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USAID Mission to Poland
Europe & Eurasia
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Pension III
Implementing Poland’s Private Pension System, Phase III
Finishing the Pension Reform Life-Cycle
Final Report
Task Order 801 (EPE-I-00-95-00043-00)
PricewaterhouseCoopers LLP
June 30, 2000.
TITLE OF REPORT: Implementing Poland’s Private Pension System
Final Report for Phase 3
TASK ORDER: Implementing Poland’s Private Pension System
CONTRACT: Omnibus II
PROJECT NUMBER: 110-0005-3-562-7075
CONTRACT NUMBER: EPE-I-00-95-00043-00
TASK ORDER NUMBER: 801
CONTRACTOR: PricewaterhouseCoopers LLP
USAID PROJECT OFFICE: USAID/Warsaw
Al. Jerozolimskie 56C
00-803 Warsaw
Poland
USAID COTR: Mr. Mikolaj Lepkowski
DATE OF THE REPORT: June 30, 2000
ADDITIONAL INFORMATION: Contact Tessie San Martin
Telephone: + 1-703-741-2422
E-mail: tessie.san.martin@us.pwcglobal.com
PricewaterhouseCoopers provided assistance to the Government of Poland on pension reform for 5 years under USAID funding. During this period, we have had the pleasure of working with a large number of representatives from the Government of Poland and the United States Government. We would like to thank all of them for their cooperation, commitment and good humor. In particular, we would like to thank the Directors of the Office of the Plenipotentiary, Michal Rutkowski and Marek Góra, for the speed of their work, vision and utter determination. We have also appreciated the opportunity to work for three flexible and non-partisan, but decisive Plenipotentiaries, the late Andrzej Baczkowski, and Jerzy Hausner and Ewa Lewicka. We thank UNFE President Cezary Mech and V.P. Pawel Pelc for their hospitality, patience and hardwork. Special thanks also go to Ryszard Petru, Agnieszka Chlon, Iwona Duda, Lidia Kukula, Leszek Bucior, Marcin Krupa, Karol Rajewski, Anna Nowak, Dariusz Lazar and the OP Public Education Implementation Team and the growing staff at UNFE. To USAID, we would like to express our appreciation for 5 years of cooperation to the understanding, flexible and knowledgeable team headed by Mission Director William Frej: Mark Kraczkiewicz, Vicki Peterson, Mikolaj Lepkowski and Pawel Krzeczunowicz.
Executive SummaryA. Introduction
C. Task Order: Reporting Details, Team, Objectives and Critical Path
Reporting Details
Subcontractors
Phase 1 Objectives
Phase 2 Objectives
Phase 3 Objectives
Phase 3 Critical Path IssuesReview Lessons Learned
Design Policy Draft Legislation
Develop Public Education
Develop Institutional CapabilitiesE. Major Project Accomplishments
1. Lessons Learned: Systemic Reform Issues
2. Lessons Learned: Institutional Building of the Pension Regulator
3. Lessons Learned: Designing and Supporting the Public Education ProgramG. Conclusion
Between October 1996 and April 2000, PricewaterhouseCoopers (PwC), under contract to USAID/Poland, provided technical assistance to the Government of Poland in the design and implementation of an ambitious pension reform program. The technical assistance included:
- Assessments of the regulatory and legal impediments to the development of a voluntary, private pension funds in Poland;
- Assistance in the development of comprehensive legislation required to establish private, capital based pension funds in the country;
- Development of a public education and information campaign; and
- Assistance in the establishment of the licensing, regulatory and supervisory infrastructure for private pension funds in Poland.
Poland’s new pension system is in many ways a benchmark for other countries. Regardless of whether a country is in the developed or developing world, their pension systems face similar issues: a demographic decline and financial instability. Thus the solutions of the new Polish pension system should be considered not only for other post-soviet bloc countries or developing countries, but also for the pension systems of Poland’s European Union and North American partners.
Poland has designed and implemented a complex system that synthesizes the lessons learned of many countries, uses public education in an extensive manner, reforms exiting institutions, and builds new ones. The system diversifies many of the risks future pensioners and the system as a whole face by leveraging the strengths and mitigating the weaknesses of the public and private sectors.
This project played a key role is supporting the Government of Poland in its ambitious and successful pension reform effort. This experience and the cooperation between the Government of Poland, USAID and PricewaterhouseCoopers bear examination for application in other reforming countries. The project’s key accomplishments over this time period have been:
Design and adoption of a pension reform policy. The project helped to educate policy-makers about the challenges to and opportunities created by pension reform, and develop consensus among stakeholders on how to reform the existing pension system. In particular, PwC consultants helped inform Polish decision-makers about the issues surrounding pension reform, drawing their attention to the lessons learned from reform processes elsewhere. The PwC Team worked with the GoP to develop an effective public education campaign to educate all stakeholders in the process.
Create an effective infrastructure for implementation. PwC helped build the institutional capability of the pension regulator, UNFE, to supervise the system and enforce compliance with the regulations. In particular, PwC assisted in:
- The development of licensing procedures and criteria for pension fund societies;
- The development of the management information and IT systems required to supervise Pillar II (including procedures for the collection and analysis of information necessary for off-site and on-site inspections);
- The development of a comprehensive training plan, and the delivery of training in key technical areas; and
- The development of drafts and amendments to the laws and decrees of Pillar II and Pillar III.
Improve public participation. The project educated the general public about the new pension systems, and their new responsibilities as individuals for the future of their pensions.
Pension Reform Lessons Learned
The Poland Pension Reform project must be considered one of the Mission’s success stories as USAID winds down its operations in that country. The way the project has been designed and implemented by USAID and PricewaterhouseCoopers, its contractor, provides a number of valuable lessons for other donor and government funded efforts in this arena in the years ahead. Key lessons learned from this project include:
Management of information systems for the social security system is critical. The success of any kind of pension reform program depends on the security, accuracy and integrity of the information from the social security agency. If there are weaknesses in this area, the entire reform process may be jeopardized. Poland’s new pension system faces many challenges, but among the most daunting is the inability of ZUS (the Social Security Institute), to identify individuals in the system, their account, the contribution to be assigned to that account and the second pillar fund which the individual has joined.
A pension system with individual accounts requires a very precise collection and distribution process. PwC spent significant effort evaluating and analyzing the operational plans for the transfer of information, as well as the membership and collection processes. However, the problems with ZUS’ systems were beyond the reach of the project, and thus, PwC’s ability to address the heart of the problem was limited. In hindsight, donors should have focused more resources on the MIS situation in ZUS. Other related information technology and information systems management issues include:Encourage, as a matter of policy, the use of only one identification number per participant in the system. The existence of a unique identifier for every individual seems a subtle and minor point, but financial and benefits systems cannot operate in a state of identity chaos. Policy makers in many countries have overlooked this issue, as they are focused on the high level marcoeconomics of the system. However, it is important to remember that identity and ownership are the basis of economic systems.
Define detailed processes and user requirements before purchasing information technology solutions. Implementers need to understand where and how the information and the money will flow through the system, and which institutions and individuals will have the responsibility for ensuring the integrity, timeliness and accuracy of this process.
Keep the old technology running until it is proven that the new technology works. The Polish system suffered when the old system at ZUS was turned off before the new system was proven. As word reached employers that the new information technology system was unable to identify payments or payees in a timely manner, or perhaps at all, many unscrupulous employers began delaying payments or stopped paying all together. This issue was only resolved when the old identification system was restarted and controllers began to chase contributions past due.
Include Accountants and Information Technology Specialists in the Policy Design Team and in the Implementation Institutions. In a pension system, there are two professions that play a particular role in the day-to-day functioning of the system: accountants and information technology consultants. Earlier attention to certain accounting, process and information technology issues may have resulted in a smoother transition from the old to the new system. Future reformers in other countries should consider writing specific requirements regarding accounting standards into the law, particularly if existing accounting regulations are insufficient or silent on some pension, investment fund or insurance issues. The regulator should be strongly encouraged to include industry in drafting such documents.
Be Inclusive and Politically Savvy. From the start of the policy design stage, the Office of the Plenipotentiary for Social Security Reform (OP) took pains to ensure that all responsible political segments were included in events (such as study tours) and informed about developments. The OP included responsible and interested parties in the process and set deliberate goals and performance targets. For instance, trade unions and employers were consulted via the Tripartite Commission from the beginning of the process. Later, in part due to the virtue of this co-operation, Ewa Lewicka from the Solidarity Trade Union would become the Plenipotentiary to oversee much of the reform’s implementation.
It should be noted that the structure of the OP, the institution charged with shepherding the reform process, seemed particularly well suited to lead the way to consensus. The OP was largely a virtual team of Polish economic experts, government officials and technocrats that drew members from various GoP ministries and agencies, as well as domestic think tanks and consultanties. Because OP membership was derived from a wide cross section, it had credible access to various responsible political camps and was able to survive, with the team and the proposed policy intact through the changing of government.Promote Rational Investment Regulations. Developing economies should look to the Western European and North American capital markets when setting investment regulations and policies. The following are of particular importance to a healthy private pension system:
Investment Limits: Pension funds must be allowed to invest in a diversified portfolio to provide a basic minimum security to the system as well as enable the participant to obtain an adequate pension. Participant interest in a diversified portfolio and long-term returns should guide investment policy and outweigh parochial interests in supporting industries, sections of the economy or the domestic economy.
Pension Fund Activities: Policy makers and regulators should also ensure that funds are not allowed to perform financial operations better left to other financial institutions. Pension funds are not banks or insurance companies and operations should be kept distinct.
Valuation: Contributions must be invested in fairly and transparently valued instruments to protect and grow the value of the pension. The purpose of fund valuation requirements is to assure that pension fund assets are reported fairly. Fund valuation requirements typically follow generally accepted accounting principles, although certain assets have special valuation rules for pension funds. As a result, for publicly traded assets, pension funds typically use market values. However, for less liquid assets, such as thinly traded bonds, methodologies are specified to assure that these values are not manipulated.
In defined contribution pension schemes, the pension amount depends on the value of the funds accumulated at retirement. Thus, flaws in the valuation system or principles used can have drastic consequences for pensioners and the state. Although the valuation of pension fund assets deals with relatively narrow, technical issues, the consequences of serious valuation errors, especially if they undermine confidence in the public pension system and securities markets, can be quite widespread.Use an Appropriate Mix of US and Third Country Talent. Pension reform is an area where many other countries have a comparative advantage in terms of knowledge and experience. The strength of the pension reform project in Poland is that USAID leveraged effectively this worldwide knowledge and brought it to Poland.
