1. Reform Reversals in Poland and Hungary:
Causes, Implementation and Consequences
Agnieszka Chłoń-Domińczak
SGH Warsaw School of Economics
Tallinn, 30 September 2019

2. Cycle of pension system changes in CEE
countries
1.From transition to
enlargement:
towards
convergence to
market economy
EU accession and
post-accession:
rebalancing the
pension systems
Shift back to PAYG
after financial and
economic crisis

3. Pension reforms in CEE countries
• Economic and social transition:
• Reduced employment and rising unemployment in early 1990s
• Rising costs of pension systems, widespread early retirement
• Demographic change: sharp drop in fertility rates causing fast population ageing in the
future
• Pension reforms:
• Changes in the PAYG pillar: from parametric reforms (rising retirement age, lower
indexation or accrual rates) to paradigmatic reforms: introducing NDC schemes
• Changes in pension financing: introducing multi-pillar schemes

4. Selected features of pension systems in 8 CEE countries
Public
pension
scheme
Retirement age
Mandatory funded
contributions
(iniital)
Enactment
date
Who participates
Bulgaria DB
60/55  63/60
 65 + life exp
2%  5% 2002
Mandatory for all workers
<42
Estonia DB
60/55  63
 65 + life exp
6% (4% +2%) 2002 Mandatory for new entrants
Latvia
Notional
accounts
60/55  62
 65
2%  8% 2001
Mandatory for new and
workers < 30, voluntary for
30-50
Lithuania DB
60/55  62.5/60
 65
2.5%  5.5% 2004
Voluntary for current and
new workers
Hungary DB
60/55  62
 65
6%  8% 1998 Mandatory for new entrants
Poland
Notional
accounts
65/60 (60/55) 
67/67  60/65
7.3% 1999
Mandatory for new and
workers < 30, voluntary for
30-50
Romania DB
62/57  65/63
(discussion to
equalise)
2%  3% 2008
Mandatory for new and
workers < 35, voluntary for
36-45
Slovakia Points
60/53-57  62/62
+ life exp
9% 2005
Mandatory for born after
1983
Source: A.Schwarz and O.Arias, The Inverting Pyramid (2014) with updates

5. Changes in funded DC schemes after 2008
Reversals
Bulgaria
No change in contribution level.
From 2015, Funded scheme opt-out and opt-in system, but no significant impact on participation.
Estonia
Temporary reduction with off-set.
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% (2+6) to offset missed contributions. An optional increase of
employee contribution to 3% in 2014-2017 (18% of insured followed this option).
Considerations to make the funded scheme volnutary
Latvia
Partial reduction.
8% contribution rate reduced to 2% in May 2009. Rates increased to 4% from 2013
Lithuania
Partial reduction.
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. From 2020 the part of social
insurance contribution will increase to 3.5 percent (3.5%+2%+2%). More than 400,000 participate according to the two-percent
scheme and the same number according to the two percent + two percent + two percent scheme. About 25,000 have chosen to
terminate pension accumulation in the private pension funds
Hungary
Permanent reversal.
Contribution rate reduced to 0% in January 2011 assets transferred to the mandatory PAYG system.
Poland
Permanent reduction and partial reversal.
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 PAYG scheme and redeemed. In 2014 system made opt-out and opt-in in specified time slots.
Assets from FF transferred gradually to PAYG 10 years prior to retirement.
2019 – proposal to transfer FF savings to voluntary accounts (with 15% fee) – default or NDC account, introduction of employer-
based employee capital plans (PPKs) from July. 2019, financed from additional contributions of employees and employers
Romania
Temporary reduction.
Slowing the planned increase path of contribution rate from 2% to 6%. Rate froze at 2%, started to increase from 2011 at annual
rate of 0,5pp to 5% in 2015, then 5.1% in 2016 and 6% from 2017 onwards
Slovakia
Permanent reduction.
9% contribution reduced to 4% in 2013. Funded scheme opt-out and opt-in system.

