After Seizing $39 Billion, Poland to End Bond Ban for Fundsby and
Pension-fund revamp to allow funds to buy government debt
New, voluntary system may be crucial for bond demand, NN says
Three years ago, Poland’s government seized $39 billion of its bonds held by the country’s pension funds and banned them from buying any more.
Now, a looming revamp of the retirement-fund industry by a different government is set to end the restrictions and further boost demand for the sovereign’s securities, already among the best-performing in emerging markets this year.
Pawel Borys, a former banker who’s helping Deputy Prime Minister Mateusz Morawiecki draft the pensions overhaul, said as much as 40 percent of the roughly 120 billion zloty ($31 billion) in assets controlled by the country’s retirement funds may be “gradually” shifted to government bonds.
Such purchases by the funds would be a welcome development for the government, which is trying to reduce foreign ownership in its bonds to shield the nation from shocks on global markets. Poland’s $247 billion bond market is the largest in eastern Europe, and bigger than those in Sweden and Norway combined.
“The effect of the reform will be positive for the bond market,” Borys, who is also the head of state development fund PFR, said in an interview. “It will be more of a side-effect than a game changer, but it will be positive."
The overhaul isn’t all good news for Polish capital markets. It intends to strip the 12 privately-managed pension funds, including units of Nationale-Nederlanden NV, Aviva Plc and MetLife Inc., of about a quarter of their assets, restructure the funds and make the bulk of future inflows into the system voluntary. The revamp will protect the funds’ stock portfolios from any “sudden outflows” Borys said, although details of the plan haven’t yet been published.
Non-resident investors increased their holdings of zloty-denominated Polish government bonds by the biggest amount in almost three years in March, according to the latest Finance Ministry data. Foreigners hold nearly 205 billion zloty of local-currency government securities, or 34 percent of the total.
Zloty bonds returned 9.9 percent in dollar terms this year, according to indexes compiled by Bloomberg, the best performance following Mexico, Brazil, Russia and Peru among more than 30 developing economies. While low inflation spurs bond buying, the current government’s spending spree could propel public debt beyond its ceiling of 55 percent of gross domestic product in two years, the European Bank for Reconstruction and Development said in a report published this week.
The yield on the country’s benchmark 10-year bond dropped to a three-week low of 3.37 percent at 2:26 p.m. in Warsaw, declining from a 2017 peak of 3.94 percent set in January. The extra yield investors demand to hold the Polish note rather than similarly maturing German bunds dropped below 3 percentage points for the first time since November.
“We don’t know all the details yet, but it seems that what the reform will bring is new buyers to the debt market,” Bank Pekao SA’s fixed-income analyst Arkadiusz Urbanski said by phone. “These funds may serve as additional market stabilizers.”
Privately-managed pension funds were the biggest investors in Poland’s zloty bonds until 2014, when the government canceled and annulled their holdings of these securities in an effort to reduce public debt. The move left the retirement funds almost entirely focused on local equities, which increased risks for the savings of 16 million Poles.
The new overhaul, whose details should be announced around mid-year, will give Poles an option to choose between funds with different investment strategies. The government is also preparing tax-incentives to lure more employee- and employer-based inflows into the system in an effort to boost long-term investment rates.
“While it may be difficult to quickly alter assets that have already been amassed in the current pension funds, we see the voluntary saving plans for companies as something that may speed up purchases of government debt,” said Ewa Radkowska-Swieton, the Chief Investment Officer at NN PTE SA, the country’s biggest pension fund. “Clients may simply seek safer strategies, and the new schemes will provide us with new inflows.”