatively important, but honesty is of lower significance.
Fig. 5. The average value of indicator of the values that guide the actions of insurers
Source: own elaboration
In accordance with Principles of Good Practices, published by Polish Insurance
Association in 2009 [Polska Izba Ubezpieczeń 2007], members of polish entire
insurance market are obligated to conduct their business in accordance with generally recognized principles of the corporate social responsibility, as well as are
actively involved in the development and improvement of these rules. In particular,
insurance companies should operate with confidence that the pursuit of business
tasks should be done to build normal relations with all stakeholders based on the
rules of dialogue, fairness, tolerance, environmental behaviour and social mission.
The instruments of social responsibility are increasingly popular in the insurance sector. The investigated companies (Figure 6) are more willing to use those
tools, which include: social investments, corporate volunteering, free provision
of services, material and financial support.
Social responsibility of insurance companies
137
Fig. 6. The instruments of social responsibility used by selected insurance companies
Source: own elaboration
Among all investigated insurance companies, there are many entities that see
the voluntary activities as a significant trend, but on the other hand they are active
in the social investment relatively infrequently (Figure 6). The average value
of indicator of instrument of social responsibility used by insurance companies
(Figure 7) has proved that theirs employees the most likely engage in voluntary
projects. The free provision of services is the least used instrument.
138
Wioleta Dębczyńska, Tadeusz Zaborowski
Fig. 7. The average value of indicator of instruments of social responsibility used
by insurance companies
Source: own elaboration
The socially responsible approach of insurance providers has been stimulated
by some specific motivators, which include building a good image, moral principles, meeting the expectations of customers, building the consumer confidence.
The research results (Figure 8) has presented that insurers point to key importance
to gain and maintain trust of their interest groups. However, the moral principles
were indicated as the least important.
Fig. 8. The motivators that stimulate the social responsibility of insurance companies
Source: own elaboration
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139
The average value of indicator of motivators that stimulate the social responsibility of insurance companies (Figure 9) has showed that the entities take actions
that can protect their good image and maintain trust of customers much more frequently than actions in reaction to the social expectation and related to commonly
recognized moral standards.
Fig. 9. The average value of indicator of motivators that stimulate the social responsibility
of insurance companies
Source: own elaboration
Analysing the results it was concluded that the insurance companies only apparently demonstrate the public their socially responsible approach to conducting
business. In fact, they relatively seldom use instruments of CSR to create added
value for their stakeholder. Generally, schemes and techniques used by insurers are
created for getting maximal profit, regardless any losses it may cause to a client.
It shows that insurance companies are not aware that taking account of requirements of their stakeholder can bring many benefits.
Insurance providers should create and offer high-quality products and services
that meet the expectations of clients and fully satisfies increasingly higher market
demands with respect to functionality and safety. Moreover, insurance agents must
fulfil their contracts with the highest professional diligence based on principles
of social responsibility.
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5. CONCLUSIONS
Although, the insurance industry is associated with business activity exposing
economic profits, it is also identified as potential target group where the social
responsibility should be strongly rooted in the organizational culture. In the literature and research related to insurance subject the social responsibility is considered
as relevant aspect of insurance instruments and the socially responsible approach of
insurers has become an increasingly important issue and is now subject to a systematic public control.
It is generally accepted that management strategy based on concept of the social
responsibility can stimulate a dialogue with stakeholder and maintain good longterm relationships with groups involved in corporate activity. The socially responsible approach means that entities are obligated to bear the consequences of conducted activity and also meet the needs of different stakeholders.
Insurance companies in their financial instruments refer to good practice and
social responsible principles, but in fact they relatively random engage in solving
social problems. Insurance companies are special public confidence institutions
and specific social role in economy. Therefore, insurance sector must operate
in accordance with the law and generally recognized standards of CSR.
The insurance companies should emphasize that they do not benefit from human tragedies, but they form a social solidarity system. The role of insurance providers is not only preparing, advertising and selling products. To create an image of
stable, safe and socially responsible company it is necessary to constantly improve
the quality of products and engage in solving customers’ problems.
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