6. IS IT ABOUT THE PERFORMANCE, FEES OR FISCAL
ISSUES?

7. Fees
40-yearschargeratioforaveragefeesinCESEcountries,%ofaccumulatedassets
Source: (Han & Stańko, 2018; Ionescu & Robles, 2014)
2008 2012/2013 2018
Bulgaria 26.51% 26.51% 21.5%
Croatia 22.21% 11.74% n.a
Estonia n.a. 31.56% n.a
Hungary 22.57% 5.93% n.a
Latvia n.a. 39.59% n.a
Lithuania n.a. 22.72% n.a
Poland 18.74% 14.35% 13.8%
Romania n.a. 16.10% n.a.
Slovakia 19.03% 19.17% 19.0%

8. Investment returns in CEEfunded pension pillars (end of 2013)
Country Type of funds Calculated Duration
since accumulated till 2012 average p.a. (in years)
Bulgaria mandatory pfs 1.07.2004 -17,67 -2,06 9,33
Estonia all funds 2.07.2002 -1,01 -0,10 10,50
conservative 2.07.2002 -9,14 -0,91 10,50
balanced 2.07.2002 -9,62 -0,96 10,50
progressive 2.07.2002 3,52 0,33 10,50
aggressive 1.01.2010 4,92 1,61 3,00
Latvia conservative 7.01.2003 -11,54 -1,22 10,00
balanced 7.01.2003 -15,29 -1,65 10,00
aggressive 7.01.2003 -16,22 -1,75 10,00
Lithuania conservative 15.06.2004 -7,56 -0,84 9,38
stable 15.06.2004 0,03 0,00 9,38
balanced 15.06.2004 -1,99 -0,21 9,38
aggressive 15.06.2004 -7,72 -0,85 9,38
Hungary classic 1.01.1998 n/appl. 3,39 7,25
conservative 22.03.2005 35,66 2,05 15,00
balanced 22.03.2005 28,73 1,70 15,00
growth 22.03.2005 11,81 0,75 15,00
Poland mandatory pfs 1.09.1999 110,48 5,74 13,33
Romania mandatory pfs 21.05.2008 29,80 5,97 4,50
Slovak Rep. conservative 22.03.2005 -3,21 -0,42 7,75
balanced 22.03.2005 -10,33 -1,40 7,75
aggressive 22.03.2005 -11,96 -1,63 7,75
indexed 2.04.2012 1,31 1,75 0,75
Real rate of return (%)

9. Transition costs
• Transition costs gradually increasing due to the increased contributions and/or
higher coverage of the mandatory pension system due to the new entrants (BG, EE,
RO)
• Reversals/reductions led to temporary (EE) or permanent decline of transition costs:
• 2009: LV, LT
• 2010: EE, BG
• 2011: HU, PL
• 2013: SK
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
BG 0.6 0.5 0.6 0.7 0.8 1.1 1.1 1.1 1 0.9 0.9 1.3 1.1 1.3 1.3
EE 0.0 0.4 0.6 0.7 0.7 0.8 0.5 1.1 0.1 0.4 0.9 1.4 1.8 1.9 2.0
LV 0.1 0.2 0.4 0.4 0.6 0.7 1 1.1 0.1 0.1 0.1 0.1 0.5 0.5 0.8 1.1
LT 0.3 0.4 0.6 0.9 1.1 0.6 0.3 0.4 0.4 0.4 0.5 0.5 0.8
HU 0.5 0.5 0.5 0.7 0.8 1 1 1.2 1.2 1.4 1.1
PL 1.0 1.1 1.2 1.2 1.1 1.3 1.4 1.4 1.6 1.6 1.6 1.0 0.5 0.7 0.5 0.2 0.2
RO 0.2 0.3 0.3 0.4 0.5 0.7 1 1.2 1.3
SK 0.6 1.1 1.2 1.2 1.2 1.2 1.2 1.1 0.6 0.6 0.6 0.7
HR 0.9 1.1 1.1 1.2 1.2 1.2 1.3 1.4 1.4 1.4 1.5 1.5 1.5 1.5 1.5
Source: Bielawska et al. (2018) with updates

