Polish private pension funds (OFEs) will transfer nearly half of their assets to the state-run pay-as-you-go social security system, ZUS, Prime Minister Donald Tusk announced at a press conference with Finance Minister Jacek Rostowski and Labor Minister Władysław Kosiniak-Kamysz last week.
Finance Minister Jacek Rostowski and Prime Minister Donald Tusk
Courtesy of KPRM/FLICKR
Mr Tusk said that the private pension system has “turned out to be too costly,” and added that “the impact of OFEs on public debt is overwhelming – it is making it impossible to focus on public investments.”
Mr Tusk’s proposal for the future of open pension funds will see OFEs’ treasury-bond assets transferred to ZUS. That will account for some 51.5 percent of the entire value of their assets.
OFEs will keep the remaining portion of their portfolio, roughly 48.5 percent, which is invested in the stock market. “OFEs’ contribution to economic growth consists in their activity on the stock exchange,” Mr Rostowski said, explaining the ministry’s rationale behind the decision.
OFEs “will also no longer be allowed to invest in treasury bonds or debentures guaranteed by the state,” Mr Rostowski stated. Mr Kosiniak-Kamysz explained, however, that they will still have the option of investing in corporate or municipal bonds.
Security above all
The prime minister also stressed that one of the primary goals of the reform was to ensure that future pensions are secure. In order to do that, the proposal will allow Poles to choose whether they want a portion of their pension contribution to remain in the OFE system, or if their entire pension contribution should go to ZUS.
“Our goal was to limit the risk to an absolute minimum,” the prime minister said, and explained that Poles who “choose to keep playing the stock market game” will have three months to submit a declaration to ZUS. If they don’t, they will automatically be transferred to the state-run system, together with their entire OFE savings.
Additionally, 10 years prior to reaching retirement age, a person’s pension savings will be gradually transferred to ZUS. The first tranche, scheduled for 2014, will involve moving zł.10 billion from OFEs to the social security system.
Mr Tusk stressed that the government’s intention is not to nationalize private businesses, but to ensure the safety of future pensions. “We have decided that nationalization is not the best solution. ... The state should not give in to the temptation of nationalizing private assets,” the prime minister said.
Analysts are wary of the decision to limit the scope of private pension funds and the consequences it may have on the economy.
The outflow of funds OFEs have invested in the stock market is all but inevitable, analysts from X-Trade Brokers, a large Warsaw-based brokerage, said.
“Until now, OFEs invested some zł.300 million in stocks each month. … Assuming the unrealistic best-case scenario, where everyone remains in the OFE system, funds invested in shares will be limited to a little over zł.250 million [per month].”
Estimates show that if less than 70 percent of all OFE members keep their savings in the private pension system, OFEs will be forced to withdraw funds from the stock market, “even up to zł.400 million [each month] if only 20 percent of people stay in private funds,” the analysts wrote.
On the day the of the prime minister’s announcement, the Warsaw Stock Exchange’s blue-chip WIG20 index fell by 2.5 percent and the overall WIG index by 2.1 percent.
The blue chip WIG20 index lost as much as 5.4 percent by the end of trading on Friday.
According to employers’ confederation Lewiatan, the move “will significantly reduce the capital inflows to the stock market … [it will impede] privatization through the stock exchange and the growth potential of the WSE.”
The Treasury is currently having a hard time finding buyers for its stakes in state-controlled companies. Traditionally, OFEs were one of the major investors in state-controlled firms, but are now more likely to sell shares from their own portfolio than acquire new ones.
“OFEs could lose any meaningful presence in markets. That would be Poland’s loss given the lack of other ideas on the table to increase private savings,” Peter Attard Montalto, emerging markets economist at Nomura International, wrote in a comment.
Currently, OFEs hold stakes in over 200 companies worth some zł.103 billion. Altogether OFEs’ assets under management are valued at zł.272 billion.
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