14/05/2023 by Jakub 0 Comments
PPK - what it is, and why you should have participated.
PPK ('Pracownicze Plany Kapitałowe') is a retirement saving program enforced by the government three years ago. In our opinion, among many missed programs our current government has established, the PPK makes the most sense. Read more to find out why.
Each company with more than 20 employees was obliged to join and enroll them into PPK (those with fewer employees could have a vote from them deciding whether to join or not). A company could choose from multiple investment firms to tie its PPK with. Each employee of the companies that joined PPK had been automatically enrolled in the scheme but could and still can resign at any time.
Why was it enforced? Well, based on current calculations, persons going to retire in 2050, will receive 29,5% of the average salary as their pension, in 2070 - 23,5%. When we put it together with the fact that in 2021 only 1/4 of Poles have been saving for retirement - a big crisis might be looming. Hence the PPK.
The mechanism of PPK is as follows. Each month 2% is taken from the gross amount of the employee's gross salary and invested in PPK (lowers the net remuneration). On top of that employer is adding 1,5% of mentioned salary, which also goes to PPK (this does not affect the paycheck). Moreover, the government adds a welcome bonus of 250 PLN and a yearly one of 240.
All these funds are invested as per the strategy of the investment firm that the company chose to have PPK at. Generally, the investment strategy depends on the participant's age funds are divided between the stock market and obligations/bonds, and the ratio between them goes up proportionally to age (meaning the younger the participant - the more aggressive strategy). As the participant gets older, a safer approach is applied to protect gathered funds. The ratio goes from a maximum of 60-80% of shares at the start to not more than 15% before the participant reaches 60 y/o and is entitled to disbursement of funds.
The PPK program has met a lot of controversy since its start, mainly connected to a lack of trust in the government, mixed with what happened with OFE (even though it's a different story, different factors). However, the numbers don't lie, and after three years we can say that joining (or just staying in) PPK was an excellent financial decision. Of course, it does not automatically mean it will continue to be so in the future. As always, let's calculate it based on a real-life scenario.
An employee earns 10 thousand PLN gross, and after joining the PPK - 200 PLN is taken from it monthly, topped with an extra 150 from the employer, so 350 total. To this government added 250 PLN at the start, and 240 yearly. Altogether, in 36 months it gave a sum of 13,570 PLN (before capital gain).
Within three years all 163 PPK strategies earned 26% on average - none lost - out of which most were added in the past 12 months due to a bull run on the markets (14% on average, and 160 strategies over 10%). All results are available publicly, e.g. here: https://www.analizy.pl/fundusze-ppk/notowania.
Let's assume the participant was neither lucky to have their funds invested in one of 13 strategies that grew over 40% in 3 years nor unlucky to be with those ten that grew below 10%, and got the average return.
Using a simple compound interest calculator, the 13,570 PLN of the invested sum became 15100 after three years of participation in PPK. However, the participant invested only 7200 PLN of their money (200 monthly), which means 109% of the return.
Even if the participant now decides to resign from PPK (so as per rules they would get 100% of their funds, 70% of the funds added by the employer, all the capital gain minus 19% tax, while losing all governmental add-ons), they would have 12220 PLN out of 7200 PLN invested over three years, giving a return of 70%.
It looks even better given all this happened with the COVID-19 crisis, the Ukraine war, the energy crisis, the inflation crisis, and the year-long bear market in the background.
Finally, PPK is flexible in the way that you can go out, and go back in at any time, so in case of limited trust in the program, cashing out gathered funds after x time and coming back in to start the cycle again seems a plausible option. If so, we highly recommend keeping the cashed-out funds invested in any way for your retirement.
That is why you should have participated (and probably should still be participating).
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