10. Financing of the transition costs
2000-2008 2009-2016
BG
EE
LV
LT
HUPL
RO
SK HR
taxes
old-age savings
gg debt
BG
EE
LV
LT
PL
RO SK
HR
taxes
old-age savings
gg debt
• Before the crisis
• transition financed mainly from taxes/debt,
with notable exception of LV
• Public debt used to finance transition in PL,
HU, RO
• After the crisis
• Transition financed from debt in PL, EE, SK, HR
• Old-age pension savings used to finance
transition in LT, LV, BG, RO
• Tax-financing less popular
Source: Bielawska et al. (2018) with updates

11. Public finance situation
• GG deficit increased between 2008 and 2011 in most of the countries, still high in
HR, PL until 2014, picking up recently in RO
• GG debt also increased after 2009, particulalry in HR and HU, but also high in PL and
SK
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Estonia -3.3 -0.1 0.2 0.4 1.8 2.4 1.1 2.9 2.7 -2.7 -2.2 0.2 1.2 -0.3 -0.2 0.7 0.1 -0.3 -0.4 -0.6
Croatia -2.2 -3.5 -4.7 -5.2 -3.9 -3.4 -2.4 -2.8 -6.0 -6.3 -7.9 -5.3 -5.3 -5.1 -3.2 -1.0 0.8 0.2
Latvia -3.7 -2.7 -1.9 -2.3 -1.5 -0.9 -0.4 -0.5 -0.5 -4.2 -9.5 -8.6 -4.3 -1.2 -1.2 -1.4 -1.4 0.1 -0.6 -1.0
Lithuania -2.8 -3.2 -3.5 -1.9 -1.3 -1.4 -0.3 -0.3 -0.8 -3.1 -9.1 -6.9 -8.9 -3.1 -2.6 -0.6 -0.3 0.2 0.5 0.7
Hungary -5.1 -3.0 -4.1 -8.8 -7.1 -6.5 -7.8 -9.3 -5.0 -3.7 -4.5 -4.5 -5.4 -2.4 -2.6 -2.6 -1.9 -1.6 -2.2 -2.2
Poland -2.2 -3.0 -4.8 -4.8 -6.1 -5.0 -4.0 -3.6 -1.9 -3.6 -7.3 -7.3 -4.8 -3.7 -4.1 -3.7 -2.7 -2.2 -1.5 -0.4
Romania -4.4 -4.6 -3.5 -1.9 -1.4 -1.1 -0.8 -2.1 -2.7 -5.4 -9.1 -6.9 -5.4 -3.7 -2.2 -1.3 -0.7 -2.7 -2.7 -3.0
Slovakia -7.3 -12.0 -6.4 -8.1 -2.7 -2.3 -2.9 -3.6 -1.9 -2.4 -7.8 -7.5 -4.3 -4.3 -2.7 -2.7 -2.6 -2.2 -0.8 -0.7
General government net lending (+) /net borrowing (-)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Estonia 6.5 5.1 4.8 5.7 5.6 5.1 4.5 4.4 3.7 4.5 7.0 6.6 6.1 9.7 10.2 10.5 9.9 9.2 9.2 8.4
Croatia 29.1 35.5 36.5 36.6 38.1 40.3 41.2 38.7 37.3 39.0 48.3 57.3 63.9 69.5 80.4 84.0 83.7 80.5 77.8 74.6
Latvia 12.1 12.1 13.8 13.0 13.7 14.0 11.4 9.6 8.0 18.2 36.3 47.3 43.1 41.6 39.4 40.9 36.8 40.3 40.0 35.9
Lithuania 22.7 23.5 22.9 22.1 20.4 18.7 17.6 17.2 15.9 14.6 28.0 36.2 37.2 39.8 38.8 40.5 42.6 40.0 39.4 34.2
Hungary 59.9 55.3 51.9 55.3 57.9 58.7 60.5 64.5 65.5 71.6 77.8 80.2 80.5 78.4 77.2 76.7 76.7 76.0 73.4 70.8
Poland 39.0 36.5 37.3 41.8 46.6 45.0 46.4 46.9 44.2 46.3 49.4 53.1 54.1 53.7 55.7 50.4 51.3 54.2 50.6 48.9
Romania 21.7 22.5 25.9 24.8 22.1 18.9 15.9 12.4 12.0 12.4 21.9 29.8 34.2 37.0 37.6 39.2 37.8 37.3 35.2 35.0
Slovakia 47.1 49.6 48.3 42.9 41.6 40.6 34.1 31.0 30.1 28.5 36.3 41.2 43.7 52.2 54.7 53.5 52.2 51.8 50.9 48.9
General government consolidated gross debt
Source: Eurostat

