How Poland’s new DC program was designed using behavioural science

While 80 per cent of Polish employees would like to have retirement savings, only around 12 per cent actually save for the long term, according to a recent survey by the state-owned financial group, the Polish Development Fund.

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This is due, in part, to historic apprehension, says Ludwin. In 2014, Poland’s previous government ruled that employee contributions to a previous voluntary savings program — invested in debt instruments — were public money, effectively reallocating 50 per cent of that fund to the country’s public pension.

“It was done without dialogue and the people saw this as a misuse of their money, because money allocated in the [public pension] is the subject of withdrawal of pensioners. If we consider every year there’s a lower number of people paying the social contributions, it’s a question of whether there will be enough money [for pensioners] to equal the contributions paid by active workers.”

To entice the population to save for their future, Poland launched a new defined contribution savings program in 2019. The employee capital plans — Pracownicze Plany Kapitałowe or PPK — are a collaboration between Poland’s government and the country’s trade unions, employer organizations and the Polish Development Fund. Perhaps most importantly, the country has introduced legislation stating that funds contributed to a PPK plan are the sole property of the plan member and can’t be touched by the government.

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The program — based on retirement savings plans in New Zealand, the U.K. and the U.S. — has been phased in over the last two years. In July 2019, companies with 250 or more employees were required to offer PPK plans, followed by firms with 50 or more workers in January 2020 and those with 20 or more employees in July 2020. Public sector companies and businesses with one or more workers were the last to join in January 2021.

Employees save by contributing to various target-date funds geared towards a different age demographic, which are offered by participating financial institutions for PPK savings, says Krzysztof Nowak, chief executive officer of Mercer Poland.

“PPK target-date funds are standard mutual funds, so [they’re subject to] investment law’s provisions which are very detailed and strict. For example, assets must be kept by an independent custodian, which is also responsible for daily monitoring of investment limits, such as the maximum share of equities and bonds, as well as Polish and foreign assets.”

The very design of the program encourages retirement savings, says Nowak. Employees between the ages of 19 and 55 with at least three months of service are automatically enrolled and, while they can withdraw funds at any time, they can do so without penalty starting at age 60. Participation is voluntary for employees aged 55 to 70.

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Plan members are required to contribute two per cent of their annual earnings, with the option to contribute up to an additional two per cent, while employers chip in 1.5 per cent of an employee’s wages and can optionally contribute up to an additional 2.5 per cent. As well, the government contributes an annual PLN240 — equivalent to about $78 — and employees who enrolled prior to this year were given a one-time welcome contribution of PLN250.

Ludwin says this behavourial science aspect is similar to a mechanism used in the U.K.’s automatic enrolment program, which assumes a plan begins with the smallest level of employee contributions and then gradually increases. “In the U.K., they’ve already increased the contribution twice — they started at three per cent and now it’s nine per cent.”

In addition to auto-enrolment and the range of investment options geared to age, Nowak says participation is further encouraged with a 0.6 per cent cap on annual asset management fees charged by investment managers. “As result, PPK funds are the most effective investment vehicles in the Polish investment market, not only because of the contributions’ model, but also from the perspective of costs and assets allocation.”

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Despite measures to entice members, Nowak says enrolment in PPK plans remains low. The government expected between 40 and 60 per cent of employees would join, but the current participation rate is between 20 and 25 per cent, after 75 per cent of eligible employees opted out upon the program’s launch. He says lack of trust in the program and limited support from employers — especially medium- and small-sized businesses — are the key factors cited by employees who forgo participation.

Ludwin says participation in the plan is highest among Poland’s largest employers, those with 250 or more employees. “We also see high participation among the multinational companies, where the financial wellness is higher than Polish companies.”

While the coronavirus pandemic may have impacted participation, the lack of trust in government is the biggest obstacle to increasing membership, says Daniel Olejnik, an associate at Willis Towers Watson based in Poland, noting knowledge is the cure for historic apprehension around government involvement in pension savings. “[The key is] education, education and education. It’s about emphasizing these funds are the private property of the participants.”

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Ludwin says the task of promoting PPK plans has been undertaken by the Polish government, participating financial institutions and the Polish Development Fund. “It’s important to explain the benefits of participation in plans like this. All financial institutions that offer PPK prepared a lot of materials promoting the benefits of participating. The government also created a portal that aims to promote PPK as a component of financial wellness in Poland.

“The first question is always, ‘Will the government take our money?’ In Poland, the level of financial wellness is very low and many people, when considering investments, are thinking they’ll lose money. . . . From our perspective, this is just the beginning. We now have a strong base to provide the knowledge and answers to why participation is worth consideration.”

Blake Wolfe is an associate editor at Benefits Canada.