Employee Capital Plans become a reality – what does it mean for employers?

The pension reform and the launch of the employee capital plans (ECP) scheme starting from the next year are becoming a reality. In September and October, the last discussion of the final wording of the act was held, first at the government level and then in Polish Parliament. It is now high time to have a closer look at ECP from the perspective of employers who will soon be burdened with a number of new requirements and whose involvement is crucial to the success of the government’s ambitious plans.

The idea behind the overhaul of the third pillar of the pension system was officially unveiled by the government in 2016. First, the government planned to launch mandatory (yet still consistently called by the government representatives as “voluntary”) employee capital plans (ECP) and, in addition, to modify the II pillar of the system. Those modifications were to involve the final winding up of the open pension funds (OPF) and at the same time a transfer of the majority of the funds accumulated there to (our) Individual Pension Accounts (IKZE). This second element of the pension reform was eventually quietly retracted. The launch of ECP resurfaced in the public domain every so often, until finally – promoted as the government bill – it was accepted by the Council of Ministers on 28 August 2018. The final, complete and official bill of the ECP Act was published on 5 September, causing a little confusion because at the very last moment a time limit for setting up employee pension plans (EPP) (which had never been presented before) was added to the bill. Finally, when the bill was debated in Parliament, the government backed out of the controversial provisions which in practice would limit setting up EPP only until December 2018, and agreed finally that the employers interested in being discharged from the requirement to offer ECP could set up EPP at the time when the requirement to set up ECP would arise at their organisations (which would be different depending on the size of the company).

The main assumptions underlying the concept of ECP could be summarised as follows:

  • The employers will be required to offer participation in ECP to all their employees. The Act has a very wide definition of an employee. In fact, it encompasses all forms of employment (provision of work), including, and that is important for many employers, also contracts for services (umowa zlecenia) – provided the employer pays social security contributions to ZUS (Social Security State Institution) on those contracts. Discharged from the requirement to offer ECP are (in practice) microenterprises, i.e. the firms which employ fewer than 10 employees. In their case, the Act stipulates that if within 60 days from hiring the first person, all the employees submit a declaration on opting out from ECP, then such firm will not be subject to the Act (and accordingly will not have to fulfil the requirements arising from the Act);
  • Employees aged 19-55 years will become participants of ECP automatically (“automatic enrolment”). Each person will, however, have the right to opt out from ECP within 3 months from the start of their work (or from the date on which the employer becomes subject to the requirement to offer ECP), by submitting a special opt-out declaration to the employer (no one has yet seen such declaration, one can only guess many will be surprised by both the form and content of such document),
  • The date from which the employers will start to be required to offer ECP to their employees will depend on the number of their employees. The first required to adapt to the requirements of the new law will the employers employing more than 250 employees. They will become subject to this requirement in July 2019. The next groups of the firms will be required to start offering ECP at six months intervals,
  • The minimum value of the employer’s contribution to ECP is 1.5% (maximum 4%), and of the employee’s contribution is, respectively, 2% and also 4%. Special treatment is envisaged for the employees whose income will be equal to or lower than 1.2 x the minimum salary – in their case, the minimum contribution to ECP will be 0.5%,
  • Contributions to ECP will be calculated as the percentage of the salary. The calculation base will be the base which is used for calculating social security contributions payable to ZUS. This means the employers will pay contributions to ECP actually on all the salary components; on the base salary, bonuses, personal insurance contributions etc. At the same time (has it been do so on purpose?), the Act does not say (unlike the “twin” regulations relating to EPP) that the so-called limit of ZUS contributions (30 times the average monthly salary) will not apply to such calculation base. This means (at least in theory?) that contributions to ECP will be charged only until the ZUS limit is reached. Of course, if this limit is ever lifted (?), the above doubts will disappear.

To sum up, the functioning of ECP could be summarised by the following graph:

In practice, the offering of ECP to employees will require each employer to select the asset management company (this role will be open to investment funds companies, life insurance companies and pension fund societies), to obtain acceptance from the trade unions (the representation of the employees) for such decision, and to enter into an agreement with such institution. Then, the employer will have to communicate the decision to the employees and collect (if any) opt-out declaration and other declarations of will confirming the employees’ decisions with regard to, among others, the beneficiaries persons. The final requirement of the employer will be to remit (but first calculate and deduct) contributions to the selected management company.

The employers’ requirements relating to newly hired people will be slightly different. In addition to the standard process of enrolment of such persons in ECP, the employers will also have to ensure that the employees’ assets accumulated in their previous ECP are properly transferred to the new ECP. Every 4 years (on one date, regardless of the date of employment of a given employee), the employers will also have to remind all their employees of the requirement to once again submit an opt-out declaration (and if they don’t do this, they will be automatically enrolled in ECP).

Obviously, both the enrolment mechanism and the mechanism of reminding of the requirement to submit another opt-out declaration are designed to ensure maximum level of participation in ECP (the universality of the plans). Also, without any doubt, the role of the employer in servicing ECP will not be limited to the requirements described above. And while the Act delegates a lot of the administrative and communication requirements to the management companies, one ought to assume that for obvious reasons those requirements will also occupy the employers running ECP.

The legislator has also provided some sweeteners for the employers who run today the so-called employee pension programme (EPP) for their employees, exempting them from the requirement to offer ECP. However, to be eligible to this exemption, the EPP must meet three conditions. First, EPP must be active prior to the introduction of the requirement to offer ECP (e.g. for the firms employing 250+, this will mean prior to 1 July 2019). Second, the employer must pay contributions equal to 3.5% or higher. And third, at least 25% of the employees must be enrolled in such programme.

It seems there is plenty of time to decide whether to opt for ECP or maybe for EPP. And if for ECP, then which version (what contribution) and in cooperation with whom. However, putting off decisions may have a number of negative consequences for the employers. Therefore, it is worth to start doing something already today, and to prepare well for the proposed legislative changes described above.

Warsaw, 5 October 2018
Krzysztof Nowak, Mercer Polska