Focus on Building the Pension Regulator. The success of reform depends on more than the adequacy of the legal and institutional framework. The functionality of new and reformed institutions determines whether the new system will succeed. Phase 3 of the project focused correctly on this important aspect. The institutions must fully understand their role and competencies in the new system and proactively cooperate with other system institutions. Finally, institutions must provide professionals with an opportunity to develop and apply their skills and knowledge. The project contributed to developing procedures, processes and, most importantly, developing training programs for staff that would be replicable beyond the life of the project.
Develop Different Supervision Strategies for Pillar II and Pillar III. Pillar II is a mandatory mechanism comprised of a small number of pension funds. Over time, economies of scale will further decease the number of these funds. As such, it is possible and desirable that the supervisors maintain detailed oversight into the activities of the funds. International experience from other developing markets demonstrates that an automated systemic supervision system that allows the regulator to check numerous details of participant accounts and investment actions and other fund operations does much to protect participant rights.
Pillar III, on the other hand, is a voluntary mechanism and it is expected that there could be hundreds, if not thousands of employee pension programs within a 5-7 year period. In such a situation, it is unlikely that UNFE would have enough resources to provide the same level of detailed oversight that Pillar II receives. For this reason, we believe that UNFE and other regulators need to use Risk Based Supervision. Risk-based supervision may be defined as a supervisory regime where the degree of oversight applied to a pension program is graded according to the degree of risk associated with this program.Promote Inter-Institutional Cooperation. The nature of regulation is such that the regulators must trail the market. Furthermore, regulators in a democracy must use their authority judiciously and ensure that they are fully informed. For this reason, it is beneficial to promote sharing of information between the various financial sector regulators. Protocols of Agreement, Memorandums of Understanding or other methods should be used to help the regulators cooperate.
Develop a Flexible Public Education Strategy. The public education strategy needs to be flexible in order for it to respond to the changing environment and the new opportunities. The Phase II project was successful in building critical mass of support for the reform. The strategy and campaign used a variety of tools to explain the need for the reform and to respond to legitimate, emotional and political criticism. Perhaps the best proof of the success of the public education campaign is that pension reform is one of the first major examples where politicians in Poland worked from "both sides of the barricade" to realize a major reform effort.
The flexibility of the mass public education strategy became crucial when funding by the Government of Poland was reduced from originally expected levels. The flexibility of the strategy allowed the implementation team to respond with a variety of different tools to educate the public about their choices. Despite the implementation funding difficulties GoP experienced, at the conclusion of the Phase III public education campaign, more than 60% of the population knew where to find GoP sponsored information about the new pension system.
Many reforming market governments do not understand the value of public education campaigns. For this reason, such governments fail to provide sufficient information to citizens and voters on the how and the why of the reforms undertaken. More extensive public education about the need for reforms, directions taken and the expected outcomes, might reward various governments at election time.
The purpose of this document is to communicate the lessons learned based on the entire life cycle of the pension reform process in Poland. These lessons learned are based on the technical assistance USAID and PricewaterhouseCoopers (PwC) provided to the Government of Poland from 1995-2000. To help highlight the lessons learned and other issues, this document also provides links to some of the key deliverables of the project. In order to access these documents, click upon the hyperlinks in blue. We also provide a general history of the reform and relevant administrative information about the project.
This project was comprised of three phases between 1995-2000. The first two Task Orders allowed a part-time level of effort in support of the Government of Poland. The third and final Task Order allowed full-time, in-country staff to support the reform effort. Over this time period, this project worked closely with two GoP offices:
- Office of the Plenipotentiary for Social Security Reform (OP): This institution held primary responsibility for policy design and coordination of the new system. It also oversees development and implementation of the public education campaigns. OP was formally disbanded in March 1999. However, the position of Plenipotentiary continued to exist with very limited direct support. Nevertheless, many of the former key OP staff continued to play key roles in implementation of the system.
- Superintendency of Pension Funds (UNFE): This institution is responsible for protecting participant rights through the regulation of the second and third pillars of the pension system. UNFE was established in the spring of 1998.
The goal of USAID’s pension assistance was to help ensure that each Pole has a safe and adequate pension in old age. In a world of changing demographics and financial uncertainty, this is a complex public policy goal. From the start of the reform, it has been USAID’s operational principle to support implementation. Generally, USAID has avoided extensive level of effort in policy-making issues, as US pension experience holds few lessons for the needs of Poland. The majority of the experience has been in the areas of public education and institution building.
The GoP initiated the pension reform process to create a multi-pillar pension system consisting of public and private, and mandatory and voluntary pensions. This new system is entitled Security Through Diversity, indicating the intention to secure pensions through diversifying the various risks pension systems and pensioners face. According to the vision of the policy makers, this reform consists of three pension pillars:
- Pillar I consists of adapting the previous pension benefits system that will continue under the administration of the Social Security Institute (ZUS).
- Pillar II is a mandatory contribution system in which the contributions are tax exempt but the benefits are taxable from the time they are received. Currently, the resources intended for this type of benefit are administered by 21 funds, which are supervised themselves by the Superintendency of Pension Funds (UNFE).
- Pillar III covers private pension plans where voluntary contributions to various asset managers are taxable but the benefits are exempt.
The basic components of the reformed Polish pension system, launched in January 1999, are summarized in the table below:
PILLAR entity summary description Pillar I ZUS – Social Security Institute Mandatory social insurance. Benefits more closely tied to contributions using National Defined Contribution method. Pillar II Universal Pension Fund Societies (PTEs) & Open Pension Funds (OFEs) Mandatory, privately managed pension funds. Individual accounts for participants. Funds invested in capital markets. Currently there are 21 licensed societies and funds. Benefits depend on accumulated capital at retirement. Licensed and supervised by UNFE. Pillar III Employee pension programs Voluntary, employer-sponsored pension products with limited tax incentives. Options include pension funds, investment funds, and insurance programs. Benefits depend on program. Licensed and supervised by UNFE.
Institutions and Entities in the New Pension System
The new pension system introduced new institutions, reformed existing ones, and provided new market opportunities for other capital market participants. The key institutions in the first, second and third pillars include:
Social Security Institute (ZUS):
This state institution is the core of the new pension system and administers individual accounts for all participants in the mandatory pension and health care system. Pension contributions paid by employers and employees are recorded in individual accounts to determine later benefits (notional defined contribution). A portion of an employee’s contribution is forwarded to the appropriate second pillar pension fund (OFE). Contributions to pillar 3 are not subject to ZUS.
Superintendency of Pension Funds (UNFE):
The purpose of this organization is to protect participant rights in the private pension system. UNFE oversees and licenses pension funds in the second pillar and third pillar, as well as employee pension programs in the third pillar.
Office of the Plenipotentiary for Social Security Reform (OP):
This institution held primary responsibility for policy design and coordination of the new system. It also oversaw the development and implementation of public education campaigns.
Universal Pension Fund Society (PTE¯ ):
The PTE is the management company/asset manager responsible for administering one second pillar open pension fund (OFE). Among its responsibilities to the OFE is the PTE’s responsibility for record-keeping, investment decision-making and client (participant) relations. There are currently 21 PTEs in Poland, each with its own OFE. Under current law, each PTE may only have one fund or OFE.
Open Pension Fund (OFE):
An OFE is an approved pension fund for the second pillar of the pension system. The OFE is a legal entity that invests in the capital markets on behalf of the participants.
Transfer Agent:
In Poland, a transfer agent is a record keeping service provider. In some cases either PTEs or investment fund management companies will outsource this activity to a transfer agent. However, the PTE or investment fund management company maintains ultimate responsibility for the record-keeping.
Employee Pension Program (PPE):
A PPE is an organizational fiduciary mechanism sponsored by an employer to invest money via an approved asset manager on behalf of employees. The PPE is the key institution of the third pillar.
Employee Pension Fund Society (PTE):
An employee pension fund society is the management company/asset manager responsible for administering one employee pension fund (PFE). Among its responsibilities to the PFE, the employer is responsible for record-keeping, investment decision-making and client (participant) relations. This institution exists only in the third pillar and should not be confused with a similar named (and operationally similar) institution in the second pillar.
Employee Pension Fund (PFE):
A PFE is an approved investment vehicle for an employee pension program. A PFE is a legal entity that invests in the capital markets on behalf of the employee.
Investment Fund:
Investment funds are group investment vehicles and operate in a similar manner to British unit trusts or US mutual funds. In Poland, investment funds, like pension funds, are comprised of two distinct legal and organization entities: the management company/asset manager, and the fund. Investment funds in Poland serve as a potential asset manager for the employee pension program.
Group Investment Agreement Linked to a Life Insurance Policy:
This product is an asset manager linked to a life insurance product. The asset manager invests in the capital markets and is generally valued on a monthly basis. This asset manager is not an investment fund under Polish law. This product may be purchased through either a corporate or mutual life insurance company.
C. Task Order: Reporting Details, Team, Objectives and Critical Path
Project Phase Title: Phase 1: Poland Private Pension Funds Assessment
Phase 2: Private Pension Fund Assistance for Poland
Phase 3: Implementing Poland’s Private Pension System
Contracting Officer: Anne Quinlan, USAID/OP/B/PCE
Regional Contracting Officer: Thomas Stephens (Phases 1 & 2),
Michael Kenyon (Phases 2 & 3)
CTO: Mark Kraczkiewicz (Phases 1 & 2),
Vicki Peterson (Phases 2 & 3),
Mikolaj Lepkowski (Phase 3)
USAID Project Office Warsaw, Poland
Period of Performance: October 1996 – April 2000
Subcontractors
The assistance to the Government of Poland required a wide range of international and local technical expertise. To meet this need, PwC partnered with several local technical providers over the course of pension reform life-cycle in Poland. These partner organizations assisted in the areas of public education and information technology implementation. These companies included Profile for both Phases II and III, and Corporate Profiles DDB, Hobbit and InfoViDE for Phase III.
Profile: Profile is a limited liability company established in 1992. This agency specializes in consulting in communication and public relations and in designing and carrying out promotion, public education and public affairs campaigns. The company’s scope of capabilities includes:
- Consulting in the area of communication, mass education and public information, developing communication strategies, for both commercial organizations and public entities; and
- Carrying out information, promotion, public relations and public affairs campaigns (mass education, public information campaigns, supporting organizational reforms and social change, image building, product promotion), organizing public relations events and activities (press conferences, press releases, press documentation).
