Polish Pension Revamp Targets $35 Billion of Private Funds

  • Plan to boost savings marks biggest pension revamp since 1999
  • Government seeks to dismantle privately owned pension funds

Poland unveiled its biggest pension overhaul since 1999, though the government won’t take control of as big a share of the industry as some investors had feared.

The government on Monday outlined plans to dismantle its privately owned pension-fund system, calling it ineffective. The industry’s 139 billion-zloty ($35 billion) of assets will be transferred to individual retirement accounts, with at least a quarter to be managed by a state entity. Poles will be offered incentives to opt for long-term investment in a bid to swell pension savings. The details will be finalized during the next year.

“It’s not the worst-case scenario we feared and doesn’t imply an immediate sell-off,” Marcin Gatarz, head of equity research at Pekao Investment Banking brokerage in Warsaw, said in a note. “While this doesn’t envisage the state gobbling up a big chunk of assets, uncertainty remains as the plan may change. That should keep Polish stock valuations lower.”

The revamp risks worsening concern over state interference in the economy after the Law & Justice party, which has pledged to spur growth and distribute wealth more evenly, won elections eight months ago. A standoff with the European Union over democratic standards prompted the country’s first-ever credit rating downgrade and spooked investors. Foreign owners of the pension funds targeted by authorities include Allianz SE, MetLife Inc. and Nationale-Nederlanden NV.

Stocks Rebound

Having been down as much as 2.7 percent, the benchmark WIG20 index closed 1.2 percent lower, extending its 12-month decline to 25 percent as banks such as PKO SA slipped. The zloty weakened 0.5 percent against the euro, the worst performer among 24 emerging-market currencies tracked by Bloomberg.

While the plan can’t be called nationalization after a Constitutional Court ruling deemed pension-fund assets public, it entails a partial government takeover of the industry’s holdings, similar to moves by Hungary and Kazakhstan. The proposals are due to take effect in 2018, with the transfer to state management trimming public debt by about two percentage points and helping finance government-backed projects.

“The plan is to give the assets of pension funds to Poles and build Polish capital,” Deputy Prime Minister Mateusz Morawiecki said. “Private pension funds haven’t worked out, the system isn’t serving anyone, doesn’t provide higher pensions and has failed to support growth.”

2014 Revamp

Poland’s privately run pension funds, set up in 1999 to provide long-term financing for companies and turn Warsaw into a financial hub, own a fifth of shares traded on the Warsaw stock exchange. They were stripped of 51 percent of their assets in 2014, when the previous administration sought to reduce the country’s debt burden. It stood at 51.3 percent of gross domestic product last year.

The overhaul two years ago saw the government seize sovereign bonds held by pension funds and ban them from buying the securities, arguing that they were middlemen increasing management costs. The changes exposed the industry to more-volatile equities, which accounted for 75 percent of assets at the end of May. The funds returned 6.3 percent in the three years ended March 31, data from the financial regulator show.

Monday’s losses in equities were largely attributed to the lack of detail on the government’s proposals. Kamil Sobolewski, head of fixed income at Nationale Nederlanden PTE SA, Poland’s biggest pension fund, said by e-mail that attracting new money to the pension system will require measures to raise retirement savings and bolster local capital markets.

“Things look much better than you could have thought,” Jaroslaw Lis, head of equities at Warsaw-based mutual fund BPH TFI SA, said by e-mail. “It seems that some savings will be left and there’s a large chance they will increase with the help of the new incentives.”

Before it's here, it's on the Bloomberg Terminal.