Ex-Banker Behind Polish Pension Overhaul Seeks to Calm Market

  • Borys says changes will make stock market more attractive
  • Stock overhang to be offset by new demand in transition period

The last overhaul of the pension system walloped Poland’s stock market, but the former banker charged with overseeing a new revamp says he is confident he can avoid a repeat.

“One of our aims is to strengthen the Polish capital market and make the bourse more attractive for companies seeking debuts,” Pawel Borys, who heads the state-run Polish Development Fund, said in an interview last week. “That’s why we want to prepare regulations that will allow for a swift transition and will ensure positive net inflows to the market.”

It’s a tall order. The government’s plan, unveiled earlier this month, calls for upending the 139 billion-zloty ($35 billion) pension industry, which holds about a fifth of the equity on the Warsaw Stock Exchange. Already battered by fears the program would involve the state taking a big chunk of the assets, the market fell to five-month lows once it was announced, recovering only modestly since.

The Warsaw market, Eastern Europe’s largest, is down 3.8 percent this year, missing out on a rally that’s taken the MSCI Emerging Markets index up 10 percent. Investors are retreating after Poland’s new government rolled out higher taxes on banks and retailers while debating whether to straddle lenders with the costs of converting $35 billion in foreign currency-denominated mortgages.

Borys, a former head of strategy at PKO Bank Polski SA, the country’s biggest lender, said the new reform, which will take effect in 2018, aims to provide some stability by creating new individual retirement accounts for Poles that will hold most of the savings now in the pension funds.

“By moving assets into private accounts, we’re removing uncertainty from the system,” he said. “The money can’t be used for other goals, either now or in the future.”

Too Tempting?

That’s the fear that’s dogged both the current reform and the previous one, conducted in 2014. Investors worry that the cash-strapped government will find meddling too tempting to resist. In the last overhaul, the government canceled the government bonds held by the pension funds -- 51 percent of their assets at the time -- to cut its debt load. Since the end of 2013, Warsaw’s main stock index has plummeted 43 percent in dollar terms, while emerging stocks dropped 13 percent.

The other risk this time is that all the portfolio shifts the plan envisions will swamp the Warsaw Stock market, where daily volume averages about 700 million zloty.

“We’re relieved that nationalizing the fund’s Warsaw stock assets isn’t being considered, but this proposal doesn’t eliminate all risks,” said Ryszard Rusak, a money manager at Union Investment TFI mutual fund in Warsaw. “Without proper regulations, the bourse may be overrun by supply as funds managing individual retirement accounts diversify away from stocks.”

Rainy Days

The new plan, for which legislation hasn’t yet been drafted, calls for taking a quarter of current pension fund assets for the government. Those assets -- foreign stocks, local corporate debt as well as bank deposits -- will be transferred to the FRD, the government’s rainy-day fund. The remaining 75 percent -- mainly the pension funds’ holdings of local stocks -- will go into the individual accounts, to be managed by private investment companies.

Those managers are expected to sell some of those shares to diversify their holdings into other assets, but Borys says the overhaul plan includes provisions to generate more than enough new demand for shares to absorb the sales.

The current system was set up in 1999 in an effort to ensure pension funding and create a source of long-term capital for investment. It brought to Poland variety of foreign financial institutions, including Nationale-Nederlanden NV, Aviva or MetLife Inc. But the diversion of pension contributions to the private accounts put pressure on the existing state-run system, which couldn’t raise enough other income to cover current payments.

New Inflows

A new retirement-savings scheme using payroll contributions -- encouraged by planned tax advantages -- is expected to generate as much as 5 billion zloty a year in inflows to the stock market, with that money going into the new individual accounts. On top of that, the FRD is also expected to put some of the money it gets into stocks. Borys said altogether, the plan would create as much as 15 billion zloty a year in new demand for bonds and shares.

To limit selling pressure, meanwhile, the plan mandates that any sales of stock from the individual accounts will have to be conducted gradually, over a period of 10 years. Borys says that will amount to about 3 billion to 4 billion zloty a year in sales of shares, a sum easily absorbed by the new demand he expects from the payroll contributions and the FRD’s equity purchases.

Morgan Stanley economist Pasquale Diana said in a research note on July 17 that the revamp is “broadly encouraging” as equity holdings of existing funds aren’t likely to be nationalized and the plan could boost long-term savings.