Corporate Profiles DDB: Corporate Profiles DDB (CP DDB) was established in 1995, when the most award-winning Polish advertising agency, Corporate Profiles, merged with the international network DDB. Today CP DDB Communication Group ranks 2nd in terms of sales and income, and is the largest corporation in the industry. In 1999, "IMPACT" monthly voted it the best agency of the first decade on the Polish advertising scene. Among the prizes won by CP DDB are the 1999 Empirion award for best campaign strategy in the history of Polish advertising, for the National Investment Fund Campaign, and Best Television Ad of the Year 1999, awarded at the prestigious Crackfilm Festival for "Prague," a spot for Tyskie Breweries. The CP DDB network has 206 offices in 98 countries.
Hobbit: Hobbit is an information technology company based in Poland that focuses on software and information technology analysis. Founded in 1998, Hobbit currently employees over 25 software analysts, project managers and developers.
Hobbit designs, develops, deploys and maintains dedicated application software (client-server and thin client). Areas of specialization include: dedicated application software, e-commerce, business analysis, data migration, and reporting software. Preferred tools and databases include: Oracle, Sybase, Progress, Microsoft and Open Shop. Hobbit is also a partner of Vasco Data Security (Belgium) and cooperates with domestic and global integrators. Hobbit’s main customers are found in the financial, telecom and government sectors.
InfoViDe: InfoViDE is a Polish training and consulting company that focuses on ensuring customers obtain strategic benefits from the use of software technologies. InfoViDE activities include the design and development of software solutions adjusted to the essential business needs of the customer. A major part of InfoViDE’s activities is building software teams for its customers in the light of challenges created by competitors and a market economy.
InfoViDE is a leading provider of consulting services and know-how concerning project management, requirement analysis and the design of software solutions for businesses on the Polish market. The consulting team offers its services within various competence centers. Competence centers are a matrix organization structure allowing consultants to deepen professional knowledge and work in a variety of technology areas and information applications while preserving a common organizational culture and basic working tools.
Phase 1 Objectives
USAID/Poland requested technical assistance to assess opportunities and constraints for development of a voluntary, private pension funds in Poland. This project provided short-term level of effort for several consultants over a period of several months.
PwC assessed the financial markets, including the legal and regulatory framework, to identify potential impediments to private pension fund development. PwC also identified potential Government of Poland counterparts to work in this area. Technical recommendations were made to the Government of Poland and USAID for moving forward.
For more information, please reference the Phase 1 Final Report.
This phase of the project was originally scheduled as a one year Task Order with part-time level of effort for various consultants. Based on political changes in Poland, swift progress of the reform, additional funding from USAID, and contractor flexibility, the contract provided short-term assistance for several consultants over the period of 24 months.
This phase of the project had the following objectives:
- Help create and adopt comprehensive, implementable legislation to establish private, capital-based pension funds in Poland.
At the termination of this phase of the project, the Government of Poland had passed much of the key legislation and convinced key policy makers and parliamentarians from two successive governments about the need for and the direction of the reform.
- Broaden and improve the quality of public information and discourse regarding pension reform issues.
This project assisted in the creation of a critical mass of support to push the reform ahead. With the assistance of USAID, PricewaterhouseCoopers LLP and Profile sp. z.o.o., Poland created the public and political will to develop a pension system based on international best practices, but also tailored to the needs of the Poland’s environment.
The team assisted in the implementation of the public education strategy. The primary goal was to build support for a favorable vote on draft pension legislation in Parliament. This effort included market research, such as surveys and focus groups, preparation of brochures, organizing press conferences, preparation of Parliamentary political information kits, supporting seminars on pension reform, and arranging study tours to see the benefits of private pension systems elsewhere.
In January, March, September, and December of 1997 and July of 1998, study tours to Chile and Argentina took place for representatives of the Government of Poland, Parliament, private sector, and the media. A similar study tour took place in Hungary in January 1998. PwC led a series of five seminars on the transfer of contributions, asset management, pension fund supervision, and annuities. The team also provided technical assistance for television programs and serials discussing pension reform.
- Assist in development of new Superintendency of Pension Funds (UNFE).
PwC assisted UNFE in the development of procedures to register and license Pillar II pension funds. The team drew on best practices from Mexico, Argentina, Chile and Peru. PwC organized a study tour in August 1998 to Chile and Argentina for UNFE staff. PwC ran training courses for UNFE staff and assisted in institution building, and helped develop procedures for Pillar II pension fund company and pension fund licensing.
For more information, please reference the Phase 2 Final Report.
This 18 month project was extended to 20 months, and USAID requirements and funding permitted the assistance of three full-time long-term consultants for most of the project, as well as the participation of over 20 short-term consultants. This project was located on-site at UNFE. The project had two overarching objectives:
- To assist UNFE establish essential licensing, regulatory and supervisory functions over mandatory private pension funds; and
- To help UNFE and the Office of the Plenipotentiary (OP) ensure that affected workers will be informed of choices available to them and the value of pensions under the new system.
The Pension Reform Project Phase 3 was divided into 11 basic tasks:
- Advise UNFE on regulatory policy, management and organization.
The Project Team advisors provided ongoing support to UNFE senior management on regulatory policy, strategic, operational and organizational issues. Our long-term resident advisors were located at UNFE offices, and provided day-to-day support to senior management. Key activities of this team of long-term advisors included:
- Identification and mobilization of short-term technical experts in key areas, as required;
- Quality assurance and review of all the work products and deliverables created by the project’s short-term advisory team;
- Development and updating of the work plan as required;
- Informal discussions with the senior management team to provide guidance on specific issues/topics as they emerged;
- General advice and trouble shooting on the development of UNFE’s organizational structures and systems to meet the changing requirements of the market; and
- General support and assistance to the senior management team.
- Assist UNFE in implementing procedures for licensing Pillar II Funds, registering Pillar III Pension Plans and resolving issues in the implementation process.
As determined by UNFE, by the start of the new system no additional assistance was required with the licensing process of Pillar II. PwC assisted in the development of registration strategy for Pillar III pension programs. As supervision in Pillar III is complex and overlaps between agencies, PwC assisted UNFE in beginning to coordinate closely with other GoP regulators (e.g. SEC, PUNU) to facilitate effective registration of pension issues within the capital markets in Poland.
- Assist UNFE in developing procedures and tools for monitoring and enforcing compliance, operations, and performance of private pension funds, including through EDP audit.
PwC assisted UNFE in developing reporting standards and monitoring and enforcement procedures. These procedures included recommended reporting formats (electronic) and frequency, and off-site and on-site inspection procedures (financial and EDP audits). Activities in this task were coordinated with training activities and information technology issues.
- Review procedures for transfer agent and custodial functions; suggest performance standards and methods to promote adherence that encourage efficient and timely transfer to private pension funds and safekeeping of fund assets in line with international standards.
PwC reviewed procedures of the centralized collection of contributions system managed by ZUS. PwC assisted in ensuring compatibility of UNFE oversight requirements with UNFE’s automated reporting, monitoring/surveillance (IT) system with the collections system. Additionally, PwC identified a number of issues facing the new collections system that allowed UNFE to prepare for disruptions and malfunctions in the system.
- Complete IT needs assessment and strategy for supervision, compliance, enforcement and public information.
The Project Team completed an assessment of information systems requirements and strategy. This strategy and recommendations were built on the work performed under Task 3. Under Task 3, our team established the groundwork to allow UNFE to monitor and enforce compliance including details pertaining to required reporting frequency, and areas subject to computerization for Pillar II.
- Conduct a training needs assessment and recommend a training plan for UNFE and the Supervision Authority Committee.
PwC completed a training needs assessment that inventoried the skills of UNFE personnel and compared them with the skills required in different areas for UNFE to fulfil its responsibilities. Following the needs assessment, PwC created a training plan that resulted in a curriculum for UNFE to help determine how to allocate funds available to workshops and study tours, set a timeline for delivering the training, and identify targeted audiences. Based on the work performed in this task, the UNFE Advisory Committee allocated an additional $300,000 in co-financing for UNFE training activities.
- Conduct training, including course materials, case studies and training trainers.
Based on the Training Plan, PwC conducted workshops on a variety of subjects and led study tours to several post-pension reform countries. These activities were coordinated to support the implementation of recommendations being developed in the areas of registration, monitoring, surveillance/inspections, and public education.
- Advise on policies and rules of ethical conduct for pension funds and their agents. (May include SRO for private pension funds and plans).
PwC provided advice on policies and rules of ethical conduct/fair practice for pension funds and their agents to minimize conflicts of interest, reinforce fiduciary responsibilities, contribute to the safety and soundness of pension fund management and increase public confidence. UNFE and the industry were introduced to the idea of self-compliance by the PTEs and the idea of transforming the Industry Association of Pension Funds into a self-regulatory organization (SRO) in order to standardize industry behavior and reporting.
- Assist in the development of a transparent dispute resolution process.
PwC advised on the development of a transparent process to manage complaints related to Pillar II pension funds. This task was related in many ways to Task 8.
- Advise UNFE on harmonizing supervision and regulation of mutual funds, pension funds and employee plans, as well as pension funds that are bank subsidiaries.
Because of a pension system’s capital markets activities, custody requirements, and transfer via the bank payments system, regulatory harmonization and inter-agency cooperation are vital for the new system. UNFE cooperates closely with the SEC (KPWiG), the payments clearing house (KIR), the National Depository of Securities (KDPW), the Insurance Regulator (PUNU), and the National Bank of Poland.
- Assist UNFE in updating its public information strategy to assure that workers have independent, objective information to make intelligent choices.
PwC assisted the OP develop a public education campaign strategy, develop materials and conduct public education training. In addition, the project helped UNFE develop its public information strategy, and ensured that the strategies of the two organizations were consistent.
As specified by USAID, the project’s task was only to design the strategy. The production and distribution costs of the campaign were funded separately. The deliverables for this task included:
- Report on Public Information Strategy (OP) which will focus on the campaign to launch the pension program;
- Report on Public Education Strategy (UNFE);
- Development of Public Information materials (brochures, media advertisements);
- Maintain OP Web Page and develop UNFE Web page;
- Training on Public Information;
- Results from public opinion polls and focus groups;
- Press conferences and briefings with core journalists; and
- Press releases.
While phase 3 of the project had a wide mandate to assist in the reform, the project team focused additional attention on just a few areas crucial for the system and UNFE’s operation. Focus on these critical path issues helped ensure the successful launch of the system.
The central collection system is the backbone of the new system. This system is primarily the responsibility of ZUS. However, UNFE must be informed of its progress and how delays/problems may affect the integrity of the entire system. PwC conducted a limited due diligence assessment of this system to help UNFE plan accordingly for the issues resulting from the less than full functionality of the ZUS system.
