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Polish schemes urge government to clarify stock-lending, derivatives rules

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The Polish Chamber of Pension Funds (IGTE) is pressing the government to issue regulations concerning second-pillar pension fund (OFE) use of stock lending and derivatives.

These two activities were introduced as part of the 2014 pension reform, but the industry is still waiting for the government to specify procedures and conditions of use.

According to a report on IGTE’s website, work on stock lending procedures started in early 2014, only to be abandoned, for unknown reasons, that April.

According to IGTE, stock lending is a cost-free way for pension funds to gain additional income on securities that cannot be traded over a short period of time.

The practice, according to the Chamber, would reduce asset price volatility and improve market valuations and Polish capital market competitiveness.

The Polish Financial Supervision Authority (KNF), the country’s pensions regulator, is also backing a speedy introduction.

The use of derivatives, meanwhile, would enable the funds to hedge currency and other risks.

This activity, supported by the Warsaw Stock Exchange, has become increasingly important since the OFEs were allowed, under the 2014 reforms, to increase their overseas investment from 5% to 10% in 2014, and to 30% by 2016.

The IGTE has also published returns for the OFEs since the 2014 pension reforms took effect.

The return between 1 February 2014 and 31 March 2015 averaged 5.64%.

Despite their high equity investments, the OFEs outperformed the Warsaw Stock Exchange’s benchmark WIG20 index (at 1.7%), one-year Polish zloty bank deposits (2.43%), Polish equity (3.29%) and balanced (4.19%) funds, and two-year bonds (5.63%).

However, the OFEs’ returns were well below the 9.44% returned by Polish sovereign bonds – the instruments that were removed from their portfolios in February 2014, and in which the funds can no longer invest.

The official three-year return reported by the KNF for 31 March 2015 was 21.53%, and 2.52% for the 12-month period.

Meanwhile, the Central Statistical Office of Poland (GUS) reports that, in 2014, the OFEs made an aggregate financial loss of PLN147.6m (€35.3m), compared with a profit of PLN19.1bn the previous year.

As a result of the reforms, net assets fell by 50.3% to PLN149.4bn.

Over that period, operating income declined by 51.9% to PLN5.5bn, and investment gains by 56.1% to PLN4.3bn.

The main cause of the loss in 2014 was unrealised loss on revaluation of PLN8.9bn, compared with a profit of PLN8.7bn in 2013.

Despite the fund losses, the pension fund management companies themselves increased their aggregate net profit by 203.3% to PLN1.1bn.

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