Polish Pension Funds, Does The System Work? Cost, Efficiency and Performance MeasurementIssues

This paper is a part of the author's wider research on the current Polish pension fund system. It deals with the systemfs efficiency from the point of view of the individual fund member. After over three years of functioning, the savings accumulated with the pension funds only slightly exceed the total premiums that have so far been paid. The study shows that the system is not cost effective and that the incentives produced by the fees and the peer-based performance measurement frameworks have a detrimental impact on active investment management. The low net results from the second pillar are also caused partly by the relatively low share of the funded component of the retirement premium. It is shown that considerable cost improvements can be obtained by immediate corrections. However, more fundamental changes in the system are suggested. In particular, the fee structure should be rearranged to create better motivation for active management. To achieve this, the penalty institution of minimal required rate of return should be abandoned. Furthermore, the investment limits should be reconsidered to allow for greater diversification and higher long-run risk to overcome the capacity problem of the local stock market. This study shows that the evaluation of funds should employ an external index to avoid herding and to allow a long-run investment strategy for retirement purposes. Several possible candidates for benchmarks are proposed.