Public information was critical for the successful implementation of pension reform. The population needed to understand its choices and understand the objectives of the reform and its implementation time line. According to Polish law, the PTEs began advertising February 16, 1999. Thus, a broad public information campaign was launched, in part, prior to that date. Furthermore, UNFE developed the procedures for publishing economic and statistical bulletins following the April 1, 1999 start date of Pillar II.
UNFE began supervision of licensed Pillar II funds in the spring 1999 (advertising/sales Feb/99, managing assets April/99). PwC concentrated immediately on assisting UNFE in the development of reporting standards for PTEs (Pension Fund Manager) and for developing monitoring and enforcement procedures.
In order to efficiently implement the monitoring and enforcement process, UNFE needed to develop and build its own information technology system. PwC immediately began working with various UNFE departments to develop user requirements and define the system processes and architecture.
Pillar III was set to start on April 1, 1999. However, serious concerns about aspects of Pillar 3 design at UNFE, in Parliament, and in industry led to a de facto delay in the start until February 2000. During the intervening time, various proposals were developed to both rationalize and make the law more attractive for employers and employees.
Much of the assistance from this project was centered around advising UNFE in revising this law, based on US and Canadian experience, defining areas of supervision concern, as well as developing procedures for reviewing PPEs and associated asset managers. Particular attention was put upon trying to make the voluntary pension products associated with insurance companies more transparent to UNFE and participants. Therefore, UNFE needed to have its registration procedures in place prior to that date.
A reform process in a developing country goes through a variety of stages. At each stage, a different set of skills and a different type of experience and knowledge is required. The USAID program of assistance was effective because it recognized early on the need to adapt the technical assistance and the nature of the project to the needs of the reform at each stage.
The project provided assistance to the Government of Poland on a range of policy, change management and institution building activities. This assistance helped the Government of Poland through the entire reform life-cycle: from initial review and policy formulation to system implementation.
Specific stages of the life-cycle included: reviewing lessons learned in other systems, drafting a policy for Poland, drafting legislation, developing public education programs for various audiences, designing processes and procedures, and building institutions that operate in the new system.
Understanding the life-cycle of the reform process is vital to the success of a pension reform. The conditions and circumstances Poland faced through various stages of the life-cycle are discussed below. We present the main principles of the stage of the life-cycle, as well as Poland’s experience, as an example.
Illustration 1. Pension Reform Life Cycle
Review Lessons Learned
Life-Cycle Principle: Each country needs to review the lessons learned from other pension reform efforts in the context of its own environment. In the area of pension reform, there are clearly different countries to examine, depending upon the type or pillar of the pension system that is being reformed. Many countries start with Chile, which started the pension reform revolution over 18 years ago. However, policy makers must look beyond the Chilean experience as other countries have taken some ideas further, developed other solutions, and have their own lessons learned to add to the policy debate. The Chilean system itself has evolved over 18 years, and certain aspects of their system look very different today than they did 10 or 18 years ago. Furthermore, as the reforms of other countries are now also significantly advanced, Chile itself looks at their lessons learned to apply to its own system.
Countries around the world face similar issues with regard to rising dependency ratios and falling replacement rates. These situations are brought in most cases by the resulting change in demographics as the reproduction rate falls. All countries must respond to these changes, and these responses can be classified generally into three categories:
Many countries try to put the problem off, at least for the short-term. They do this by funding shortfall from general budgetary revenue, by continuing to raise social security contributions, or by relying to a greater extent on voluntary employer/individual sponsored pensions. More affluent counties (France, Germany, United States) can pursue a mix of these policy options for a longer period of time. Many transition countries facing more difficult budgetary situations and lacking any private pension provision, quickly realize that this option cannot be sustained in the long-run.
Other countries try to rationalize their pension system by increasing contribution rates, as in the first case, but also by lowering benefits or seeking other efficiencies (for instance better record keeping and enforcement). However, the basic mathematics of a declining working-age population coupled with increased number of retirees makes such policies effective only in the short-term.
The third response is to develop a system that is financially sustainable in the long-term. For the most part, the countries that have undertaken this option thus far tend to be developmentally middle-tier countries: neither so wealthy that they can afford to avoid the reform in the near term, nor so financially strapped to lack the resources for the reform. Some of the countries include Argentina, Bolivia, Chile, Hungary, Mexico, Poland and Uruguay.
Poland’s Experience: Poland ultimately pursued the third option. In doing so, a key issue was the review of the other countries’ experience. The following is a list of the countries upon which Poland based major parts of its reform:
Pillar I – Sweden: Generally, pay-as-you-go systems around the world tend to demonstrate the inferiority of cash accounting and the outcome of poor record keeping. The idea of the Swedish system is to resolve this in part by keeping virtual accrual accounts to record contributions and award benefits. The actual funding of the system continues to use the pay-as-you-go principle to fund the system, but pensions are based on the accruals of the virtual accounts and actuarial analysis.
Pillar II – Chile, Argentina, Mexico, Peru: Many developing countries contemplating pension reform face similar economic conditions that characterized pre-pension reform Latin America: dominant role of the state in the economy, pay-as-you-go pension system, high social insurance contributions, strong sense of entitlement among the population, relatively shallow and illiquid capital markets.
Pillar III – United States, Canada, Western Europe: The experience of North America and Western Europe is most applicable for creation of a voluntary, fully-funded pillar of the pension system. These countries have many years of operational experience with these systems. These countries also have useful lessons to offer in the development and regulation of the larger capital markets, design and implementation of information technology systems that pension systems require. However, due to the size and liquidity of markets in advanced economies such as Frankfurt, London and New York, the issues faced in emerging markets can also be quite different.
Life-Cycle Principle: The policy makers of a country undertaking reform need to design a policy that envisions an efficient collections, savings and payment system. As pensions are essentially investments for the long-term, the policy design should stress good investment management -- that is, diversification of risk. As much as possible, the policy designers should outline the processes that information and money will take through the process before implementation begins. Completing this exercise will help identify areas that require additional policy and regulatory attention.
Poland’s Experience: In Poland, this phase of the life-cycle started in the early 1990’s in the midst of the larger structural reforms Poland initiated. At that time, Poland lacked both a legal and regulatory framework for private pensions. Nevertheless, demand for the products did exist.
The overriding issue facing private interests was the already high social security contribution (which included pensions, health care and disability benefits) to the existing pay-as-you-go system that crowded out most possibilities for additional voluntary contributions. This rate rose from 38% of gross remuneration in 1989 to more than 45% by the mid 1990’s. Interviews with Poles at this time indicated both a desire for immediate pocket money through a reduced social security contribution, as well as a desire for a secure and adequate retirement income.
Like most countries, Poland’s dependency ratio continued to fall, reaching close to 2 active workers supporting each retiree by the mid-1990’s. Replacement rates remained relatively high at 60% of final salary, and were not related to the amount a person contributed to the system over their career. The average retirement age for women was 55 and 59 for men. Extensive privileges for certain sectors of the economy and lax disability requirements put further strains upon the financial stability of the pension system.
The need for pension reform was recognized from the beginning of Poland’s transformation. By the early 1990’s it was generally recognized by all responsible policy makers that something needed to change with the pension and social security system, particularly as unemployment resulting from privatization was disguised as disability pensions.
USAID and PwC joined Poland’s pension reform effort in 1995, midway through the post-communist government’s (SLD-PSL) term, and at the beginning of the end of the rationalizer vs. reformer debate inside this government for pensions in Poland. The USAID-sponsored, PwC administered, project’s role was to help build consensus, assist Poland’s policy makers in understanding the lessons learned in other countries, and decide among the policy options available to Poland. PwC filled this role by assessing for USAID and GoP the opportunities and constraints for the development of voluntary, private pensions in Poland. At that time, PwC reviewed the financial markets, including the legal and regulatory framework, to identify potential GoP counterparts to make the case for reform.
As the need for reform in Poland grew, two policy directions emerged--the Miller Plan and the Kolodko Plan--which preceded the Security through Diversity plan finally enacted. We discuss the three reform efforts here to demonstrate the richness of the policy debate and some of the starting points for the policy ultimately adopted.
In December 1995, the Government of Poland announced its intent to reform the pension system. The Miller Plan, named for the then Minister of Labor Leszek Miller, was initially the Government’s blueprint for rationalized reform. This plan proposed a three pillar model as follows:
Pillar I – Publicly managed, mandatory social insurance system (ZUS) providing a basic benefit for old age, disability and survivorship.
Pillar II – Privately managed pension pillar allowing employer-based and independent funds. Tax incentives for participation were expected. These pensions would have supplemented the public pensions. Proposals included making this pillar either voluntary or mandatory.
Pillar III – Individual, voluntary private pension funds with associated tax incentives.
The intent was to reform the first pillar to reduce costs. Such cost reductions would come about through increasing the retirement age for women and reducing preferential benefits for certain groups. This plan was viewed as a rationalist approach, and was criticized by many as one that Poland could little afford in the medium to long term.
The Kolodko Plan, named for then Minister of Finance Grzegorz Kolodko, proposed adopting the Latin American approach to reform of the Polish pension system. The central idea of the Latin American model was to create a mandatory, fully funded pillar of privately managed pension funds. According to the Kolodko Plan, the second pillar in Poland would have initially consisted of ZUS and privately managed, defined contribution based pension funds. While participants in ZUS would have had the option to switch to the new system, workers entering the labor force would have had to join the new system.
As the financial situation of the social security system continued to deteriorate, politicians were pushed to deal with the issue. In an indication of the maturing political situation in the country, various politicians from both sides of the political “barricade” (post-communist vs. post-solidarity) found themselves variously working for or against the reform regardless of their pre-1989 political background.
The post-communist government of 1993-1997 was itself the battle ground of rationalizers and reformers. Only when “rationalizer” and Minister of Labor Leszek Miller moved away from pension issues to take the Ministry of Interior portfolio, was the way clear for significant reform of the pension system to begin.
In 1997, the Office of the Plenipotentiary for Social Security (OP) was created to definitively design and lead the pension reform effort. The team at OP crafted a plan in the spirit of the Latin American reforms, particularly from the experience of Argentina. However, important components were also included from Sweden’s reform effort (Pillar I) and the existing pension systems in the United States (Pillar III). The central idea of OP’s reform was to create a three pillar risk diversifying system: a basic, minimum government pension; mandatory participation in a private second pillar; and a voluntary private third pillar.
Over the course of the next three years and two governments, the successive Plenipotentiaries (the late Andrzej Baczkowski, and Jerzy Hausner and Ewa Lewicka) and two office Directors (Michal Rutkowski and Marek Góra) succeeded in managing a virtual team of pension and financial sector reform experts to design and implement the policy. The title of this policy the OP team created received the name Security Through Diversity.
