Challenges for pension reforms in Eastern Europe Zbigniew Derdziuk President

1. Challenges for pension reforms in Eastern Europe Zbigniew Derdziuk President Social Insurance Institution (ZUS) Montevideo, Uruguay, 19-20 March 2013

2. Challenges for pension reforms in Eastern Europe EU countries in Eastern Europe Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia The object of study The subject of study • Main reasons for reforms • Current and future reforms Montevideo, Uruguay, 19-20 March 2013

3. Challenges for pension reforms in Eastern Europe • Weak capital markets after transitions in 90-s • Fast economic growth as result of EU pre and post accession • Introduction of the 2nd pillar coincided with period when the rates of return in global capital markets were high • Activepublic government social campaign • High number of people entering to the labour market and to the system born in 70-s and 80-s (baby boom) Introducingfunded pension pillar - background Montevideo, Uruguay, 19-20 March 2013

4. Challenges for pension reforms in Eastern Europe Main reasons of current reforms – rising life expectancy • retirement ages not adjusted to rising life expectancy • too many early retirements • low effective exit age Source: European Commission, 2012 Ageing Report: past trends in life expectancy at birth (1960-2009); projection of life expectancy at birth (2010-2060) Montevideo, Uruguay, 19-20 March 2013

5. Challenges for pension reforms in Eastern Europe Main reasons of currentreforms – negative trends in population structure • rising dependency ratio • low employment rate of older workers (55-64) 2060 Source: European Commission, 2012 Ageing Report: decomposition of the population by age-groups (2010-2060) Montevideo, Uruguay, 19-20 March 2013

6. Challenges for pension reforms in Eastern Europe Main reasons of currentreforms – rising pension expenditure to GDP • pension schemes are not balanced • high burden of national budgets and PAYG systems Source: European Commission, Fiscal Sustainability Report 2012; Increase in total budgetary expenditure, 2010-2060, % of GDP Montevideo, Uruguay, 19-20 March 2013

7. Challenges for pension reforms in Eastern Europe • Increase effective retirement age - link to life expectancy Bulgaria, Czech,Poland, Romania, Slovakia • Reduce early retirement Bulgaria, Czech, Poland • Increase of the minimal length of service Bulgaria • Benefit indexation – to consumer prices instead of to wages Romania, Slovakia • Increase employment rate of older workers Bulgaria, Lithuania, Slovenia EU recommendations for reforms Source: European Commission, White Paper on Pensions, 16th February 2012 Montevideo, Uruguay, 19-20 March 2013

8. Challenges for pension reforms in Eastern Europe • Increasing of the pension age (gradually) Bulgaria,Czech, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia • Reducing early retirement Czech, Poland, Romania • Increasing of the minimal length of service Bulgaria, Czech • Stricter pension calculation methods (elimination of inequalities) Hungary, Romania • Stricter indexation (price indexation) Czech, Estonia, Hungary, Latvia Latest reforms Source: European Commission, White Paper on Pensions, 16th February 2012 Montevideo, Uruguay, 19-20 March 2013

9. Challenges for pension reforms in Eastern Europe • Hungary 2010 – abolished funded pillar, pension assets wereused to finance current expenses • Estonia 2009-2011 – temporary suspension of the transfers to the funded pillar to reduce PAYG deficit • Latvia 2009 – reduced contributions: from 8% to 2%, in 2012 increasing up to 6% Latest reforms – changes in funded pension pillar Source: European Commission, White Paper on Pensions, 16th February 2012 Montevideo, Uruguay, 19-20 March 2013

10. Challenges for pension reforms in Eastern Europe • Lithuania Reduced contributions: from 5.5% to 2% with the possibility of increasing them after crisis • Poland 2011 – reduced contributions: from 7.3% to 2.3%; the contribution rate to funded pillar will be increasing up to 3.5% in 2017 • Czech 2013 – workers will be able to transfer 3 pps. of their mandatory pension insurance payments to private funds on the condition that they will add a further 2 pps. of contributions from their income Latest reforms – changes in funded pension pillar Source: European Commission, White Paper on Pensions, 16th February 2012 Montevideo, Uruguay, 19-20 March 2013

11. Challenges for pension reforms in Eastern Europe Withdrawal phase – funded pension pillar • Pension reforms in CEE countries are at early stage – there is no withdrawal phaseyet – only contributory phase • Withdrawal phase is provided in Europe: i.a. Sweden and Denmark • Sweden is a good example in implementation withdrawal phase – three pension products with different risks distribution (inflation, longevity and investment risk) – withdrawal provided by a state institution -Pensionsmyndigheten (Swedish Pension Agency), which gives withdrawal sustainability and cost effective management Source: Heinz P. Rudolph, Anita M. Schwarz, Organizing Benefit Payments from Private Pension Funds in Poland, December 2012 Montevideo, Uruguay, 19-20 March 2013

12. Challenges for pension reforms in Eastern Europe Conclusions • Pension reforms are constantly needed: - to keep sustainability pension systems - to minimise burden of national budgets - to keep balance and equitability between working and retired people (difficult situation on labour market vs. retirement privileges for retired) • Pension reforms have to be introduced basing - on accrual calculations - with economicprojections in long- term perspective • Rising and equalisation retirement ageneed to be linked to the rising life expectancy and supported by labour market reforms • Reforms are subject to wrong and not reasonable changes since policymakers are afraid of taking not popular decisions (political risk) Montevideo, Uruguay, 19-20 March 2013

13. Thank you for your attention Zbigniew Derdziuk President Social Insurance Institution ZUS Zbigniew.Derdziuk@zus.pl www.zus.pl