12. IMPACT OF THE CHANGES: ASSETS AND PENSION
WEALTH

13. PensionsystemsassetsinCEE (mandatoryandvoluntaryschemes)
Source: OECD Pension Stats

14. Decomposition of asset changes in Poland
(3rd quarter 2018)
(+) Net change of assets =
(+) contributions plus interests
(-) up-front fee
(+) net before asset
management fee
(-) asset management fee
(-) slider
(-) other transfers
Source: Financial Supervision Commission

15. Consequences of the changes
• Different impact on the future situation in relation to the PAYG parts of the pension
schemes
• Impact on both adequacy and sustainability
• Potentially lower pensions in the future (with already risk of low adequacy of
pension benefits)
• liquidated 2nd pillar balances were mostly transferred to the state and earned PAYG
entitlements (retroactively)
• allowing people to simply spend the liquidated balances reduces the pension wealth and
future benefits

16. Change in pension wealth for average
wage earner
-30
-20
-10
0
10
20
30
40
50
60
PL LV EE RO LT SK
%ofaverageannualwage
50 year old 40 year old
• Reversals of the multi-pillar scheme
have different outcomes on expected
pension levels, which depends mainly
on the design of the PAYG scheme
• In the case of higher pension
expectations, the change leads also to
higher level of implicit liabilities, which
means that the change increases total
public liabilities (Slovakia)
• In the case of lower pension
expectations, the change leads to similar
level of public liabilities, but there is an
efficiency loss as r>g (Poland)

17. Evolution of legal retirement age:
convergence and equalisation
Male Female
2016 2030 2050 2016 2030 2050
Bulgaria 65 67 67 65 67 67
Czechia 63.1 65 65 60.5 64.7 65
Estonia 63 65 65 63 65 65
Croatia 65 65 67 61.5 65 67
Latvia 62.8 65 65 62.8 65 65
Lithuania 63.3 65 65 61.7 65 65
Hungary 63.1 65 65 63.1 65 65
Poland 65 65 65 60 60 60
Romania 64.8 65 65 60.4 63 63
Slovenia 65 65 65 63 65 65
Slovakia 62 64.2 67.3 60.2 64.2 66.8
Source: Ageing Report 2018

18. Pension developments in CEE countries
• Each of the analyzed countries is characterized by different combination of socio-
economic factors taken into account
• Reversals of pension reforms were caused by a set of socio-economic factors,
including most importantly
• poor fiscal situation
• rising pressure from current pension system expenditure
• Countries that introduced permanent changes also faced pressures from rising
expenditure and number of beneficiaries in the pension system
• Performance of pension funds had little impact on reversal decisions
• Permanent reversals and reductions were made in countries with highest
demographic pressures foreseen in next decades

19. RECENT DEVELOPMENTS IN POLAND – REPLACING
MANDATORY SAVINGS WITH QUASI-MANDATORY
ONES?

20. Introduction of PPKs
• In November 2018, the new Act on Employee Capital Plans (PPKs) was signed by the
President and adopted for implementation from June 2019, establishing a new
occupational pension savings scheme (Pracownicze Programy Kapitałowe)
• The scheme will cover all salaried workers in Poland (around 11.5 million people) and
potentially increase their pension savings
• PPKs is based on auto-enrolment.
• The scheme covers all employees hired in accordance with the Labour Code contract who
are between 19 and 55 years old
• Workers aged between 55 and 70 can join an PPKs voluntarily