As the name suggests, the essential idea of the reform is to provide pensions via several mechanisms, both public and private, and mandatory and voluntary. In this way, the new system diversifies the risk all workers and pensioners face over the long term in the financial markets. For a much broader discussion of the reform details, please refer via hyper link to the policy design description in Security Through Diversity.
Life-Cycle Principle: The new legislation has to turn the policy papers into rules and processes for day to day operation of the new system.
Turning policy papers and ideas into effective legislation is a complicated and time consuming activity. Draft legislation will undergo multiple revisions to ensure it meets the policy objectives and eliminates where possible vagueness and opportunities for overly liberal interpretation.
In many reforming economies, the existing law does not contain the basic concepts necessary for development of a private pension system, such as concepts of the trust, the fiduciary and the prudent man. These concepts require that the one entrusted with investing the pension funds of another act for the sole benefit of the beneficiary. In fulfilling the prudent man obligations, this person must follow the standards of the investment profession at the level of a reasonably trained professional of the field.
Poland’s Experience: As Poland is a Civil Code country, such issues needed to be addressed via contractual doctrines rather than the conceptual practice in Common Law countries. Therefore, in addition to the general legislation, it was necessary to draft and pass a large volume of decrees and regulations. The pension reform effort in Poland has struggled with this issue, as government officials have had to learn a large variety of technical issues while the system was already in motion.
One of the major issues encountered in Poland was the drafting of such implementation regulations. As in most countries, major acts of legislation put public policy in place. Details of system operations are left to the regulator that works with the system on a day-today basis.
Shortly after the majority of the legislation was passed, forming the basis of the new pension system, Poland also changed its Constitution. Under the new Constitution, regulatory bodies such as the National Bank of Poland (NBP), the Securities Commission (KPWiG), the Insurance Regulator (PUNU) and other regulators were deprived of the right to issue regulations. This change in the basis of regulatory authority seriously hampered the new pension system, as even minor regulatory issues now needed to be an Act of Parliament.
UNFE and the other regulators do not have the ability to issue regulations or interpretive documents that would help smooth initial operations and answer questions resulting from legislation. Other areas of the young financial markets were less affected by this change in the Constitution, as NBP, KPWiG, PUNU had at least several prior years to the Constitutional reform to issue interpretive guidance and decrees. UNFE did not have this luxury.
The lack of authority to issue regulations, which govern the actions of the regulated bodies, has made UNFE’s job particularly difficult, and will become more so. Any regulations have to be proposed by UNFE to the Council of Ministers or Parliament for consideration and passage. As the system expands, regulatory issues will become more detailed and complex. UNFE will need to expend significant resources to educate Parliamentarians and high-level policy officials about the importance or direction of needed changes. Furthermore, the regulatory process is open to limit politicization.
In this area, PwC provided review for OP of the Law on the Organization and Operation of Pension Funds in 1998. PwC also assisted UNFE with changes to the pillar III law and with drafting of an accounting decree, a valuation decree and a universal chart of accounts, as well as other regulatory issues
Major legislation included:
- Law on Organization and Operation of Pension Funds
- Law on Employee Pension Programs
- Law on the Reform of ZUS (Mother Law)
- Law on the Use of Privatization Assets to Fund Pension Reform Transition
Life-Cycle Principle: Pension reform is a complicated subject area for which there are a number of deeply held misperceptions. These misperceptions interfere with communication about pension issues; they make it difficult for people to hear the facts about the program and the need for it. The abstract and intangible nature of the reform fosters these myths and misperceptions. Change can only happen if people clearly understand that it is essential.
Inherent contradictions need to be addressed carefully. People often expect the system to change, but not too much. They expect to get more, but to pay less. They want change, but are tired of continuing government reforms.
Therefore, it is necessary to have a carefully thought out and tailored public education campaign. This public education campaign needs to communicate the case for change and needed action to the appropriate audiences. During and after the drafting of the legislation, public education becomes an on-going activity. At a minimum, public education must serve at least two audiences: key policy makers and the general public.
Furthermore, it is our experience that many people in government, whether political appointees or career civil servants, discount the usefulness of public education.
There are several reasons for this behavior:
- Uncommon Practice: In reforming economies, it has generally not been the practice to communicate with the population in a proactive manner.
- Waste of Resources: Public officials may feel that it is a waste of resources to educate the public.
- Benevolent Monarch: Public officials new to government may feel that because they are the "reformers" with the best interests of the public in mind, they do not need spend resources to communicate with the public.
- We observe, ironically, that it is usually the post-communist parties that first learn and become adept at public education and public relations. Reform interested parties might be more successful if they spent more effort explaining what direction they are leading the country and why.
Poland’s Experience: During the efforts to educate and convince Parliamentarians (Phase II), policy makers and government officials to support the reform, PwC and Profile, developed a public education strategy and assisted OP implement the campaign.
From the very beginning of the process, the OP recognized the value and the importance of developing a good working relationship with the media. OP deliberately cultivated relationships with key journalists in the national and local media environments with the goal of educating them about the complicated issues but simple messages of pension reform policy. To help deliver targeted messages, OP used public opinion polls, focus groups, individual interviews and press research, brochures, television and radio.
During this phase, public education was targeted at key-political decision-makers. This strategy was particularly successful helping to convince key political decision-makers about the need for pension reform and the direction the OP had chosen. This deliberate and targeted public education strategy allowed OP to leverage its relatively small numbers to reach the maximum audience on a regular and as needed basis. This campaign was successful in helping to pass the major legislation.
The Project’s attention then turned to the mass education campaign and the creation of a year-long strategy for communicating with the public during the implementation of Phase III of the project. In accordance with project strategy, the main aim of the campaign was to provide the public with full information that would enable people to make informed decisions concerning their pension. Another important objective of the campaign was to support a new image of ZUS and create a positive attitude for the reform itself, which is closely related to the creation of the image of the reform.
The campaign also assumed that the campaign would:
- Eliminate fears of persons not covered by the reform (persons aged above 50); and
- Prevent the feeling of being insufficiently informed – build confidence that information on the pension reform is available.
To reach these goals, the campaign used a variety of public education, public relations and advertising tools. Despite funding difficulties experienced by the Government of Poland, the objectives of the campaign were met. Near the end of the campaign, a survey revealed that over 60% of the population knew where to obtain government information about the new pension system.
For additional information, please reference:
Communication Strategy: Promotion of the Pension Reform
and:
Public Education Final Report
Develop Institutional Capabilities
Life-Cycle Principle: A country undertaking pension reform on the scale that Poland and many Latin American countries have needs to develop the requisite institutional capabilities in the private and public sectors to operate the new system. This will involve both creating new institutions and reengineering old ones. The major issues that all institutions face is in the development of human capital and the development of processes for handling normal business in a transparent manner.
Poland’s Experience: With regard to the development of human capital, the Polish financial sector has faced huge demands over the past 5 years. Within the last four years, the Polish fund market has grown from about 4 investment fund companies and one regulator to 35 investment and pension fund companies (with over 70 funds) and two fund regulators, namely, the Securities Commission (KPWiG) and UNFE. UNFE itself came into existence just over two years ago and now employs 150 staff.
Furthermore, pension funds are required to maintain a diverse portfolio and are allowed to invest abroad. In the insurance market, barriers to foreign entry have been lifted, and many play a significant role in the Polish market. This explosive growth has put strains upon the human capital of the financial sector with direct effect upon the development capabilities in institutions.
In the area of processes, even the simplest of activities can prove difficult and time consuming at first. As experience quickly grows, new and better ways of doing things will become evident. The risk the new institution faces is that despite all best intentions, it will appear to be non-transparent or unfair, as it treats its clients differently or by different procedures over a relatively short period of time for the same issue. To protect the reputation of the new institution, overwhelming emphasis must be placed on building transparency and a sense of fair play for all participants by explaining why procedures are changing and what the changes mean.
E. Major Project Accomplishments
This assistance has worked from the start to the finish of the life-cycle of the pension reform. Over the course of 5 years, this project has had direct impact upon a variety of pension related activities on behalf of UNFE and OP. Within these various areas, some issue stand out.
The major accomplishment of Phase I of this project was to summarize then current pension reform thinking in Poland and focus USAID’s attention on key areas for further assistance at the start of the reform life-cycle. In Phase I of the project, a multi-disciplinary team comprised of regulatory specialists and practitioners reviewed Polish financial sector products as well as the legal and regulatory framework to assess constraints and opportunities for private pension fund development. Based on the success of PwC’s assistance in this area, USAID awarded PwC the follow-on Phase II project on a sole-source basis.
In Phase II, the assistance focused on the passage and promotion of pension reform legislation. Phase II of the project had the following major accomplishments:
By examining pension systems development and restructuring in Chile, Argentina, and Hungary, PwC consultants were able to use pertinent and comparable data as well as "lessons to be learned" in the development of private pension funds for Poland. Based on the team's findings, PwC prepared recommendations on the future legal and regulatory framework for private pension funds in Poland.
The project supported the Government of Poland in the process of developing a multi-pillar pension system. PwC provided technical assistance on the issues of public education, training and institution building to help the Government of Poland create this new pension system.
The project relied on both training and technical assistance, drawing on the expertise of practitioners in countries that have already undertaken such reform. This combination of activities was carefully planned to support Poland’s reform efforts already underway. The project thus helped create and adopt comprehensive, implementable legislation to establish private, capital-based pension funds in Poland.
Phase III of this project was successful in helping to establish a new, private, fully funded pension system in Poland. The project helped build the institutional capability of UNFE and helped educate the public about this new pension system. In particular, this project helped:
UNFE license 21 pension fund societies (PTEs) and pension funds (OFEs), thus laying the groundwork for the creation of a competitive pension fund market. Over the period of approximately 9 months, UNFE reviewed over 25 applications for pension fund societies and pension funds. The project helped establish the initial procedures and criteria for reviewing applications.
UNFE develop the knowledge and information technology capability to collect and analyze the pension fund portfolios and trades on a daily basis. The analysis is based on a growing information technology system. UNFE today has an operating system with clean databases that accepts over 150 types of data on a daily basis in electronic format from each pension fund. To conduct this information collection and analysis, UNFE uses software purchased with project funds. The project also provided training in capital markets analysis issues and the use of the software.
Develop a comprehensive training needs assessment for UNFE. The training needs assessment identified the skills and knowledge a pension supervisory would need, and then matched this to the current needs at UNFE. The project then helped meet some of these training needs. In addition, based on this project training needs assessment, the Government of Poland provided co-financing of over $300,000 over a period of one year to help meet the needed training.
