Ghost of Hungarian Pension Demise in 2011 Haunts Polish Markets

Updated on
  • Poland pension shift may not end asset grab, OTP fund says
  • Frequent government market meddling rattling investors: Ativo

Investors trying to assess the likely fallout from Poland’s plans for its pension industry may benefit from looking at neighboring Hungary.

Since Prime Minister Viktor Orban’s government seized 3 trillion forint ($10 billion) in pension savings in 2011, trading in Hungary’s BUX Index has slumped by almost two-thirds. Budapest-based OTP Alapkezelo and Ativo Capital Management in Chicago are among those saying Poland risks a similar fate after the government in Warsaw unveiled plans for the biggest shake-up of retirement funds since 1999.

While Poland’s plan envisages 75 percent of retirement savings remaining in private hands even as it dismantles the non-state pension system, investors are concerned the ruling Law & Justice party will keep encroaching on the nation’s financial market as Hungary did. More than $27 billion has been wiped off the value of Poland’s equity market since the government was elected in October on plans to finance increased social spending through special taxes on banks and retailers, measures that echo those taken by Orban five years ago.

"The main issue is that this story may not end here,” said Levente Boer, who helps oversee $5.5 billion as a money manager in Budapest at OTP Alapkezelo, Hungary’s largest investment fund, which has an underweight position on Poland. "The Hungarian example shows you have to be a pessimist as decision makers tend to move toward more radical policy measures. Trading volumes will fall as companies’ market capitalization wanes and as the stable inflows from pension funds dry up."

About 6.9 billion euros ($7.6 billion) of shares were traded on the Budapest Stock Exchange last year, down from 19.9 billion euros in 2010, when the nationalization of pension funds was announced, data from the Federation of European Securities Exchanges show. Volumes in Warsaw were 49 billion euros last year, little changed from five years earlier.

Poland is looking to transfer the pension-fund industry’s 139 billion zloty ($35 billion) of assets, 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, according to the plan. The details will be finalized during the next year and take effect in 2018.

Asset Grab

"I would not be surprised if they go the 100 percent route like Hungary and seize all private pension assets," said Ram Gandikota, who helps oversee $1.5 billion in assets as a senior money manager at Ativo Capital in Chicago. “We are concerned by the frequent market intervention. This definitely has shaken investor confidence in the Polish market.”

QuickTake Poland’s Populist Turn

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. The previous administration, which reduced flows into pension funds in 2011, stripped them of 51 percent of their assets three years later by canceling government bond holdings as it sought to reduce the country’s debt burden.

The current proposed transfer of assets to the state will remove about two percentage points from public debt and help finance state-backed projects, according to the plan. Debt stood at 51.3 percent of gross domestic product last year. The pension system has been ineffective and failed to support growth, Deputy Prime Minister Mateusz Morawiecki said on Monday.

Polish stocks fell to a five-month low on Wednesday, before recovering some losses by the end of the week. The WIG20 Index has dropped 3.9 percent this month in dollar terms, the worst performance among 93 indexes tracked by Bloomberg worldwide.

Damage Done

“Most of the damage is already done,” said Anastasia Levashova, a money manager at Blackfriars Asset Management Ltd. in London, which holds Polish stocks in several funds. “The question is when the market will believe the government and recover. This may take months and even quarters.”

Investor confidence in Poland has been rocked by the eight-month-old government policies, including the European Union’s highest tax on banks’ assets in February, and plans for lenders to bear the costs of converting foreign-currency mortgages. A power grab of key institutions prompted S&P Global Ratings in January to hand the country its first-ever sovereign downgrade, citing concern over the independence of the central bank and the Constitutional Tribunal, the nation’s top court.

"I’m seriously very skeptical about the way Poland is moving forward," said Ozgur Yasar Guyuldar, head of equity sales at Raiffeisen Centrobank AG in Vienna. “I fear that Polish authorities will look for ways to take the money out of pensions funds to fulfill their election promises.”