Warsaw IPO Boom at Risk as Poles Ditch Funds for State PensionsPiotr Bujnicki
Poland is embarking on a pensions revamp that threatens to shatter its status as East Europe’s biggest market for share sales.
Under a government program to curb state debt that started this month, eight out of 10 Poles will return to a state pensions system after 15 years saving with private funds, according to Fredrik Myren, a money manager at Swedbank Robur Fonder AB, who holds Polish stocks. The institutions hold 43 percent of the Warsaw bourse’s free-float assets, data from the exchange show, helping make Poland a magnet for share issues.
Companies and their owners raised $29.8 billion in share offerings on the Warsaw bourse since 2008, 79 percent of the total in the region and 4.5 times as much as in Moscow, according to data compiled by Bloomberg. With 54 IPOs worth 1.1 billion euros ($1.5 billion) last year, Warsaw was second in Europe behind London by number of offerings and fifth by value, according to a report by PricewaterhouseCoopers LLP.
“Clearly the overhaul will weaken the Warsaw bourse’s position as a regional centre for initial public offerings,” Hubert Kmiecik, who helps manage the equivalent of $892 million at Allianz TFI SA mutual fund in Warsaw, said by phone on April 1. “It would be harder for potential issuers to find buyers as pension funds will have less money and will be more selective.”
Poles have four months from April 1 to decide if they want to continue allocating 2.9 percent of their pay checks to funds or automatically switch to the state system. The private funds will continue to manage their existing assets until transferring them back to the state before contributors retire.
The government’s overhaul will reduce public debt by 9 percent of gross domestic product by canceling sovereign bonds held by the funds at a time when the economy is recovering from the worst slowdown in more than a decade, according to Finance Ministry estimates. The reduction in public debt and servicing costs will be “offset by an increase in long-term state pension liabilities,” Matteo Napolitano, an analyst at Fitch Ratings in London, wrote in a report on March 24.
The pension funds were set up in 1999 to reduce reliance on Poland’s communist-era, pay-as-you-go social security system. The move back to the state comes 25 years after after then-President Lech Walesa engineered the country’s switch to capitalism, since when Poles’ per-capita purchasing power more than tripled to $20,577, or 66 percent of the EU average, according to the International Monetary Fund.
Whereas a retiree’s benefits in the private system fluctuate with stock market swings, Poland is guaranteeing payouts based on economic growth to those in the state plan.
“The industry revamp will expose Polish stocks to global swings,” Jaroslaw Lis, who helps manage the equivalent of $1.1 billion zloty of stocks and bonds at mutual fund BPH TFI SA, said by phone from Warsaw March 28. “Pension funds played an important stabilizing role and very often were buying stocks during market turmoil thanks to steady inflows.”
The exchange’s broad WIG Index has climbed 32 percent since the collapse of Lehman Brothers Holdings Inc. in September 2008, compared with a 26 percent increase in the MSCI Emerging Markets Index. When details of the pensions overhaul were announced on Sept. 4, the WIG declined 6.4 percent over two days, the biggest selloff since 2011. The index has gained 13 percent since that drop, compared with a 6.7 percent advance by the MSCI EM Index.
The overhaul already stripped the 13 funds, including companies managed by ING Groep NV and Aviva Plc, of their government bond holdings and banned investment in the debt, making them into equity-focused asset managers. The funds had 154 billion zloty ($51 billion) in assets on Feb. 28.
There are 452 companies trading in Warsaw, including 46 foreign ones, compared with a total of 75 on stock exchanges in Prague and Budapest combined, according to data on their websites.
The Treasury Ministry, which manages the government’s stake in companies, didn’t respond to two e-mailed requests for comment sent in the past two weeks.
“Pension funds have contributed to building the strong position of the Warsaw bourse,” Adam Maciejewski, chief executive officer at the Warsaw exchange, said in an e-mailed reply to Bloomberg News questions April 1. “However, the Polish market has matured to such an extent that potential lower inflows to these funds won’t impact the market significantly.”
The new regulations require funds keep at least 75 percent of assets in stocks this year, with the minimum falling to 55 percent in 2015. The rules double the cap on foreign investment to 10 percent of assets this year and 20 percent in 2015.
The funds would need to sell 19.4 billion zloty of Polish equity assets this year to meet their foreign-investment limit and the guidelines on non-equity holdings by Dec. 31, Mateusz Zawada and Carsten Hesse, London-based strategists at Wood & Co., said in a research note dated March 24.
“Inflows from pension funds will turn into outflows,” Myren, who oversees 5 billion krona ($762 million) at Swedbank Robur’s East Europe fund, said by phone from Stockholm April 10. “This is not priced in yet, as the process won’t happen overnight. We are underweight on Polish stocks.”
Thirteen percent of Poles want to continue saving with the private funds, while about 50 percent plan to switch to the state system, according to a TNS Polska poll published by Gazeta Wyborcza newspaper on March 29.
“It’s a huge shift, whose results will be staggering,” Allianz’s Kmiecik said. “Warsaw will lose glamor as the days of pension funds as captive stock buyers seem to over.”