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Government attacks on Poland’s second-pillar pension funds (OFEs) are putting the brakes on capital market development, according to an analysis from the Civil Development Forum Foundation (FOR), the Warsaw-based think tank founded by Leszek Balcerowicz, architect of Poland’s port-communist economic transition.

The paper, written by Tomasz Bardziłowski, vice-president of Polish brokerage Vestor Dom Maklerski, argues that capitalisation growth at the Warsaw Stock Exchange (WSE) over the last 15 years was mainly due to the growth of OFE savings.

Overhauls to the system, starting in 2010 when the contribution rate was cut from 7.3% to 2.3%, and more recently in 2014, is shrinking the availability of capital finance for local companies.

Following the transfer of nearly half of OFE assets to ZUS in 2014, Polish pension fund savings as a share of GDP fell from 19% to 9%.

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The impact of the “slider”, which incrementally transfers the OFE savings of those with 10 or fewer years left before retirement to the Social Insurance Institution (ZUS), will be more pernicious.

In 2015, slider transfers will total around PLN3.7bn (€901m) in 2015, while new contributions (from those fund members who chose to remain in the system when it became voluntary) fall to PLN2.7bn, from PLN8.2bn the previous year.

Those savings accumulated when the system was mandatory.

As yet, the funds have not been obliged to liquidate equity holdings to meet their ZUS obligations only because of the dividends they have accrued and reinvested, primarily in Polish equities, but the slider gap will have doubled to some PLN2bn by 2020.

When the second pillar was launched in 1999, it was mandatory for those born after 1968 and optional for those born between 1949 and 1968, so the slider currently applies to the latter, smaller category.

From 2026 onwards, the first cohort of mandatory payees falls into the slider, and net outflows start to exceed inflows.

The impact on the WSE is already evident.

Before 2014, the OFEs invested in around half of the exchange’s listed companies.

As of the end of 2013, their investment accounted for around 20% of market capitalisation and around 50% of the free float.

In the case of 55 companies, OFE investment exceeded 25% of those firms’ capital.

The paper argues that, in addition to listed companies that will now need to seek alternative market investors, the number of IPOs will shrink drastically as a result of the OFEs’ reduced purchasing power.

In 2014, the value of WSE IPOs by market capitalisation fell to an eight-year low of PLN1.3bn, from PLN4.7bn in 2013 and a five-year high of PLN15.6bn in 2010, in contrast to global stock market trends.

Overall market turnover on the WSE fell by 9% year on year in 2014, and by 15% in the first quarter of 2015.

The effect on NewConnect, the WSE’s alternative trading platform launched in 2007 for smaller, mostly high-tech companies, will be more striking.

The number of companies making their debut on the platform plunged from 172 in 2011 to 42 in 2013 and only 22 in 2014.

The paper stresses that the investment capital accumulated by the OFEs was one of the attractions for these high-growth companies to list on NewConnect.

Alternative capital market sources for corporate investment are scarce.

The third pillar remains unattractive, with only a small number of Poles saving in either IKE or IKZE accounts.

Meanwhile, the government’s ban on OFE advertising over April-July 2014 (when members had to decide whether to remain in the system), coupled with its own negative campaigning against the second pillar, has resulted in a minuscule take-up by new labour market entrants of only some 5,000.

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