Develop a public education strategy for the pension system. The Plenipotentiary for Social Security Reform implementation team conducted an innovative pension reform public education campaign, based on this strategy. That project funds were well utilized is demonstrated by the results of an October 1999 survey, in which over 60% of the population declared that it knew where to obtain information about the new pension system.
UNFE in drafting and submitting amendments to the Laws covering the pillar III program.
Support UNFE in the day-to-day regulations of the Pillar II pension funds in the areas of accounting, valuation, conflicts of interest and what information should be gathered by UNFE from the funds in these areas.
In addition, this project played a role in supporting the cooperation agreement between Mexico and the United States, known as the Merida Plan. The purpose of the Merida plan is to leverage the lessons learned of the Mexican economic reform process to assist other reforming countries, such as Poland. In cooperation with USAID/Mexico, the project helped leverage the Mexican pension reform experience for Poland.
As stated above, the key purpose of this document is to explore the lessons learned from the successful complete life-cycle implementation of pension reform in Poland, such that they may be used to assist in other reform efforts world-wide. The lessons learned from this project are divided into three areas:
- Systemic Reform Issues;
- Institutional Building of the Pension Regulator; and
- Designing and Supporting the Public Education Program.
Prior to reform, Poland had a pension system similar to that of many other countries in the region, and based on principles used world-wide. Poland itself examined lessons learned from Latin America, as pay-as-you-go systems tend to leave host countries and economies in similar situations, regardless of geographical location.
The basic economics of pay-as-you-go systems make them similar across countries, regardless of the stated ideology used. Where countries tend to differ is in the immediacy of the need for reform and other economic structural and institutional issues that may add to the problem. For these reasons, it is now vital that future reform efforts in other countries study the system level lessons learned of pension reform in Poland.
1. Lessons Learned: Systemic Reform Issues
Many of the systemic lessons learned deal with the design and implementation of process and information technology solutions. To date, most of the donor attention in terms of reform assistance has been drawn into the area of policy design and assistance with the development of the regulatory structure. Ultimately, however, one of the key lessons to be drawn from the project is that IT matters, and the longer it is ignored, the greater at risk is the reform implementation process.
In developed countries, the information technology that back mutual fund, unit trust, 401K and IRA type plans is assumed. Yet existing information technology, human capital and institutions in developing countries can be far from up to the task of designing and implementing these systems. Although the economies of the developed world may have less to offer in the way of policy development for pension reform, the backbone of pension system operations should be based on the operational experience and procedures that meet internationally recognized and recommended standards.
Within the first few months of the project, the PwC project issued a document identifying the weaknesses of the membership and collection processes and analyzing the system found at ZUS. Similarly, and over the course of months, opinions were issued about various operational procedures such as: registration of sales agents, transfer of funds from individual accounts, further details about membership and collection, and mergers.
Although these reports did not find a willing audience at the social security agency (ZUS) or elsewhere in government until the problems had occurred, they were able to help UNFE prepare for the subsequent difficulties that arose, since they had advance warning. UNFE itself is an end-user of some information from the central collections and record keeping system (KSI System). Although UNFE had little influence over the information it received, UNFE was to some extent able to prepare for the inevitable confusion in contribution ownership, fund membership and participant rights issues. Nevertheless, from the start of the new system, UNFE was inundated with complaints and inquiries from pension fund participants. The core driver of most complaints is the inability of the KSI system to identify with certainty any one participant or his or her status in the system.
The experience of the KSI system at ZUS has rightly motivated UNFE to move in a cautious and deliberate manner in developing its own IT system. As a result, UNFE today has an operating system with clean databases that accepts over 150 types of data on a daily basis in electronic format from each pension fund. Based on this system, UNFE is able to track the investments of the pension funds to ensure that the funds are within proscribed investment limits, to investigate market irregularities in an informed manner, and to collect information about the system for further analysis. Establishing this system is one of the major successes of this project.
Keep the Information and Money Together
Poland’s new pension system faces a number of challenges. However, the most significant challenge is the continuing inability of ZUS to identify individuals in the system, their account (or accounts!), the contributions to be assigned to that account, and the second pillar pension fund which individuals have joined. This issue threatens the very existence of the system.
For instance, Mexico suffered a system failure in 1994, when the same inability to identify participants and their money overwhelmed the system. Millions of unidentified dollars worth of contributions remain on account in banks to this day. The threat to the Polish system cannot be understated.
The new pension system needs to be able to identify contributions at every step of the process. If money is paid for an employee and the corresponding information is not consistent, the employee won’t be recognized for the contributions at retirement. For the employee, it would have been the same as if the contributions were not paid.
Information about the contribution and the contribution itself must travel together at all times. A pension system with individual accounts requires a very precise collection and distribution process. In a "defined benefits" pension system, the money is kept in a general account for all employees.
However, in "defined contribution" pension systems the detailed information about the contributions is as important as the money itself. Further, it is actually the information about the contribution that is the most important, as the authorities can almost always chase or repossess money. However, as the Polish, Mexican and other pension reform cases demonstrate, recalling or recreating lost information is extremely difficult, if not impossible. Information can lead one to the money. In a market economy, unidentified money is useless.
Late in Phase II, and then more in-depth early in Phase III, PwC analyzed the operational plans for the transfer of information, and contributions models available from or provided by various governmental agencies. PwC also examined the membership and collection processes, through interviews held with ZUS, OP and UNFE officials to validate the feasibility of the processes and of the administrative and technological capacity of the Social Security Institute (ZUS) to implement these processes.
Allow Only One Identification Number for Each Participant
Each individual participant needs to have one, and only one, unique identity number. International experience demonstrates that the use of more than one identification number creates a large number of duplicate accounts and confusion in the system databases. As a participant’s identity is the basis of the defined contribution system, compromising the participant’s identity compromises the integrity of the system.
In Poland, as many as four numbers are used to identify participants. In such an environment, ZUS is unable to confirm how many participants the system has, who is a member of which fund, or transfer contributions for individuals to the proper pension fund account.
Define Detailed Processes and User Requirements Before Purchasing Information Technology Solutions.
Policy decisions are only the beginning of implementing a new pension system. Information technology implementers must design detailed processes of each user in each institution to meet the guidelines of the new pension reform policy. This means that the processes need to be defined first. Implementers need to understand where and how the information and money will flow through the system, and which institutions and individuals will have responsibility for ensuring that it does so.
Keep the Old Information Technology and Process Systems Running Parallel in the Background.
The new pension system should manage the risk of initial problems in the system by keeping the old systems running in the background. The systems should be run at a minimum level to ensure that the contributors can be identified. Although this will involve additional costs, it does provide the system with security until any start-up issues are resolved.
The Polish system suffered problems when the old system at ZUS was turned off before the new system was proven. As word reached employers that the new information technology system was unable to identify payments or payees in a timely manner, or perhaps at all, many unscrupulous employers began delaying payments or stopped paying them all together. This issue was only resolved when the old system was turned on again and controllers began to chase contributions past due.
Comprehensive pension reform is an extremely ambitious reform process and usually takes place in a complicated political environment. While policy is generally understood to be the realm of economists and lawyers, it is also valuable to ground proposals or certain policy ideas with professionals who will be left to implement and run the system.
In a pension system, there are two professions that play a particular role in the day-to-day functioning of the system: accountants and information technology consultants. Earlier attention to certain accounting, processes and information technology issues may have resulted in a smoother transition from the old to the new system.
Future reformers in other countries should consider writing specific requirements regarding accounting standards into the law, particularly if existing accounting regulations is insufficient or silent on some pension or investment fund issues. The regulator should be strongly encouraged to include industry in a drafting of such documents.
As a provisional benchmark, we propose that the purchase of any information technology take place only after the production of a detailed process map schematic and a list of user requirements.
Develop and Allow Strong Leadership. This reform benefited from strong political support and shielding from the three individuals who served as Plenipotentiary: Andrzej Baczkowski, Jerzy Hausner and Ewa Lewicka. It is important to note that these three individuals come from different political backgrounds, but were nevertheless able to agree on and support the themes of the reform. The political skill and maturity of these three individuals did much to move pension reform from being policy talk between ministries, to stand as a concrete and innovative pension reform program. Significant credit for envisioning the policy direction of the reform, as well as managing the day-to-day reform effort, must also be attributed to the two Directors of OP, Michal Rutkowski (October 1996 to September 1997) and Marek Góra (October 1997 to March 1999).
Be Inclusive and Politically Savvy.
From the start of the policy design stage, OP took pains to ensure that all responsible political segments were included in events (such as study tours) and informed about developments. However, it is important to note that OP leadership did not hesitate to rebut or correct public criticisms based on misinterpretations or misunderstandings. Thus, in a fairly short time span, pension reform in Poland jumped the gap from discussion to implementation. The OP was able to bridge this gap by relying on the credibility of its economic arguments, its strong leadership, and by cultivating an inclusive and deliberate work ethic. The OP included responsible and interested parties in the process and set deliberate goals and performance targets.
For instance, trade unions and employers were consulted via the Tripartite Commission from the beginning of the process. Later, in part due to the virtue of this co-operation, Ewa Lewicka from the Solidarity Trade Union would become the Plenipotentiary to oversee much the reform’s implementation.
It should be noted that the structure of the OP, the institution charged with shepherding the reform process, seemed particularly well suited to lead the way to consensus. The OP is largely a virtual team of Polish economic experts, government officials and technocrats that drew members from various GoP ministries and agencies, as well as domestic think tanks and consultanties. Because OP membership was derived from a wide cross section of stakeholders, it had credible access to various responsible political camps and was able to survive with its team and the proposed policy intact through the changing of government.
Promote Rational Investment Regulations
Rational investment regulations are critical for the long-term health of the pension system. Unless the funds are invested in a rational manner, the entire reform is compromised. Therefore, in this regard, developing economies should look to the Western European and North American capital markets when setting investment regulations and policies.
However, on a brief aside, based on our work in Poland and elsewhere in the world, it is our observation that many pension implementers and host government authorities have a tendency to focus excessively on investment regulations issues to the detriment of other pension issues. Where the money is invested, in what amounts, by whom, and expected performance are critical. However, only after the reforming country develops a balanced pension reform policy and implements a system that properly tracks the information and money of the system, does the investment issue become truly relevant. The strength or weakness of investment performance is of little importance if the money is unidentifiable.
