Poland Pension-Fund Overhaul to Cut Debt Sets 75% Stock Minimum

Poland today unveiled its draft law to take over 51.5 percent of assets held by the country’s privately-run pension funds, saying the step will reduce public debt by 9.2 percentage points of economic output next year.

Thirteen funds, which invest mandatory contributions from

16.2 million members and control $94 billion of assets, will be banned from buying government bonds from Feb. 3 and required to put at least 75 percent of their assets in stocks.

The overhaul will give the government more leeway to boost public spending as 2015 general elections loom while its public support wanes. The draft will be sent to parliament in mid-November following a month of consultations, Prime Minister Donald Tusk told reporters in parliament this week.

“With 75 percent of assets in stocks, pension funds will effectively become equity funds, irrespective of the age and profile of their clients,” Marcin Zoltek, who oversees the equivalent of $20.2 billion of assets as deputy chief executive of Aviva PTE in Warsaw, Poland’s second-largest pension fund, said today by phone. “It will be difficult to offset the risk linked to stock-market volatility.”

Poles will have three months to decide whether they want to divert all of future contributions to the state-controlled pay-as-you-go system or transfer 2.9 percent of their pay to the pension funds. They will be allowed to review their decision in 2016 and every four years afterward, according to the document posted on the Labor Ministry’s website.

Foreign Assets

Under the draft law, funds will be allowed to invest as much as 10 percent of their assets abroad in 2014, up from a 5 percent limit this year. That maximum foreign-asset allocation will increase to 20 percent in 2015 and 30 percent in 2016.

Funds may be allowed to buy derivatives to hedge against market risk, with the government specifying which derivatives may be used in a separate regulation, according to the draft bill.

Pension funds in the mandatory system held 292 billion zloty ($94.4 billion) of assets, including 120.3 billion zloty of stocks and 124.1 billion zloty of bonds as of Sept. 30, data from Poland’s financial markets regulator show.

By taking over and canceling the bonds held by the funds, the government will save as much as 25 billion zloty in borrowing costs annually in 2014-2017, according to Labor Ministry commentary accompanying the draft bill.

Collision Course

The plan may still put the government on a collision course with the European Union and the owners of companies running the funds, which include Aegon NV, Allianz SE, MetLife Inc., Aviva Plc, AXA SA, Assicurazioni Generali S.p.A., ING Groep NV and Nordea Bank AB.

Henri de Castries, chief executive officer of AXA, said in September his company will become “very aggressive from a legal standpoint” if the law were introduced. The Polish Chamber of Pension Funds in a letter asked European Commission President Jose Barroso to “closely analyze” the plan and “take appropriate actions.”

The Polish government has already factored the pension-fund changes into the 2014 budget, projecting a drop in the central deficit to 47.7 billion zloty from 51.6 billion zloty this year. Standard and Poor’s said on Sept. 5 the plan was “neutral” for Poland’s rating and “essentially an accounting exercise.”