ECP – In for the long run

Long-term saving for the future. This is the main idea behind the creation of Employee Capital Plans. In the five years since its launch, around 3.5 million participants have joined the scheme, appreciating the triple-source contribution mechanism and the opportunity to save systematically. Despite some critical voices at the outset, it is safe to say that the ECP has been very successful, as evidenced by the statistics.

Shaping the future

Everyone is thinking about their future. We think ahead, making plans – both professional and personal. Where will I be in 5, 10, 20 years' time? Will I have developed my career, been promoted or opened my own business? Or maybe I will have completed an ambitious educational programme or fulfilled my travel dreams? What will my family life look like? What fields of study will my children choose? Will I be able to afford all these plans?

Financial planning is crucial when thinking about the future. This is a reasonable approach. But are you able to go one step further and think about what your future will look like after retirement?

When reality falls short of expectations

According to UCE research published in April, one in four Poles do not know what benefits they can expect when they retire. As many as 40% of us are counting on receiving a pension from the Social Insurance Institution of at least 50% of our current salary. Given the projected replacement rate, many may be in for an unpleasant surprise. Pensions were around 56 per cent of the average salary, but these were statistics for 2020. Unfortunately, projections indicate that the replacement rate will continue to fall as a result of significant demographic changes. In 2040, the pension replacement rate is estimated to be 38 per cent, in 2050 – 29 per cent and in 2060 – only 25 per cent of salary1. This sounds worrying, especially for those of us in our 30s. It is difficult to imagine how to plan expenses with 1/3 or 1/4 of our current salary.

There is a solution to this! ECP

Fortunately, there is a solution to help secure your own future and increase your financial security – Employee capital plans. Despite a difficult start during the pandemic, the economic crisis, the outbreak of war in Ukraine, which also affected the Polish financial market, ECPs have won the trust of almost 3.5 million participants, with the accumulated assets exceeding PLN 25 billion1. A participant who has been saving in an ECP for at least 12 months has an average of PLN 12,000 in their account. Contributions to the plan are also made by the employer and the state. Based on the simulations, the rate of return for the participants ranges from 128 per cent to 167 per cent1 – depending on the target date of the fund in which the funds are invested.

The launch of ECPs has sparked a public discussion about the need for long-term savings. There is a growing interest in pension projections and an awareness that saving for the future is not a choice, but a necessity if we want to build a financial cushion and take care of the future – both our own and that of our loved ones. A long-term approach is required for an ECP programme to bring maximum benefit to its participants. It is best to join the scheme as early as possible and save 

Saving marathon

Due to the long-term nature of Employee Equity Plans, the programme can be likened to a marathon. But what does a long-term savings scheme have to do with long-distance running? Both require long-term commitment, consistency and regularity. The reward for effort can only be enjoyed after a long period of time.

Of course, an ECP participant, like a marathon runner, may encounter a number of obstacles along the way. There may be a downturn in financial markets and, at some stage in the savings process, there may come discouragement, impatience or the temptation to use accumulated funds more quickly, even though there is no real need. Market data shows that some participants in the ECP programme treat it as an injection of extra cash, regularly withdrawing funds from their account. However, this runs counter to the long-term objective of the programme, which is to build financial security. In addition, it is much less advantageous for the participants themselves, as by using the withdrawal option, they return all the contributions made by the state as a reward for long-term saving. In addition, 30 per cent of the funds from the employer's contributions are transferred to an individual sub-account with the Social Insurance Institution, and capital gains tax must be paid on the investment profit.

So instead of using ECP funds for immediate needs, it is better to look at the programme as an investment measure that will bring greater benefits in the long term.