21. Contributions to PPKs
Amount of
ECP
contributions
Mandatory
contribution
Voluntary
contribution
Financed by
employer
1.5%
of the wage
up to 2.5%
of the wage
Financed by
employee
2.0% of the
wage (with
exceptions)
up to 2.0%
of the wage
• Employees with salaries below
120% of the minimum wage will
pay reduced mandatory
contributions, but no less than
0.5% of their wage
• An additional co-payment will be
made from the public Labour
Fund. This will include an
introductory lump-sum payment of
PLN 250 (€60) and an annual
payment of PLN 240 (€57) for
those who contribute more than
the minimum amount

22. Main principles of the PPKs
• Employers choose an asset manager from among the following:
• investment fund companies
• insurance companies
• pension fund societies, managing the open pension funds
• employee pension funds
• The structure of the investment portfolio will be adjusted to the participant’s stage in
life, with the investment horizon set at a fixed date (2030, 2035, 2040, etc.):
• In the 2030 Fund, the share of equities must not be higher than 15% of the total assets
• In the 2070 Fund, it must be no more than 80% of the total assets
• Payments out of PPKs can be made after the participant reaches the age of 60.
• The standard pay-out option is a lump-sum withdrawal of 25% of the accumulated funds
(untaxed), and the rest can be taken in the form of 10-year scheduled withdrawals
• The entire amount can be paid out in a lump sum, but in such a case 75% of the ECP
savings will be taxed. The savings can also be used to purchase an annuity

23. Pros and cons
Pros
• generation of additional old-age
savings and increased old-age
income in the future
• private ownership of assets
accumulated in the PPKs
• additional stimulus for the
development of the capital market
in Poland
Cons
• higher tax wedge due on
contributions paid to PPKs, as
additional contribution will reduce
net wages and increase total cost
of employers
• increased fiscal costs due to co-
payments from the Labour Fund

24. Assessment (GRAPE think-tank)
• The net increase in savings as a result of introducing PPKs will be smaller than gross
savings estimated by the government
• Other individual savings may be reduced by as much as 70% of the amount paid into
to the PPK account.
• The PPKs savings will be smaller than the initial level of savings in mandatory open
pension funds

25. 2019 announcement: shifting FDC assets to
individual retirement accounts
• Draft proposed for the consultation
• Main assumptions:
• Conversion of open pension funds (FDC) to individual retirement accounts (IKE)
• Around 15.7 million people will have a choice
• to convert their FDC accounts to IKE accounts with 15% conversion fee (default) with an option to
further contribute voluntarily
• Transfer assets to NDC accounts and Demographic Reserve Fund
Declarations should be made by January 10th, 2020
Transfers will be made as of end of January 2020
• Minimum limit of investment in equities will be gradually reduced from 90% to
67.5% by the end of 2029
• Slider mechanism will be removed

26. Long-term consequences
• Initially higher deficit of Social Insurance Fund, but smaller in longer run (due to
lower pension payments)
• Lower old-age pensions for those who follow default option
• Increased poverty at old age
• Not assessed in the proposed law!
• Short-term increase of inflows to the state budget (conversion fee), but decline later
(removal of the slider mechanism)
Source: Impact Assessment

27. State of play in Poland
• The pension reform is not a closed chapter and further efforts are needed to
maintain sustainability and adequacy
• Changes in the funded system in Poland brought many consequences, mainly for the
financial market, including the Warsaw Stock Exchange, but also the bond market.
• The newly proposed Employee Pension Plans with auto-enrolment mechanism are
an attempt to introduced quasi-mandatory pension savings, but at additional fiscal
cost (paid by employees and employers) and no solutions for the pay-out phase
protecting from the old-age poverty).

28. Summary
• Significant shifts in pension systems should be strongly reviewed
from perspective of the participants, financial markets and the
public finance system
• The big questions:
• Is it possible to remove the inefficiencies in the existing systems?
• Fees and costs
• Investment rules and returns
• is reversal the best option?
• The most important issue is to sustain the public trust towards
the pension system in the long-run