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

Dariusz Stanko


This paper is a part of the author's wider research on the current Polish
pension fund system. It deals with the system's 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.