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Pension reform approved by the Sejm

9th December 2013
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Controversial changes in the pension scheme have been adopted, but concerns as to their legality and economic impact remain

Poland’s lower house of parliament, the Sejm, has adopted the reform proposal that will see some 51.5 percent of assets held by private pension funds (OFEs) transferred to the state-run Social Insurance Institution (ZUS). The reform won 232 votes of support, while 216 MPs were against the change. Only one abstained. 

Jarosław Kaczyński was against the reforms
Courtesy of

The government’s proposal for the future of OFEs will see all the treasury bonds in their possession (51.5 percent of the entire value of their assets) transferred to ZUS. OFEs will keep the remaining portion of their portfolio, roughly 48.5 percent, but will be restricted to investing them almost exclusively in the stock market.

Poland’s current pension system was created in 1999 and consists of two major components: the state-run ZUS and private OFEs which receive a portion of a person’s monthly pension contribution and invest it in various market instruments. The private component of the system has taken a lot of heat in the past few months, ever since the reform plans were first announced in the spring.

A scam’

Politicians from various factions have repeatedly called the entire system “a scam,” created for the sole purpose of “deceiving Poles with an illusion that they might expect higher pensions,” opposition leader Jarosław Kaczyński said in the Sejm last week.

Even though strongly critical of the current system, Mr Kaczyński’s party Law and Justice (PiS), along with other opposition groupings, voted against the changes proposed by the government. “Our amendments have not been accepted, … and we cannot accept the reform proposal without our amendments,” Zbigniew KuĽmiuk, a PiS member, told weekly Wprost.

Prime Minister Donald Tusk said his opponents “are only strong in words, but when it comes to taking action, [the ruling Civic Platform] is the only one left standing.” He also added that Mr Kaczyński and others “had plenty of opportunities to implement changes in the OFE system [when they were heading the government] but not a single one of them did a thing to improve it.”

Mr Tusk repeatedly said the reform was a difficult choice, but one that had to be made. He also stressed that the proposed reform in OFE is “safe for the citizens and for the state.”

Still, not all Civic Platform (PO) politicians are so firm in the belief that the reform will bring nothing but peace and prosperity. One of the PM’s party colleagues admitted it was a lose-lose situation from the start. “Either we take half [from OFEs] and win the elections, or Kaczyński wins and takes it all,” the source said as reported by Newsweek.

Expropriation or not?

Opponents of the reform, mainly lawyers and economists, warn that transferring assets from OFEs to ZUS “entails taking away non-state property from legal entities and transferring it to a state organizational unit, and therefore is classic expropriation,” according to an opinion issued by the State Treasury’s legal advisors.

PM Tusk rebuffed these concerns simply stating that he is “confident” about the legality of the reform.

Then there is the threat that international funds which have invested in OFEs might demand compensation on the grounds of internationally binding agreements about protecting investments. That could result in hundreds of millions in damages, experts say.

Stock market dilemma

And finally there is the stock market, which also might take it badly if the capital inflows it now receives get halved. And this is likely to be the case, as the government is working under the assumption that Poles agree to all of their assets being turned over to ZUS, unless they provide a written declaration stating otherwise.

Not only will the stock exchange’s capitalization decrease, some even say collapse, but OFEs will have to start selling their stock portfolios to meet their financial obligations towards ZUS. This will inevitably bring stock prices down. On the day the reform was announced, the WSE saw a huge sell-off, during which the blue-chip WIG20 index lost 2.5 percent. Today OFEs hold stakes in over 200 companies worth some zł.103 billion. Altogether OFEs’ assets under management are valued at zł.272 billion.

Beata Socha

From Warsaw Business Journal

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