Poland will take over and cancel government bonds held by its privately managed pension funds, stopping short of fully “nationalizing” the system as it seeks to curb public debt, Prime Minister Donald Tusk said.
Pension funds will keep current assets that they invested in stocks and future contributions to the system by Poles will be “voluntary,” Tusk told reporters today in Warsaw.
The government, gearing up for elections in 2015 and trailing the opposition in polls, is seeking to spur recovery in the European Union’s largest eastern economy, which is forecast to expand this year at the weakest pace since at least 1997. The owners of companies running Poland’s pension funds include Aegon NV (AGN), Allianz SE (ALV), MetLife Inc. (MET), Aviva Plc (AV/), AXA SA (CS), Assicurazioni Generali S.p.A., ING Groep NV and Nordea Bank AB. (NDA)
“The privately run pension system is partly built on expanding debt and that has turned out to be very costly,” Tusk told a news conference. “The system’s impact on public debt is crushing and has effectively prevented us from making another civilizational leap.”
The shift would reduce public debt by about 8 percentage points, Finance Minister Jacek Rostowski told reporters.
Yields on the government’s 10-year zloty-denominated bonds increased 13 basis points, or 0.13 percentage point, to 4.79 percent, the highest since October 2012. The zloty pared its gains, trading 0.1 percent stronger against the euro at 4.2763 at 6:04 p.m. in Warsaw. The WIG20 Index of the country’s largest and most-liquid stocks declined 2.5 percent, the lowest close since July 30, data compiled by Bloomberg show.
The economic slowdown forced the government last month to widen the budget deficit by 16 billion zloty ($5 billion) to 51.6 billion zloty. It also suspend thresholds limiting increases in public debt, a move Fitch Ratings said Aug. 23 “reduced fiscal credibility.”
The government outlined in June three options to overhaul the country’s three-tier pension system, which was set up in 1999. Contributions to privately managed funds have reduced funding for the pay-as-you-go state system that delivers benefits to current retirees, forcing the government to cover the shortfall through bond sales.
The 14 privately managed pension funds in the mandatory system held 281 billion zloty of assets, including 111.4 billion zloty of equities and 121.2 billion zloty of bonds as of July 31, data from Poland’s financial markets regulator show.
The state will take over the amount of bonds that pension funds held as of end of Sept. 3 and turn them into pension liabilities in the state-run social security system, Deputy Finance Minister Wojciech Kowalczyk told today’s news conference.
The state will assume control of 51.5 percent of pension-fund assets, including bonds guaranteed by the government and “other non-stock assets,” he said in an e-mailed statement. The changes were designed as to “avoid negative market impact,” he said.
The security system will also gradually absorb pension-fund assets for people due to retire in the 10 years prior to reaching the official pension age, Tusk said.
The pension changes will take effect by mid-2014, Labor Minister Wladyslaw Kosiniak-Kamysz said at the briefing.
Pension funds will continue to hold about 48.5 percent of their current assets, Rostowski said. While the funds won’t be allowed to buy government bonds, they’ll be able to buy more corporate debt and will be freed from having to comply with performance benchmarks, according to comments from the labor and finance ministers.
While the cancellation of bonds cuts public debt, it would also increase the share of outstanding bonds held by foreign investors to about 45 percent from 36 percent as of July 31, according to Rafal Benecki, chief economist at ING Groep NV (INGA)’s Polish unit said in e-mailed comment.
“Pension funds will no longer work as shock absorbers,” Benecki said today. “The relative exposure of foreign investors on the zloty debt market should grow.”
Poles will have three months to declare whether they still want to save for their retirement with privately run funds, Tusk said. If they opt not to, their future contributions will go to the social security system, he said.
The Polish chamber of pension funds said it was “deeply disappointed” with the plans outlined by the government and said they raise “serious legal doubt,” according to a statement e-mailed today.