Investment Limits: Pension funds must be allowed to invest in a diversified portfolio to provide a basic minimum security to the system as well as to enable pensioners to obtain an adequate pension. Participant interest in a diversified portfolio and long-term returns should guide investment policy and outweigh parochial interests in supporting industries or certain sectors or the domestic economy.
The growth of strong capital markets and the economy are better achieved through economic policy that will attract capital, rather than relying extensively on captive capital. Currently, pension funds in Poland are allowed to invest up to 5% of assets abroad in OECD countries. This limit is sufficient for now. However, Poland risks over pricing assets or the development of an asset bubble in the future if the limit on international investment is not raised, as it is unlikely that the Polish capital markets will grow with the speed and quality necessary to absorb the relentless increase in pension fund contributions.
The need for asset diversification will not be met only in the domestic Polish markets, as certain industries (for instance tires or tobacco) are not represented in companies listed domestically in Poland and which are therefore unavailable as pension fund investments. Although mandatory defined contribution pension reform serves as an excellent method to develop the domestic capital markets, authorities in Poland will need to continually re-evaluate the proper balance between the need for a diversified portfolio, domestic capital needs and the health of the capital markets.
To this end, Polish pension system should seek to participate in the free flow of pension fund capital when Poland accedes to the European Union. This of course assumes that the EU itself by that point will require such free flow of pension capital among it members, which it does not currently do. Many of the current EU members also maintain significant domestic investment requirements for pension funds.
Appropriate Pension Fund Activities: Policy makers and regulators should also ensure that pension funds are not allowed to perform financial operations better left to other financial institutions. For instance, pension funds in Poland are allowed to offer credits and loans. However, funds do not fall under the regulatory scrutiny of the banking regulator; nor do the funds maintain the risk management and loan servicing capabilities to ensure that the loans made have the proper risk; nor are funds required to keep a reserve to cover bad loans. Legislation is silent on how UNFE could oversee such loans in more than a basic manner. Shortly, millions of dollars in loans could be entering the economy under a poorly regulated credit and loan regime.
Valuation: Pension funds must invest contributions in fairly and transparently valued instruments to protect and grow the value of the pension. The purpose of fund valuation requirements is to assure that pension funds report the value of assets fairly. Fund valuation requirements typically follow generally accepted accounting principles, although certain assets have special valuation rules for pension funds. As a result, for publicly traded assets, pension funds typically use market values. However, for less liquid assets, such as thinly traded bonds, methodologies are specified to assure that these values are not manipulated.
In defined contribution pension schemes, the pension amount depends on the value of the funds accumulated at retirement. Thus, flaws in the valuation system or principles used can have drastic consequences for pensioners and the state. Although the valuation of pension fund assets deals with relatively narrow, technical issues, the consequences of serious valuation errors, especially if they undermine confidence in the public pension system and securities markets, can be quite extreme.
A brief enumeration of these problems could include any or all of the following:
- Inequitable distributions of market value between persons who currently are contributing to the system and those who are receiving benefits. As the system reaches maturity, the most important transfers resulting from mis-priced assets would be between workers and retired persons. At the current time, when there are few if any retirees in the system, this problem has not caused serious loss to any participant, but would be an issue in the future.
- Deliberate or accidental errors in pricing fund assets and calculating fund net asset values will affect the fees fund managers collect (based on a percentage of assets under management).
- The change in the fund’s net asset value (NAV) and rates of return significantly influences a manager's ability to market and attract new participants (and their contributions) to the fund. This may provide an incentive to artificially inflate fund NAV’s around reporting dates for marketing reasons.
- Pension funds are certain to become dominant participants in Poland’s capital markets. Disincentives by the funds to hold particular types of assets, such as treasury bills or bonds because of unreasonable valuation requirements, can adversely affect the cost to the Treasury of financing government debt and the efficiency with which the central bank can conduct open market operations and monetary policy.
- Lack of confidence in the ability of regulatory bodies, such as UNFE, the SEC and others, to provide appropriate regulation for those portions of the financial markets under their supervision, can reduce the willingness of foreign investors to commit capital to the Polish markets.
Our assistance identified two serious valuation problems for fixed income securities in pension funds, Treasury bills and Fixed Coupon Treasury Bonds. Both problems resulted from how UNFE and others interpreted the Pension Fund Valuation Decree. Finally, in June 2000, following the close of our project, GoP resolved these issues in a new decree sponsored by the Ministry of Labor and Social Policy and UNFE via the Council of Ministers. However, we provide a discussion of the situation prior to the new decree regarding two important assets.
Treasury Bills. Treasury bills, like most money market instruments, carry no coupons and provide returns to investors only in the form of discounts from par value. Their market value is, simply, the present value of their eventual payment at maturity. For short term bills, having 3-months or less remaining to maturity, market value is not likely to deviate significantly from cost plus straight line amortization of the purchase discount. The previous valuation decree, however, did not allow the amortization of short-term treasury bills. Rather, authorities required valuation of these instruments at the cost on the books of the funds, which was clearly inappropriate.
Fixed Coupon Treasury Bonds. Pension funds were required to value these instruments on the price of trades on the Warsaw Stock Exchange. However, these instruments traded infrequently on the Warsaw Stock Exchange. Requiring valuation of these bonds in a market in which they are not actively traded and in a market which is known to be manipulated cannot be justified. Furthermore, such a requirement is not justifiable when an active domestic inter-bank market, and even an international inter-bank market for GoP treasury bonds exist and from which pension funds and the market can easily derive prices.
There are a number of sources for such prices. One procedure would be to use the average, closing bid price for Fixed Coupon Treasuries of each maturity derived from the screens of three brokers who are active in the inter-bank market. Other procedures, involving an average of bids displayed on Reuters by active dealers in the bonds, also could be considered. Either would be a substantial improvement over the use of a quote on the Warsaw Stock Exchange, from a small transaction, which could be anywhere from one to five months old.
Use Appropriate Mix of US and Third Country Talent.
Pension reform is an area where many other countries have a comparative advantage in terms of knowledge and experience. US sponsored efforts should not preclude the use of these other countries’ experience. It is more important that project staff have the right functional experience, and less important their country of origin. The proper mix for pension reform may include using the experience of reform from Latin America on policy design and implementation, and US experience in such areas as financial market regulation, pension fund management, and information technology system design.
2. Lessons Learned: Institutional Building of the Pension Regulator
The functionality of new and reformed institutions determines whether the new system will succeed. The institutions must fully understand their role and competencies in the new system and proactively cooperate with other system institutions. Finally, institutions must provide professionals with an area in which to develop and apply their skills and knowledge.
Soon after the major elements of the policy framework were in place, this project correctly turned its attention to addressing the institution-building needs of the regulator. The lack of a strong and balanced supervisor that operates in a transparent manner prohibits markets from functioning efficiently and effectively.
The business of supervision is similar across the financial sector. Transparency in operations, flexibility in adapting to the growing market, cooperation with other financial sector supervisors and between the supervisor and industry, even-handed treatment of all industry participants, and protection of the individual investor’s rights are key areas on which that every supervisor should focus.
Over its decade long experience in Poland, USAID has developed a positive reputation in Poland on supervision matters, as it has played a key role in helping to build the securities and banking regulators. Therefore, it made great sense for USAID to use its comparative advantage and knowledge to work with the various GoP client groups in this project to focus attention on the importance of proper pension supervision development.
In terms of supporting the development of the regulatory institutions, it is critical to be able to mobilize the right types of expertise quickly and remain in tune with the clients’ requirements, as needs emerge in the nascent organization. A new supervisory agency will find itself trying to define the working reality of its mandate. Legislation lays out the policy direction, and therefore, by its nature, is usually high level and may be seen as vague when it comes time for implementation. A supervisory agency will need expert advice to move from theory to practice—to determine quickly the proper interpretation of legislation for day-to-day activities.
In this regard, encouraging the new agency to establish linkages with other financial sector regulatory institutions in the country and abroad can be critical. Drawing on other regulatory experiences in the country can help the new supervisory body avoid the "reinventing the wheel" syndrome.
Promote an Understanding of the Processes to be Supervised.
Regulators need to understand the various processes of the system, whether they oversee all the processes in their entirety or not. This issue is critical, as in many developing economies such as Poland, there is a scarcity of human capital with significant long-term experience in the financial sector. A pension system is a holistic unit, and problems in one process area will cause problems elsewhere in the pension or financial system. The regulator needs to have the skills to identify where the problem resides, understand the roles of all the institutions, and act accordingly.
Two processes are particularly key to the health of the pension system: the affiliation process (i.e., the process of signing up pension fund participants) and the contribution collections process. Within the first few months of the project, PwC performed an analysis of these processes, identifying strengths and weaknesses. Unfortunately, most of the issues identified in this analysis are outside UNFE’s immediate jurisdiction. As our analysis did not find a willing audience elsewhere in the system, it was necessary to wait until the issues emerged in their entirety before corrective action was initiated.
Similarly, and over the course of the project, PwC issued opinions about various operational procedures. These included: registration of sales agents, transfers of funds from individual accounts, transfer of participant information between funds, further details about affiliation and collection, portfolio investment and about pension fund mergers. In all cases, PwC encouraged UNFE to develop analytical understanding beyond the individual case at hand, and to try and understand the cause and effect of the issue and consider methods to correct the process.
Develop a Commitment to Training and Promote Staff Skill Diversity
A new regulator will need to master a large volume of information quickly. However, they must also learn to use their authority in a discrete and measured manner, and only when they have a high degree of certainty about the issue at hand. International experience demonstrates that the regulator must follow the innovations in the market closely while realizing it will continually evolve. This requires a comprehensive training program, which will provide an appropriate degree of restraint to be combined with skilled knowledge, and mature judgement.
Pension regulators need staff with a wide variety of skills. Lawyers, economists, accountants and information technology specialists are all vital in a pension regulatory agency. Where possible, and based on the experience of supervisors in other countries, pension regulators should source staff with strong audit and accounting skills.
With these needs in mind, PwC developed a comprehensive training needs assessment for UNFE. The training needs assessment identified the skills and knowledge a pension supervisory would need, and then matched this to the current needs at UNFE. The project then helped meet some of these training needs.
The original staff at UNFE is characterized by a large number of economists and lawyers. As such, issues surrounding accounting and information technology were often given less attention than would have been optimal early in UNFE’s operation. Accounting is the very basis of the defined contribution system, in terms of recording contributions and tracking investments. Information technology is the key enabling tool for the regulator. Although UNFE recognized from the start that accounting and IT issues are key to successful supervision, certain actions and decisions were delayed while staff obtained required training or IT staff were hired. Furthermore, as a new reforming economy, Poland generally faces a lack of qualified accountants and information technology specialists. Thus, UNFE’s strategy to grow these skills internally is justified in the long-term.
