What kind of PPK should I chose? Or maybe there are other options?
As we are on the verge of launching of the first Employee Capital Plans (PPKs) many employers are undoubtedly wondering whether it makes sense to “invest” more than the required minimum (the obligatory contribution of the employer is 1.5%, however – the employers may declare a contribution of up to 4%) and what results will such an approach yield? In this context, an even more important question arises: “Do I as an employer, have other options to increase the attractiveness of my retirement benefits package? If I do, how do I do it?”
The hypothesis that PPK reform may usher in a broader discussion on the role of the employers in the area of long-term investments of their employees has many backers. Some of them believe that PPK not only does not end the process of reforming of the Polish retirement system and instead starts its new chapter. This belief is based upon a simple assumption: if everyone offers (because they have to) a PPK with minimum 1.5% contribution (at least), what should an employer who wants to offer a more competitive benefit do? Until recently, the answer was simple – he should implement a tax qualified pension plan (PPE) or a non-qualified savings plan (PPO). But what can an employer do today in this scope? PPE of course remains a valid option. However, if it is to be used as a means for obtaining exemption PPK, this is now only possible in case of small and medium-sized enterprises. The large enterprises – those that employ 250 or more staff members will not make it with the implementation of their PPEs until the end of June this year. Of course, they are still eligible for PPE, but in their case the program can only “accompany” the PPK.
In such a situation, perhaps the employers should build their pension benefits system using PPOs (non-qualified plans)? In this case, the “governmental” PPK would only represent a piece of the obligatory, national retirement system, while the main focus and the value of the system could be built around the voluntary PPO. Is this really the best solution to the issue? Perhaps there are more options? Below, you will find a list of four basic variants that one should consider:
PPE is the leading program, it grants exemption from PPK, a variant that is no longer viable in case of companies that employ more than 250 employees. PPK as the leading program (two sub-variants available: employer is an active entity and offers more than the minimum 1.5% contribution level and the other variant where the employer provides PPK “as required by law”). Non-qualified PPO plan as the dominant solution with an accompanying PPK program. Non-qualified PPO and PPK as complementary programs. In fact, there are even more options to choose from. One should not forget that our pension system is also equipped with IKE and IKZE, which are individualized retirement products that can be easily used for reinforcing the corporate pension systems. Moreover, apart from the basic schemes, one can apply those less-obvious solutions such as: e.g. those where a single employer offers both PPK and PPE programs and where the latter has been established after the setting-up of the PPK.
In the case of large employers (>250 employees) who do not have a PPE set-up already and who do not intend to set-up a PPO, the choice for the nearest future is limited to just two solutions: the above-minimum contribution PPK and the “minimum” PPK (as indicated in point 2 above).
The results of the last year’s Mercer survey suggest that the vast majority of employers, who intend to set-up a PPK, will make only minimum contributions – at the level of 1.5%. Few employers even consider making an additional payment. However, it is worth to note that this group also contains those employers that will participate actively in PPK. How can such an employer make his approach towards PPK different? This depends on what role will the PPK have in a given company, that is: whether the PPK is to become a real company benefit, or solely a piece of the obligatory (imposed by applicable law) system. In the first case, the employer may want to actively participate in relations with the investment company, that manages the assets of the PPK (starting with the selection of the company, negotiating better terms, but also can monitor the company and its investment performance, as well as take decision on changing it in the future).
Apart from taking care of the investment results, such an “active” employer may also communicate the PPK as an important piece of the benefit package offered in his company. In order to do this, most probably he will have to make contributions higher than 1.5%. Apart from the above, the employer can also offer a better than average administrative support, including communication, access to accrued assets, investment performance etc.
Now, let us briefly discuss the “minimum” variant. In this case, one can imagine a PPK managed by an “appointed institution” that is an Investment Fund Company whose more than 50% of ownership belongs to PFR (Polish Development Fund). As of today, only one entity – PFR TFI can take this role. In such a case, the employer may assume that he will not be required to overlook the program. He is required to sign an agreement with a “governmental” asset manager and will be able to limit to the minimum the communicational and administrative obligations. In practice, this means that an employer will treat and communicate the PPK in a manner that is similar to ZUS. That is, he will only make contributions and will be involved in administrative and communicational activities only in the scope as required by the law.
Which of the two variants described above is more suitable? These are two opposite approaches. However, both will require that the employer conducts a basic analysis and that he answers some key questions. These include:
What I, as a company can and want to achieve with the PPK? What will my employees think about the PPK, and thus, will it be possible to build a PPK plan that is more valuable than the basic statutory plan? What are my legal obligations and what more can I do when it comes to PPK? What / Do my competitors at present provide to their employees? How will they approach the PPK issue? Does the variant I pick provide me with an advantage in the labor market? How much (costs, time, energy) will I have to “invest” in PPK? The above list is without doubt not exhaustive. However, there is still time to make the above analysis. Naturally, guessing the reaction of our employees may be the hardest task. Many voices suggest that it is the approach of the employees that should have the biggest impact on the employer’s decision. If interest in PPK is wide and participation is above 60-70% one can assume that employees are interested in the PPK and that they are likely to value an active role of the employer in this scope.
The next part shall cover the two remaining solutions that an employer may implement in his pension benefits package – the non-qualified plans. These once used to be popular, but today seem to be forgotten. However, there have been signs that we may soon see their wide “reactivation”, but perhaps in a slightly changed form.
Krzysztof Nowak, Mercer Warsaw, 30th of April, 2019