In November 2018, the new Act on Employee Capital Plans (ECPs) was signed and in January 2019 implemented to the Polish legal system. The new regulations are coming into force in tranches starting from July 2019. Firstly, the biggest enterprises (employing >250 workers) are encompassed with the new system. Eventually, starting from January 2021, ECP will cover all employees between 19 and 55 years of age (workers between 55 and 70 years can join voluntarily), hired in accordance with the Labor Code (c. 11.5m Poles according to the Polish Statistical Office GUS).
The scheme is based on an auto-enrollment mechanism with a possible opt-out. Contributions to the system will be financed by employers, employees and the state budget and will consist of a mandatory stake of at least 3.5% of employee’s gross salary with an optional additional contribution of up to 4.5% of salary. Additional funds will be provided by the state’s budget entity, Labor Fund – an introductory payment of PLN 250 and an annual contribution of PLN 240 for those contributing above the mandatory required amount. ECPs are run by investment funds, pension funds, insurance companies and employee pension funds for a fee of up to 0.6% depending on the portfolio performance. Currently, c. 60 investment companies fulfill the requirements but as of 1 August 2019 19 companies registered for running ECPs.
The reasons for the reform were the Open Pension Fund liquidation reform in 2014, considerably low level of retirement savings (only c. 20% of workers in Poland save for their retirement themselves according to Aegon), and growing number of retirees after a reduction of the retirement age for men (67 to 65 year old) and women (65 to 60 year old) in 2017, which will likely lead to lower state pensions in the future.
From the stock market perspective, the reform means capital inflow as the institutions entitled to run ECPs will be obliged to invest a significant share of the accumulated funds on the Polish capital market. Therefore, we see the new regulations as a positive stimulus for the Warsaw Stock Exchange (WSE). The ECPs investment policy assumes allocating at least 40% of assets in shares and share-based instruments (i.e. futures, options) listed in the blue chip WIG20 index, including assets where the index is the underlying instrument, and no more than 30% of assets in other WSE-listed companies. It is worth mentioning that ECPs are allowed to invest in the alternative NewConnect segment, where pension funds have legally been banned from since 2014. Taking all ECP investment policy restrictions together, around 70% of the assets eligible for share-based instruments will be invested on the WSE. The total cash inflow, which will support the Polish capital market in the coming years, is estimated between PLN 6bn/EUR 1.4bn and PLN 15bn/ EUR 3.5bn per year.
As offerings similar to ECP have already been established by the biggest corporations (i.e. Citibank Europe), c. 30% of the biggest companies in Poland will not provide ECPs (Source: Gazeta Prawna). This means that the expected funds that e.g. will support the Warsaw Stock Exchange may be lower than expected. Secondly, press’ and NGO’s opinions on the new scheme is far from being positive. Various think tanks and newspapers stress the fiscal burden of the government’s co-payments formula, which may require higher taxes in the coming years. According to GRAPE, the cost of the state’s contribution is estimated at 0.7% of currently collected VAT tax amount. In addition, the cost of the reform will be co-financed by those who will not benefit from it – i.e. entrepreneurs (>2m Poles).