EU Pension Deal With Poland May Avert Hungary-Style Rollback of Overhaul

The European Union may be able to keep countries from following the example of Hungary, which is rolling back a pension overhaul, by agreeing to ease deficit rules for countries that set up private retirement plans.

Poland and the European Commission agreed on Dec. 10 that the burden of shifting payments to private funds will be “taken into account” when the EU evaluates deficits and debt, Deputy Finance Minister Ludwik Kotecki said. “Very good progress” was made in the phone call between Polish Prime Minister Donald Tusk and Commission President Jose Manuel Barroso, according to Barroso’s spokeswoman, Pia Ahrenkilde Hansen, who said the EU’s 27 member states must approve any deal.

Eastern EU members including Poland diverted pension contributions from the pay-as-you go state system to private accounts to set up a model that the 27-nation bloc says will be more sustainable. The overhaul sapped their budgets of funds to pay current retirees. Hungary moved to direct the funds back to the state to meet EU-imposed deficit targets after the commission rejected a request to account for pension costs.

‘Alarm Bell’

“Hungary’s decision was a serious alarm bell,” Marcin Mrowiec, a senior economist at Bank Pekao in Warsaw, said by phone on Dec. 11. “The Commission probably figured out that the current rules, which have been so discouraging for the countries that reformed their pension systems, are even more discouraging for those that haven’t tried yet.”

Hungarian lawmakers are scheduled to vote today about the rules for directing private pension accounts to the state. The move is necessary to keep government debt from “burying” the country’s economy, Prime Minister Viktor Orban said in a video posted on his Facebook page yesterday.

The new rules would be applied during the EU’s excessive deficit procedure, which sanctions countries that breach the limit for budget shortfalls, the Finance Ministry said in a statement on its website yesterday.

While the agreement doesn’t change EU statistics, it may let Poland to report lower debt by domestic accounting rules, Jan Krzysztof Bielecki, head of Tusk’s Council of Economic Advisers, wrote today in the Warsaw newspaper Rzeczpospolita.

‘Flexible’

“What we are doing is to make it more explicit that we will be flexible when carrying out these assessments,” Amadeu Altafaj, spokesman for Olli Rehn, the EU’s economic and monetary affairs chief, said at a briefing in Brussels today. “If this reassures member states we are definitely willing to do so.”

There is “clear convergence” between Poland and commission on the pensions issue and they are “very close” to an agreement, Altafaj said. Barroso will present the changes in a letter that will be distributed today or tomorrow, he said.

Polish Economy Minister Waldemar Pawlak proposed suspending budget transfers to private-pension funds to keep public debt from exceeding 55 percent of gross domestic product, which would trigger austerity measures. The government expects the ratio to rise to 53.2 percent this year, or 55.4 percent by EU standards.

The total value of pension contributions shifted to private funds since 1999 accounts for 211 billion zloty ($69.3 billion), or about a third of Poland’s public debt. The country’s debt would total about 40 percent of GDP when stripped of the amount of government debt held by the pension funds, according to Finance Minister Jacek Rostowski

‘Pretext’

“This gives the government a pretext to redefine public debt without making markets nervous,” said Piotr Kalisz, chief economist at Citigroup Inc.’s Bank Handlowy SA unit in Warsaw. “Lower pension costs also make it easier to adopt the euro, although nobody in Poland is thinking about that now.”

Rostowski didn’t rule out a decision to exclude some pension costs from the Polish definition of public debt while simultaneously reducing the self-imposed debt ceiling, Rzeczpospolita reported. It would be “sensible” to delay decisions until the Commission specifies proposals, he said.

“An evident and direct effect” of the Commission’s decision is to “remove the risk of breaching the 55 percent debt limit,” Bielecki wrote in the same newspaper.

Both Rostowski and Bielecki said more lenient treatment from the EU won’t change Poland’s actual debt or borrowing needs, meaning that the country must still consider altering its pension system to seek savings. The agreement “doesn’t entail any need to change statistics or legislation related to statistical methodology in Polish law,” the Finance Ministry said in a statement yesterday.

Fiscal Rules

Principles on how to “calculate and include these costs” in the EU evaluation of country finances will be negotiated by a working group and written into the code of conduct for the Stability and Growth Pact, which sets fiscal rules for the trading bloc, Kotecki said. The mechanism won’t change official statistics compiled by Eurostat, he said.

“If the compromise reached with the Commission concerns only the excessive deficit procedure, it isn’t a breakthrough,” said Lukasz Tarnawa, chief economist at PKO BP in Warsaw.

The Commission in July urged EU members to increase the retirement age and overhaul pension systems as ageing populations will probably increase their pension costs.

Brussels officials rejected an August request by nine EU states, including Sweden, to account for the costs of their revamped pension systems in debt and deficit calculations. Most of those countries face increased scrutiny for their budget deficits, risking a reduction of EU grants.

‘Much Less’

“We would play down the significance of the agreement,” Peter Attard Montalto, an emerging markets economist at Nomura International Plc in London, said in a note to clients. “It is much less than Poland and its eight fellow countries originally requested.”

In most EU countries, pensions are paid by active workers. Demographic trends show that the ranks of retirees will swell and the number of contributors is set to decline. Fund-based systems lessen this burden by investing part of pension contributions now to finance employees’ retirements later.

“We are reaching a critical stage as the first cohorts of baby boomers are now approaching retirement and Europe’s working-age population is set to start shrinking from 2012 onwards,” the Commission said in a report on July 7.

To contact the reporter responsible for this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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