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Polish reform: A lot not to like

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  • Castle Square in Warsaw, Poland

Managers of Polish pension funds (OFEs) can at least be grateful that their industry has not been entirely nationalised following the decision in early September to end mandatory participation in the second-pillar system and to transfer domestic government bond holdings to the government. Of the OFEs’ total €66.5bn investment portfolios, around half is invested in fixed income of all types. Hungary went much further in 2011 when it nationalised and liquidated almost €10bn in supplementary pension assets.

 The World Bank’s three-pillar pension model was adopted by Poland and some of its Central and Eastern European neighbours in the 1990s and 2000s. But since the financial crisis there has been a fundamental tension between the World Bank model and EU accounting rules. Pension assets in countries that built up a funded second pillar have not sat on the government balance sheet since they are formally in private hands.

Recent budgetary pressures have made a partial or wholesale dismantlement of the funded second-pillar systems almost inevitable. At a stroke, Poland’s decision will reduce public debt and improve the fiscal deficit.

But there are several areas of concern. First is the liquidity effect of the withdrawal of OFEs as private holders and traders of Polish government debt. While there is an inescapable rationale in favour of using the OFEs’ government debt assets to reduce overall debt levels and the fiscal deficit, it would have been preferable to use the assets to create one (or more) buffer funds to finance long-term pension liabilities.

A wholesale liquidation would have had a much more serious effect on the liquidity of the Polish equity market, even if a wind-down were carefully managed over a long period, not to mention on Polish corporates’ ability to raise long-term capital.

But an IMF report of July still predicts liquidity issues in the domestic equity and government debt markets, even without a wholesale withdrawal of pension fund capital.

The second concern is the effect on Polish citizens in the short and long term. Anyone remaining in the old system will be a holder of an equity growth portfolio and it is untenable that they should not be permitted to diversify into government debt.

Third, is the business rationale for the existence of the OFEs, many of them owned by foreign insurers, who moved into the market in good faith early in the last decade. They have endured much uncertainty, and further consolidation is inevitable.

Fourth, is the effect Poland’s decision will have on other countries in the region. The partial dismantlement of the largest funded second pillar in the CEE region sets a precedent for the fate of other similar systems.

Regardless of the politics and the incompatibility of the World Bank system with European norms, the World Bank model was, in itself, prudent in that it enabled the gradual build-up of significant assets to fund long-term pension liabilities. The OFEs, until now among the region’s foremost institutional investors, smoothed Poland’s path through the recent economic turmoil as providers of liquidity to government and private enterprises. As long-term shareholders, the OFEs have also influenced corporate governance for the better and for the wider benefit of all shareholders.

Unfortunately, Poland’s decision is merely the latest in a series of attacks on second-pillar systems in CEE, and should be set in the context of nationalisations of pension assets and the drawdown of buffer funds in countries across the European Union. Poland’s government would now do well to promote its (currently little used) workplace saving vehicle. International bodies, not least the EU, should continue to promote supplementary pension saving and long-term investment.

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

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