Markets and pensions
Do financial markets reward countries that have a fully funded and mandatory second-pillar pension system? It is hard to say. But it’s clear they do not penalise countries that dismantle theirs.
During 2014, Hungary, Poland and the Czech Republic all carried out plans to nationalise private pension assets and transfer them onto the state’s balance sheet. This was done to address short-term fiscal-stability concerns, despite the negative implications for the long-term sustainability of their budgets.
From January last year, 10-year government bond yields of the three countries fell to historical lows: from 6.3% to 3.7% in Hungary, 4.7% to 2.6% in Poland and 2.5% to 0.7% in the Czech Republic.
Fair enough, emerging market bond spreads fell across the board throughout last year, and investors do not look exclusively at pension policy when deciding whether to buy emerging market sovereign debt – growth is probably the main concern.
And the fact is that yields have also fallen for countries such as Romania and Croatia, which have both stuck to their private pension systems and have very different growth prospects (rosy for Romania, bleak for Croatia).
But surely the question asked by one Croatian pension fund director is valid: Do investors realise that a fully funded private pension system is essential for overall growth – as it takes huge pressure off state budgets and contributes to the growth of local capital markets?
Should they be discouraged from investing in governments that act in a myopic fashion and seize private pension assets?
Of course, boosting balance sheets nets
positive short-term results, but returning to the old world of pay-as-you-go state pensions
poses a serious threat to long-term economic stability. Not to mention the risk that once governments have tapped into private pension assets, they will be more inclined to nationalise other assets.
The apparent conflict between the World Bank three-pillar model adopted by these countries and EU fiscal rules should not be used to justify such counterproductive plans.
Many countries are managing to uphold EU standards while committing to a fully-funded, mandatory private pension systems.
But the reason investors do not seem to have noticed is that the markets themselves are short-term oriented.
Those investors that have a truly long-term view will take into account and reward virtuous countries such as Romania and Croatia, even when there are temporary jitters about growth, and they will benefit from it.