Poland: Ongoing pensions saga
Krystyna Krzyzak charts moves, countermoves and conflicting policies for reform of Poland's supplementary pension system
Poland's latest attempt to reform its pension system has generated a raft of competing proposals reflecting the coalition government tensions between the centre-right Civic Platform (PO), its junior partner, the agrarian Polish Peasants' Party (PSL), and their respective allies. The two core issues are the sustainability and relationship between the state (first pillar) and privately managed (second pillar) pension systems following the 1999 pension reform, and Poland's public finances. The second-pillar funds (OFEs) are funded by 7.3% of gross wages transferred from the first pillar. The first pillar, which used to get the full contribution, retains 12.2%.
The finance ministry estimates that a change in the EU's accounting rules would lower the public debt, most recently estimated by the European Commission as 55.5% of GDP in 2010, by some 14 percentage points, as well as cutting the general government deficit, estimated at 7.9% of GDP, by up to 2 percentage points. The maximum deficit level for euro-zone membership is 3%. Meanwhile, Poland has its own internal limit of 55%, above which a long-standing constitutional mechanism automatically triggers public spending cuts, such as freezing the wage-and-inflation linked rises for pensions and other benefits.
In the autumn, prime minister Donald Tusk charged fellow PO minister Michal Boni, his chief adviser, to draft a revised second pillar that also addresses some of the current constraints on OFE fund management and performance. The key elements of Boni's proposals, published in October 2010, include:
Following an extended consultation, Poland's Economic Council is evaluating comments and counter-proposals from other ministries, and stakeholders such as the pension funds, trade unions and other bodies. The most forceful opposition to the OFEs comes from labour and social policy minister Jolanta Fedak, a PSL member. Back in November 2009, Fedak, supported by finance minister Jacek Rostowski, floated the idea of cutting the OFE contribution portion from 7.3% to 3%, using the rest to set up a virtual government bond portfolio at ZUS.
While this project never saw the light of day, Fedak's response to Boni's document is a two-year suspension of all contributions to the private system as the quickest means of rectifying the budget. Fedak also wants the system to provide for less compulsion. When it was launched in 1999, the system was compulsory for those born after 1968 and voluntary for those born between 1949 and 1968. However, the latter could not subsequently leave the private system.
This time, the finance minister, a political independent, has kept his counsel. Fedak's supporters in the government include fellow party member Waldemar Pawlak, deputy prime minister and economy minister. Their constituency, largely self-employed farmers, benefit less from the private pensions system than they do from the largely unreformed and state-subsidised Agricultural Social Insurance Fund (KRUS). Other backers include the left wing All Poland Alliance of Trade Unions (OPZZ) and more recently the opposition Law and Justice party (PiS), led by Jaroslaw Kaczynski, twin brother of the late president Lech Kaczynski, who was killed along with more than 90 Polish dignitaries in a plane crash in April 2010.
They all argue that the pension reforms of the 1990s were a mistake, as privately run funds carry investment risks for their future retirees and ultimately only benefit the pension company fund managers. Supporters of the pension reforms counter that the state system, for demographic reasons, is not sustainable in the long term. They include the central bank, the Warsaw Stock Exchange (WSE), the centre-right union NSZZ Solidarnosc and the pension fund industry.
The Polish Chamber of Pension Funds (ITGE), which back in August had presented its own pension reform proposals in conjunction with PKPP Lewiatan, the Polish private employers confederation, largely welcomed Boni's proposals, although the Chamber takes issue with some of the assumptions about sub-fund composition and performance. It has also proposed alternative benchmark calculations and opposes the ban on client acquisitions.
Meanwhile, Boni's initial recommendations have evolved. In mid-November, the minister unveiled an additional proposal in the form of retirement (pension) bonds. The bonds, in 20 and 30-year tenors, would be non tradable, with a return linked to GDP growth, and redeemable at maturity by the state Treasury. Boni has told the press that, as passive investments, retirement bond portfolios do not require any specialist investment management skills and should consequently not incur any management fees. He has also assured the parliament that the bonds would not count as public debt under EU criteria. As it stands, most observers are baffled by the proposal.
The development of the latest pension project has been dogged by conflicting ministerial statements, including by prime minister Donald Tusk, who at one point suggested the second-pillar schemes could become voluntary, and by his deputy Waldemar Pawlak, who announced that the 2011 budget was being drafted on the basis of suspended contributions, only to be contradicted by the finance ministry, the body responsible for budget drafting.
Rumours circulated that Tusk would take the easy way out and dismiss either Boni or Fedak. The conflicts have dented Tusk's image as a premier in charge of his ministers and on top of his brief. His damage limitation now has to extend to reassuring pension fund members and the markets generally that the government has no intention of adopting what the Poles term the 'Hungarian variant'. Budapest announced in late November that it was effectively nationalising its second-pillar system.
Coalitions mean compromise, and as of early December, only one such concrete proposal had emerged. As of 2011, OFE contributions will be cut from 7.3% to 5%, which is not as drastic as a suspension or as severe as Jolanta Fedak's 2009 proposal, but a cut none the less. The cut appears to have Boni's approval.
The reduction in new OFE monies would be considerable - contributions and interest transfers funds totalled close to €5bn in 2009 and €4.4bn in the first three quarters of 2010 - and if passed would confirm the Warsaw Stock Exchange's worst fears. Unlike Czech or Hungarian pension funds, the Polish OFEs are heavily invested in equities. At the end of October 2010, listed equities accounted for 35.5% of collective OFE portfolios and totalled PLN79.64bn (€18.94bn). According to the WSE's own analysis, in the first half of 2010 the OFEs accounted for 21% of equity trading, second only to investment funds. With 65-odd IPOs completed in the first 11 months of 2010, the exchange is one of Europe's leading venues for debuting companies - it is naturally concerned that reduced OFE contributions would decrease liquidity and make it less attractive for capital raising. It blames the increasing likelihood that contributions will reduce on the cancellations or postponements of around 15 IPOs set for November.