Pension plans in Poland

Poland created a national mandatory defined contribution plan in 1999. Now the DC plan is optional, and many of the participants of the twelve DC funds are transferring their money to the basic guaranteed pension. (source)

About seven out of eight workers in Poland with 10 or more years until retirement would rather direct their payroll deferrals to the Polish Social Insurance Institution (ZUS), which is like our Social Security program, than to the twelve “second pillar” national defined contribution plans (OFE), IPE.com reported.

Of the 14 million workers with 10+ years until retirement who were allowed to opt out or stay in the DC plans, only 12% (1.75 million) chose to stay in—well below the 20% predicted by the Polish government.

Some 16.7 million participants had been contributing 2.92% of their gross wages to the plans, so inflows are expected to drop substantially. In the first six months of 2014 alone, according to the Polish Financial Supervision Authority (KNF), contributions totaled PLN6bn (€1.5bn or about $2 billion), boosting OFE net assets to PLN153bn.

Polish pension reforms, signed into law in January 2014, made the formerly mandatory second pillar DC plan voluntary. Because higher-paid workers have been more likely to choose the second pillar than low-wage workers, the share of contributions could reach 15-17%, said Paweł Cymcyk, investment communication manager at ING IM Poland.

All Polish state and state-guaranteed bonds were moved from the DC plans to the first pillar pension last February, lowering net assets by 48% in a single month. The next asset shrinkage starts in October. Under the so-called ‘slider’, the funds have to transfer the relevant proportion of all the assets of members with 10 or fewer years left until retirement to ZUS, which under the new law takes responsibility for second-pillar, as well as first-pillar, payouts.

A total of about PLN4.2bn is expected to flow into the first pillar fund this year. The second pillar funds are expected to liquidate equity holdings to fund the transfers. This could hurt the Warsaw Stock Exchange, where pension funds account for a big share of trading and capitalization. Small-cap stocks are particularly at risk because of their low turnover, said Cymcyk.

“If there is a significant small-cap sell-off, their prices will go down,” he warned.The next decision window is in 2016, and every four years thereafter, by which time it is unlikely many of the 12 OFEs will be around.

“We predict around half that number through mergers and acquisitions,” Cymcyk told IPE. With no way to increase assets, only the bigger ones, with economies of scale, are likely to be able to generate the profits and the results to keep their clients.

Poland Moves Forward on Bill That Would Transfer Private Pensions to State

(from NYT 11 Oct 2013)

Ignoring warnings that it could deter foreign investment, the Polish government has announced a draft bill that would require private pension funds to transfer about 35.2 billion euros, or $47.6 billion, in government bonds to the state in February.

Critics have likened the move to a Soviet-style nationalization of private assets, or an asset seizure. Plans for the bill, which was introduced on Thursday, alarmed some international investors and aroused strong criticism from economists, the business community and senior members of the government.

But the center-right government of Prime Minister Donald Tusk insists that the pensions revamp is nothing more than an accounting change that will not undermine pensioners. Moreover, it says that the changes do not amount to nationalization since the private funds will still manage equities.

Adam Jasser, secretary of state and a member of Mr. Tusk’s economic policy team, said in an interview on Friday that it was within the government’s legal right to make the transfer because the private funds had been managing public retirement funds as part of the state social security system, with the government taking on all the risks.

He noted that when Poland adopted a hybrid pension system in the 1990s, under which a portion of workers’ contributions were transferred from the state pay-as-you-go system to private pension funds, it was never intended to be a privatization of the pension system, because the privately managed funds remained part of the state system. He added that the hybrid system had proved costly and unworkable for the state and had imposed an unnecessary funding squeeze on the government that had been laid bare during difficult economic times.

“This is not nationalization,” Mr. Jasser said by phone from Warsaw. “All we are doing is moving assets from one part of the state system to another.”

The Civil Development Forum, a foundation established by Leszek Balcerowicz, a respected former finance minister credited with liberalizing the Polish economy after the fall of communism in 1989, called the government’s bill “an easy heist of Polish pensioners’ funds.”

Most of the private funds are owned by big foreign money managers, including ING, Aviva, Allianz and Generali. Altogether, the private funds hold assets worth about 68 billion euros, or more than one-fifth of Poland’s gross domestic product.

The Polish government, which has faced public dissent over austerity measures, faces an election in 2015, and analysts say the changes are part of a move aimed at improving its financial breathing room to borrow and spend.

Under the changes, the government plans to cancel the bonds, which will reduce the government’s debt by around eight percentage points, Mr. Jasser said. He said that pensioners would receive a financial commitment from the state equivalent to their transferred assets.

Yet for all the assurances by the government, criticism of the overhaul has not abated. The government, which has a slim majority in Parliament, is expected to be able to pass the bill, though it could still be sent back to Parliament by President Bronislaw Komorowski, who was elected as the candidate of Mr. Tusk’s Civic Platform party but is officially nonpartisan.

Privately managed funds in Poland have indicated they are considering a legal challenge to the bill in the country’s constitutional court, and the Polish Chamber of Pension Funds recently sent a letter to José Manuel Barroso, the European Commission president, asking him to give an opinion on the overhaul.

If the legislation passes, the European Commission can review it and take legal action if it deems it to be incompatible with European Union law.