POLAND - The European Commission has referred Poland to the European Court of Justice for limiting the amount of money that local pension funds can invest overseas to just 5%, arguing this in turn breaks EC rules concerning the free movement of capital.

A statement issued today said the EC believes the 5% overseas investment limit on Polish Open Pension Funds (OPFs) "constitutes an unjustified restriction on the free movement of capital) under Article 56 of the EC Treaty as "they are liable to dissuade or prohibit OPFs from obtaining loans or making investments in other Member states".

The EC noted not only is there a maximum overseas investment limit of 5% but foreign investment is further discriminated against through calculations related to management fees and transaction costs, which would also make investing over border appear less attractive to investing domestically.

It appears Poland may have tried to argue in earlier correspondence with the EC that the rule is not applicable to OPFs, yet the EC statement said OPFs they cannot be classified as public entities "since they do not replace the State in the performance of the obligation to set the social security system in Poland".

This latest move by the European Commission is only one of several issues seen as hurting the Polish second pillar pensions system right now, as the government recently agreed to cut the amount contributed to pensions, along with a series of other measure which are designed to deter people from investing in non-state pension arrangements.

Similarly, the small percentage of investment allowed overseas is said to have contributed to the wild fluctuation seen on Polish stock indices last year, as despite being Europe's fourth-largest stock index for futures, the pension funds cannot use these for hedging or other purposes, and the fund are themselves too big for the market to cope with when they make tactical asset allocation changes.  (See earlier IPE article: Crisis management)

Polish pension funds also lost PLN2bn (€460m) in 2008, despite receiving contribution inflows of PLN20.5bn over the course of the year.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com