Battling for Poland’s second pillar

First came Hungary, then Portugal, followed by Ireland. The financial crisis has pushed governments across Europe to treat private pension savings as legitimate sources of cash to help reduce their national deficits.

Now the Polish government looks set to raid the PLN268.9bn (€65bn) of second pillar savings to help meet its targets in line with the European Union’s excessive deficit procedures.

Initially funded by a 7.3% contribution diverted from workers contributions to the first pillar, the open pension funds (OFEs) have seen contributions slashed to just 2.8%.

Now, fiercely-denied press reports have suggested that finance minister Jacek Rostowski is considering the option of nationalisation.

There are reportedly proposals to cancel some of the PLN120bn of government debt held by the funds. In exchange, the government would assume the liabilities of members within 10 years of retirement, moving assets to a conservative fund run by the state-owned Social Insurance Institution (ZUS).

The Polish Chamber of Pension Funds (IGTE) has issued its own proposals for safeguarding the funds of those savers approaching retirement, which would mean a pension provider setting up a low-risk sub-fund in addition to the existing single fund.
However, there is still no framework for managing payouts, with the first cohorts due to retire in 2014. Before the second pillar was introduced in 1999, the Polish Parliament debated proposed structures for the payout phase, but ultimately nothing was agreed.

One big problem for the second pillar is that most pension pots approaching retirement are too small to pay out tiny amounts in lifetime annuities. The IGTE has suggested tackling the issue by offering term annuities. These could offer capital preservation so that if an annuitant died while receiving their pension, the remainder of the contributions would go to their beneficiaries.

According to the local press, Rostowski branded these term annuity plans “deeply shocking”, in what appears to be the start of a public relations battle with the pensions industry. What he failed to acknowledge was that the IGTE also proposed an alternative, to provide lifetime annuities, although this would be costly for pension funds.

Marcin Hadys, a board member at Aegon Poland Pension Fund, says he is concerned about the quality of the debate. “There is no big picture, only a focus on parts of the overall picture. All this is damaging the credibility of the second pillar.”

Suspicion is still strong that the government will go ahead with the part-nationalisation, with University of Warsaw professor of economics Wojciech Otto remaining concerned: “Rostowski’s proposals to shift assets from the second to the first pillar will endanger the existence of the accumulation phase,” he warned.

Charges levied by OFEs have been the butt of government criticism – potentially a further excuse to justify grabbing private pension savings. “First you organise some payments from the second pillar to the ZUS,” says Otto. “Then you say it doesn’t make sense to keep funds in the second pillar, because the ZUS can play the same role, but more cheaply.”

He adds: “The government may not take assets from OFEs now, following the recent publicity, but they are probably considering reducing the level of contributions going to the second pillar.”

“What I’m afraid of is that other significant changes in the system could follow the transfer of funds,” says Hadys. “It is a breach of the agreement between the people and government. Just doing this once creates a precedent for a future government to make further big changes.”

One thing seems certain: the battle for the Polish second pillar will continue to rumble on.

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