One of the more depressing side effects of the financial crisis has been the spectacle of government attacks on funded pensions. But the practice is not new. Back in autumn 2003, the Belgian government nationalised €3.6bn in first pillar pension assets held by the former state telecoms monopoly Belgacom. As finance minister, Gordon Brown launched a bold attack on UK pensions in 1997 when he announced the abolition of dividend tax relief for pension funds.
In the Netherlands in the early 1990s, attacks on the perceived surpluses of pension funds proved highly damaging to the long-term health of the industry. Even if the surpluses were not taxed in the end, funds avoided building up buffers in case they were.
Observers might have been forgiven for thinking these to be isolated examples of poor policy. They would be wrong.
In December 2011, Portugal announced the nationalisation of four banks’ first-pillar pension assets, worth €6bn. A year previously, it announced the nationalisation of the €2.8bn pension fund of Portugal Telecom. Most central and eastern European countries curtailed contributions to funded pensions in the aftermath of the 2007-08 crisis. For some, the cuts were a temporary measure but while this represented a popular short-term fix to boost consumer spending, the longer-term need for funded pensions and savings cannot be wished away. The cuts were not helped by perverse EU national accounting rules that penalise countries that adopted the funded world bank pensions model.
In Poland, where some parties such as the agrarian Peasants’ Party have long held an antipathy to the funded state second pillar, the outcome has been a permanent diversion in contributions away from these funds in favour of the unfunded pensions. The funded first pillar is now an industry in retrenchment, especially since providers can no longer advertise for customers to switch to their funds.
But the prize for the most egregious, malicious, incompetent, and damaging pensions policy has to be reserved for Hungary’s Fidesz party government. It decimated the country’s funded first pillar early in 2011 (in the true definition of the word as funded first-pillar assets are now less than a tenth of their worth in late 2010).
The boldness of the move speaks for itself. The malice is evident in the explicit threat that those who failed to hand their pension assets to the government will not receive a state pension and in that dissenting companies appear to have been targeted for regulatory investigation. The incompetence is staggering: Hungary’s government claimed it needed to nationalise the retirement savings of millions to stave off an IMF bailout, yet it was still forced to turn to the IMF in late 2011. The damage to the long-term health of the Hungary’s already weak finances and pension system has yet to be recorded.
The tragedy is that funded pensions are part of the solution, not the problem, as our Special Report on Latin America demonstrates. Indeed, pension funds have heaped tremendous benefits on Poland’s capital markets. Accounting for some 21% of domestic share turnover on the Warsaw Stock Exchange, they promote good corporate governance and help keep the liquidity taps open in times of stressed bank credit. The long-term reduction in contributions to the funded second pillar will reduce their influence and potentially create a vacuum to be filled by (potentially shorter-term) foreign investors.
Poland and Hungary could have been examples for southern European countries that desperately need to channel savings into funded pensions to take pressure away from the highly stressed and unaffordable pension systems. Funded pensions are part of the long-term fix for Europe’s broken economies. Poor policies such as these harden the resolve of those ideologically fixated against funded pensions and weaken the resolve of those who would boost retirement saving and the policies that promote it.