Poland: Dismantling the second pillar
Krystyna Krzyzak reports on the latest reforms to Poland’s second-pillar pensions system
At a glance
• The bulk of second-pillar assets are to be transferred to new third-pillar accounts.
• Tax benefits and auto-enrolments have been proposed to boost the new system’s take-up.
• Rumours of a full-scale nationalisation have resurfaced.
• Asset allocation remains focused on local equities.
The Polish pensions system is set for an overhaul that will see the replacement of second-pillar funds (OFEs) with a new third pillar.
The Capital Accumulation Programme, announced in July 2016 by Mateusz Morawiecki – the deputy prime minister, economic development minister and now also the finance minister – envisages transferring, as of 2018, 75% of all OFE assets into a variant of the existing third-pillar individual retirement account (IKE) run by investment funds – the IKE Plus. Given the size of the OFE assets – PLN147bn (€34.1bn) at the end of October 2016 according to the Polish Financial Supervision Authority (KNF) – the third pillar is set for a massive boost.
The programme introduces Employer Capital Plans (PPKs), and Individual Capital Plans (IPKs) for small companies. Employees, auto-enroled but with the option of withdrawing within three months, will pay between 2% and 4% of wages, and receive a welcome bonus of PLN250 from the state. Employers will pay between 2% and 3%, accompanied by a 0.5% state supplement.
“The system is to be similar to ones existing in UK, New Zealand and other countries,” says Wojciech Rostworowski, chief investment officer and board member of PKO BP Bankowy PTE. “It sounds good, but the clue will be in the details which are not known yet.”
The existing system of third-pillar IKEs and individual pension insurance accounts (IKZEs) will be simplified. The aim is to increase the third-pillar membership by 5.5m. As of mid-2016, the IKE system had assets totalling PLN6bn and 867,799 members, the IKZEs PLN764m and 613,918 respectively.
The remaining 25% will go to the Demographic Reserve Fund (DFR). A buffer fund built up to plug any holes in the first-pillar pensions system, but credited to individual savers sub-accounts with the first-pillar Social Insurance Institution (ZUS). “In practice, it means the [DFR] money will be used to fund the current needs of social security,” suggests Rostworowski.
The pensions industry and financial markets have given the proposals a guarded welcome because the majority of assets would be privately owned and managed by the financial sector. Share prices on the Warsaw Stock Exchange (WSE) unsurprisingly rose in response.
“These assets will be treated as private savings – now regarded as a part of public sector in light of a Supreme Court ruling,” says Rostworowski. However, given the legal changes that the second pillar has been subjected to recently, the market needs concrete reassurances. As Małgorzata Rusewicz, chairman of the Polish Chamber of Pension Funds, says: “Concerning the legal status of the IKE Plus, the financial sector recommends that this is guaranteed by a special law.”
The key to the programme’s success, according to Grzegorz Chłopek, CEO of Nationale-Nederlanden PTE, is private sector involvement from the start. It needs a high employee participation rate, so workers must understand that the system is not obligatory, and additional contributions are their choice. Making employee participation the default option in company plans, and the support of employers, are key to raising the participation rate.
“The second issue is that annuities should be delivered by the private sector, as is the case with employee pension schemes in the Netherlands,” he adds. This would require the involvement of the life insurance industry, and not a subsidised entity like ZUS, where a third of current pensions payouts rely on state budget transfer.
The OFEs themselves will be transformed into investment funds, and the pension fund management companies (PTEs) into investment fund companies (TFIs). “This means there is no more need for a separate entity to manage the assets, as is the case today,” says Rostworowski. “That will allow financial groups to realise cost savings – the new investment funds can be managed by existing asset managers – the TFIs.” Rusewicz adds that, based on the assumption that the pension funds would be governed by the same regulations as investment funds, their range of investments would be similar.
These investments include real estate and commodities, which were not permitted for OFEs, and sovereign bonds, which the previous government banned in 2014 under wide-sweeping reforms.
Meanwhile, Chłopek calls for a rebuilding of trust and stability within the pension system, starting with securing the equity part of OFEs as private assets, followed by giving them a transformation period of a year to convert into mutual funds. “They need to redefine their operations and strategies, and deal with regulations such as the EU’s Market Abuse Regulations and the Foreign Account Tax Compliance Act,” he says.
From the financial markets’ perspective, the proposal is preferable to the mooted alternative of a wholesale nationalisation of OFE assets. In May 2016, the Polish press reported that the funds would be merged into a single entity managed by PZU, the state-owned insurance company that also runs an OFE. In November, a report that the Ministry of Family, Labour and Social Policy, as part of its consultation response to Morawiecki’s plan, wanted all the OFE assets in the DFR, a policy favoured by ZUS.
Both moves would result in the state becoming a shareholder in numerous private companies. A significant number of them would have been foreign entities because of the number of dual listings on the WSE. This would have led to massive sell-offs.
These tensions are unresolved as the final decision will be made by parliament in the first quarter of 2017.
The Economic Development Ministry, which has denied any intention to nationalise OFE assets, envisages the new pensions system to be one of the drivers for Morawiecki’s Responsible Development Plan, an ambitious economic restructuring published in February 2016.
Because of the Plan’s requirement for stable and growing capital markets to finance growth-generating companies and technologies, Chłopek says there is a strong chance that the Capital Accumulation Programme will be introduced in 2018.
Government policies undo OFEs
One of the rationales for the pensions overhaul is that since the 2014 reforms the current second pillar has become unsustainable. Contribution inflows fell once the system was made voluntary, as only 2.5m of the 16m members continued to save their 2.92% contribution in the funds. The ‘slider’ incrementally placed the assets of workers with 10 or fewer years left until retirement into the first pillar. This resulted in an estimated net outflow of PLN1.8bn in 2015-16. The plan projects the figure to rise to PLN2.5bn in 2020 and PLN4.6bn by 2025.
High inflows of dividends have kept the OFEs cash positive to the tune of PLN2bn. They remain hampered by 2014 regulations that kept them largely invested in, and dependent on, the Warsaw Stock Exchange (WSE).
“Asset allocation strategy among OFEs has been stable for last two-and-a-half years, with average exposure to equities staying around 80%,” says Wojciech Rostworowski, chief investment officer of PKO BP Bankowy PTE. “During 2016, sector allocation was strongly affected by the events related to government policies, such as the introduction of a banking tax, discussions on a retail tax, currency loan regulations and making utility companies spend more on capex. High-volatility events like the Brexit referendum and US elections created opportunities for OFEs to buy some quality stocks on temporary panic but have not changed the overall approach.”
The main problem in 2016, says Grzegorz Chłopek, CEO of Nationale-Nederlan den PTE, was the poor return of the WSE’s WIG Poland stock index.
“As of late November 2016, we were close to zero and could even be negative, for the first time since Poland joined the EU in 2004,” he warns.
“A more important issue, according to Chłopek, is how companies can rebuild effectiveness because of the huge impact of government policies on the profitability of companies in sectors like banking, insurance and retail.”