UNFE itself understands the need for a commitment to training, as fully 10% of staff time is devoted to training activities, and staff regularly attend courses until 7:00pm several times a week. There are few organizations anywhere with such a commitment to training. Furthermore, based on this project’s training needs assessment that UNFE and PwC developed, the Government of Poland provided co-financing of over $300,000 over a period of one year to help meet the needed training.
Develop Different Supervision Strategies for Pillar II and Pillar III.
Although they are both pension saving mechanisms, Pillar II and Pillar III characteristics demand that each have a unique approach to supervision.
Pillar II Supervision Strategy. Pillar II is a mandatory mechanism comprised of a small number of asset managers (pension funds). As such, it is possible and desirable that the supervisor maintain detailed oversight into the activities of the funds. International experience from other developing markets demonstrates that an automated systemic supervision system that allows the regulator to check numerous details of participant accounts and investment actions and other fund operations on a real time or near-real time basis does much to protect participant rights.
At the beginning of 1999, PwC and UNFE developed a general model for supervision through the use of an automated system. The module set forth the principal activities, which, based on the experience of international best practices, UNFE will need to check to fulfill its inspection and oversight responsibilities.
Work under this contract focused on defining user requirements, and, using this information, defining the data and process models. During the process of defining requirements, intense work was done to develop the supervisory mechanisms to be used by the supervisory agency, including financial, accounting and operational issues. The definition included follow-up on the correction of irregularities detected during the supervision and, ultimately, usage of the information received in order to obtain statistics on the system.
Furthermore, in mid-1999, USAID agreed to spend $100,000 to purchase Genio and Business Objects software. Set on the existing UNFE Oracle platform, this software created the basis of the automated system, provided UNFE with a basic functionality to check the investment activities of the funds, and provided UNFE with a testing ground to determine other data needs and user requirements. The project provided assistance via Hobbit and InfoViDE in order to define user requirements and build the system.
Pillar III Supervision Strategy. Pillar III is a voluntary pension mechanism and it is expected that there could be hundreds, if not thousands, of employee pension programs within a 5-7 year period. In such a situation, it is unlikely that UNFE would have enough resources to provide the same level of detailed oversight that Pillar II receives. For this reason, PwC proposed that UNFE use Risk Based Supervision.
Risk-based supervision may be defined as a supervisory regime where the supervisor grades the degree of risk associated with a program and applies oversight accordingly. Risk-based supervision may take different shapes and forms. For example, the supervisor may adjust the frequency and scope of on-site inspections in relation to a pension program’s overall risk ratings. The supervisor will inspect the most risky programs yearly in an in-depth and customized manner. The review of financial statements and other documents filed on a regular basis may be made more extensive, or more frequent, or both for pension programs with the highest degree of risk.
Some of the criteria that can be used to determine risk include:
- Filing history
- Complaint history
- Compliance history
- Irregularity history
- Contribution remittance history
- Financial soundness of sponsoring financial institution/pension fund
- Competence of administrators of sponsoring financial institution/pension fund
- Willingness to co-operate of administrators of sponsoring financial institution/pension fund
- Quality of investment management
- Degree of risk of investment portfolio
- Quality of communication with participants
- Administrative performance
- Soundness of the employer
- Soundness of the employer’s industry
- Number of participants
- Amount of assets under management
- Outstanding special situations like merger, division, liquidation, etc.
- Presence of unions
- Industry-wide or multi-company pension programs
- Poor investment results
- Fees, commissions and other charges
- Auditor
- Computer systems
Promote Inter-Institutional Cooperation
The nature of regulation is such that the regulators often trail market developments and are forced to be reactive. Furthermore, regulators in a democracy must use their authority judiciously and ensure that they are fully informed. For this reason, it is beneficial to promote the sharing of appropriate information between the various financial sector regulators to ensure the widest possible understanding of market developments. Protocols of Agreement, Memorandums of Understanding, or other methods should be used to help the regulators cooperate.
In the case of Poland, regulating Pillar III requires significant cooperation as UNFE, the Securities Commission, the Insurance Regulator and others have influence and oversight over the system and its participants. In pillar II, UNFE, ZUS and the Banking Regulator all need to trace the flow of contributions for their own reasons, but there is no need to duplicate work. UNFE and the Securities Commission share oversight of the Pillar II funds, as well.
Experience from mature markets demonstrates that regulation is more effective when the regulator acts in a proactive manner toward the market. The regulator needs to promote cooperation and a sense of good-will within the system. Such co-operation and good-will can be developed through working groups with industry on specific issues and providing periods for comments on draft laws and regulations.
As time has passed, UNFE has developed confidence and closer working relationships with other regulators. One of the capstone events for the project was a working group session between UNFE Pillar III supervisory staff and representatives from the Securities Commission and the Insurance regulator. UNFE’s relationship with industry has also developed, as the initial apprehension on all sides regarding the initial licensing processes has faded and dialog has been undertaken on some points of mutual concern.
Leverage Internal Compliance to Enable the Regulator.
Regulatory agencies have limited resources. One method to maximize supervisory oversight with these limited resources is to promote a policy of internal compliance in the regulated institutions.
Interviews with PTEs, the Chamber of PTEs and UNFE disclosed not only an awareness of the importance of compliance but also the desire to promote a culture of compliance. Representatives of all PTEs interviewed had some form of documented compliance procedures, policies or a manual, and designated individuals that performed different aspects of the compliance function.
The compliance process begins with all individuals and entities associated with a pension fund. It is their responsibility to abide by the rules and regulations related to their respective areas. It is the responsibility of senior management to ensure that employees are informed of compliance requirements related to their functions. In addition, there should be a Compliance Officer at each pension fund.
The Compliance Officer’s responsibility should be to monitor compliance and respond to customer complaints. It should be noted that it is not a Compliance Officer’s responsibility to formulate policies and procedures. That is the responsibility of each operational unit and of senior management. The Compliance Officer’s responsibility is to assess compliance with these policies and procedures, and to make recommendations regarding such guidelines as a result of a compliance review or provide input prior to formulation of these guidelines. The Compliance Officer and/or the Legal Department may assist senior management in apprising employees of compliance requirements related to their function.
3. Lessons Learned: Designing and Supporting the Public Education Program
From the very beginning, the OP recognized the value and the importance of developing a good working relationship with the media. OP deliberately cultivated relationships with key journalists in the national and local media environments with the goal of educating them about the complicated issues but simple messages of pension reform policy. To stimulate informed public discourse, OP used public opinion polls, focus groups, individual interviews and press research, brochures, television and radio.
During Phase II, public education was targeted at key political decision-makers. This strategy was particularly successful helping to convince key political decision-makers about the need for pension reform and the direction the OP had chosen. This deliberate and targeted public education strategy allowed OP to leverage its relatively small numbers to reach the maximum audience on a regular and as needed basis.
Phase III focused on mass education, to help system participants understand their place and required decisions in the new system. This campaign took place as the creative and destructive chaos of system implementation began. As such, the campaign had to respond in a flexible manner to a variety of developments and chance tools as conditions and resources allowed. While the campaign was hampered by limited implementation finances, a highly motivated and skilled public education implementation team at the OP was the critical element that made the campaign a success.
Obtain (written) Commitment from the Host Government on Co-Financing
Co-financing is often a key mechanism to secure a host government’s buy-in into the assistance process. When significant sums of money or controversial decisions are required, it would behoove USAID to negotiate a signed commitment to co-financing with the host government.
In the case of Poland, based on the verbal commitment USAID received from high level GoP officials, the original implementation budget for the public education campaign was to be between 7 and 10 million USD. However, over time this amount decreased. Furthermore, access to the funds was delayed, such that the public education campaign lost valuable time to communicate competition-free with the public.
Obtain Donor Agency Cooperation
International donors and lenders have a key role in the development of financial markets. It is therefore extremely important that they communicate with each other as to what assistance they can and cannot provide, as well as communicate to the appropriate host government personnel what conditions must be fulfilled to secure funding.
Donor cooperation in Phase II on a variety of issues was extensive. USAID, The World Bank, EU Phare, U.S. Department of Labor and the Government of Sweden are just some of the institutions that contributed to the overall success of the reform, as well as the education campaign to decision-makers.
Develop a Flexible Public Education Strategy
The public education strategy needs to be flexible in order for it respond to the changing environment and the new opportunities created during an ongoing reform process.
In Phase III, in cooperation with OP staff, Profile and Corporate Profiles DDB developed a comprehensive communication strategy for mass education. This team worked to modify the strategy and implementation plan as reform circumstances and finances changed communication needs and possibilities.
Public Education Final Report
The Regulator Needs to Play an Active Role in Educating the Public
Pensions are a complicated subject of which every worker must have some understanding. As the primary subject matter expert in the on-going system, the regulator has an obligation to engage the public in meaningful dialogue and explain participant rights and responsibilities.
Up to now, UNFE has only been able to commit limited resources to this area. UNFE has demonstrated more interest in developing scholarly reports and analysis about the operation of the system. As the system matures, participants can be expected to have greater expectations of UNFE’s public education role. In particular, the public education role in Pillar III will be acute. Pillar III presents for the first time myriad financial, legal and product choices to employers and employees unfamiliar with voluntary pension issues.
For the past 10 years, Poland has undertaken numerous reform efforts in the administrative, agricultural, defense, financial, political, and social sectors. Until pension reform, these have all been in an effort to try and reach the level of systemic and operational sophistication common in Western Europe and North America. However, Poland’s new pension system represents a benchmark for countries in the developing and developed world.
Certainly many of the other developing countries have already visited Poland to learn from their experience. Yet Poland’s new pension system has implications and lessons for systems in the European Union and in North America. In certain regards, particularly the extensive use of diversity to provide security at the systemic level, this pension reform is the first reform effort where Poland has surpassed countries in these regions.
As the European Union and North America learn more about Poland’s pension solutions, they may look to apply similar resolutions to their own over-burdened pension systems. Ironically, it is these countries that funded much of the development projects or provided much of the initial investment in the private sector. However, there could be no better return on investment than to have similar successes and options in their home countries.
As USAID closes operations in Poland, it can be satisfied that it has been part of Poland’s pension reform success. The way the project has been designed and implemented by USAID and PricewaterhouseCoopers provides a number of valuable lessons for other donor and government funded efforts in this arena in the years ahead. This project played a key role is supporting the Government of Poland in its ambitious and successful pension reform effort, and USAID and other donor agencies leverage this experience for application in other reforming countries.
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Last Updated on: March 13, 2002 |
