3rd Pillar in Poland Must be Put into Life

A pension paid out under the new pension system will be even lower than current benefits. Whereas the Poles — frightened by the crisis and discouraged from saving in the Third Pillar — in the first 6 months of 2012 made payments only to 12,000 Individual Pension Security Accounts (IKZE) from among 300,000 opened ones. The total of the payments equalled only PLN 5.5 million.

On the citizens’ initiative, the Parliament received a bill on IKZE amendment with the aim of making the system more attractive to all those who wish to receive higher pensions. The proposal reported by the ‘RAZEM’ Citizens’ Regulatory Initiative Committee is supported by the Polish Insurance Association. The costs and advantages of the solutions included in the bill were analysed by the Tax Studies Institute (Instytut Studiów Podatkowych) which prepared, at the request of PIU, a report assessing the efficiency and effectiveness of the solution proposed by the ‘RAZEM’ Committee.

In the new pension system, the average remuneration replacement rate will amount to about 30% for women and 40% for men (First and Second Pillars together). Whereas — as results from the report on the Third Pillar pensions in Poland prepared at the request of the Polish Insurance Association by the Tax Studies Institute — social expectations as to the replacement rate are minimum 75% of the last remuneration.

‘The only way to improve the situation that will occur after retirement under the new system is long-term independent saving. Unfortunately, as reflected by the data published lately, over 80% of people who should voluntarily save for the retirement are not doing that. All signs indicate that in the coming years, the interest of the citizens in Third Pillar investments will be low. This is closely related to deteriorating economic situation in Poland and the global economic crisis. Therefore, there is an urgent need for changes in the system of voluntary pension insurance, so as to make available forms of capital accumulation more attractive to the future pensioners’, emphasises J. Grzegorz Prądzyński, President of the PIU Management Board.

The first concrete proposal of changes in that scope was prepared by the ‘RAZEM’ Citizens’ Regulatory Initiative Committee and is awaiting consideration by the Parliament. ‘As soon as following several months of introducing IKZE to the market, it is clear that the expectations vested therein will not come true. The basic fault of the currently binding system is the fact that upon reaching the pension age, income tax will have to be paid at the moment of withdrawing cash. This means that the tax obligation will apply at the time when the funds collected will be most needed, i.e. after retirement’, explains Adam Sankowski, Proxy of the ‘RAZEM’ Committee.

One of the mechanisms proposed by the Committee is the introduction of tax incentives, thanks to which pension saving will become more attractive not only for the most affluent ones. The bill on IKZE amendment prepared by the Committee covers three basic demands:

• guarantee of tax exemption for life annuities. At the moment, progressive tax scale, i.e. 18% or 32% tax, applies to IKZE, and assuming that tax rates may rise in the future, this is a serious barrier in making a decision on long-term saving;
• application of PIT allowance basis in the form of an identical nominal amount of PLN 4,000 to be indexed every year. Today, the IKZE mechanism at most represents 4% of annual revenues, and no more than PLN 4,030. Only 3% of the most affluent Poles, earning over PLN 100,000 a year, may avail of the allowance in its full amount. The amount determination shall also extend the scope of people potentially interested in additional pension saving for uniformed services or persons who have just entered the labour market;
• allowance of 18% for everyone, both those who today pay tax at progressive and linear scale. Presently, IKZE does not apply at all to those paying linear tax, although they pay minimal National Insurance (ZUS) contributions and, therefore, should additionally save for their pension.

The analysis of foreign pension solutions prepared by the Mercer Advisors shows that similar tax incentives are present in many European countries. Exemption of the money paid out (in whole or in part), if the payment has the form of life annuity, is applied by the UK or the Netherlands. The tax allowance dependence on the form of payout upon reaching the retirement age has been introduced in Denmark and Spain. Whereas, the limit of contributions and/or limitation of payments defined as amount instead of percentage is applied in the UK, Ireland, Denmark and Spain.

The report prepared by the Tax Studies Institute headed by Professor Witold Modzelewski assesses the bill of the ‘RAZEM’ Committee as an accurate response to the need for a fair pension. It is a socially important solution whose beneficiaries shall be mainly people with average or lower income. The bill is worded clearly and simply and, at the same time, provides for a real incentive to save. And, what is most important, it is a solution acceptable for the government authorities.

Report by the Tax Studies Institute
Review of Foreign Systems by Mercer