A gloomy picture coloured by poor market performance and asset shrinkage was further clouded by the election of the Law & Justice party late last year, ahead of a review of the pension system in 2016, finds Krystyna Krzyzak

At a glance

• Membership and assets continue to shrink but dividends keep cash flow positive.
• A downturn in the Polish stock market has lowered returns
• Foreign investments rise, but hedging ban limits opportunities.
• Tender offers have dominated the corporate governance landscape.

Poland’s second-pillar pension funds (OFEs) experienced another year of asset shrinkage following the 2014 reforms, exacerbated by a bearish Polish stock market and political uncertainty.

At the end of September 2015, the investment portfolio had shrunk by 8.6% year-on-year to PLN143.9bn (€31.4bn), according to the Polish Financial Supervision Authority (KNF) (figure 1). The number of members fell by 94,500 to 16.6m. Of these around 15% actively chose to continue contributing to the second pillar when the system became voluntary.

One reason for the continuing asset shrinkage is the slider mechanism, introduced in 2014. This incrementally transfers the assets of those who have 10 years or less to go to retirement into first-pillar Polish Social Insurance Institution (ZUS). Close to PLN3.7bn was transferred in 2014, with a further PLN3.2bn leaving in the first nine months of 2015, outstripping the PLN2.4bn of contribution inflows. “It was only thanks to PLN4.7bn of dividends that the sector was cash positive,” said Andrzej Sołdek, chairman of the board of PTE PZU.

Membership has been shrinking as older members reach retirement, while newer workers are showing little interest in the system, according to Sołdek. Active acquisition of clients was banned in 2012.

In November 2015, Poland’s Constitutional Tribunal finally ruled that the reforms were legal, with the exception of the advertising ban imposed during the three-month window in 2014 when workers had to actively choose to continue contributing to the second pillar or default to ZUS. It is a minor victory, because in the next decision window in 2016, funds will have to defend potentially volatile performance that will closely mirror that of the local equity markets.

Fighting for fair value

The Polish stock market had a significant number of public tender offers by strategic shareholders over the course of 2015, which has in turn led to a decreasing share of Polish equities in OFE portfolios. “It’s the consequence of pension reform and reduced demand on the Warsaw Stock Exchange from pension funds, which has resulted in lower valuations and made it attractive for strategic investors to place bids at these lower prices,” says Andrzej Sołdek, chairman of the board of PTE PZU. 

Notable tender offers for companies in which the OFEs held significant stakes included a bid for the outstanding shares in broadcaster TVN by US-based Scripps; Dutch-registered Echo Partners bidding for 66% of real estate company Echo Investment; Enea, a power group majority-held by the Polish state, bidding for 66% for coal producer Bogdanka; and the proposed delisting from the WSE by Global City Holdings (GCH), a Dutch-registered real estate and entertainment company.

“The OFEs are the single most powerful group of local institutional shareholders in Polish public companies. In several cases they acted as an advocate of all minority shareholders versus a well-positioned strategic shareholder,” says Wojciech Rostworowski, CIO of PKO BP Bankowy PTE. “A good example is the case of delisting of GCH. The main shareholder planned to delist the company from the WSE and offered a price that was regarded by minority shareholders as being well below fair value. The OFEs undertook legal actions, lobbying with the market regulator and WSE, along with the negotiations with the main owner. The action resulted in a more satisfactory solution – a better price and another bid for the remaining shares.”

Even before the 2014 pension reforms, OFEs invested a relatively high share of their assets in equities, with the result that their returns did tend to track the ups and downs of the benchmark WIG index of the Warsaw Stock Exchange (WSE) (figure 2). The index reached a historic high in 2007 after a four-year sustained bull run, followed by a two-year plunge. The OFEs’ annualised returns and three-year average returns also dropped, even turning negative in the first quarter of 2009. However, the decline was mitigated by the safe haven of Polish government bond investments, which increased in value.

Pensions in Poland

Following the reforms, the OFEs were banned from investing in Polish and foreign sovereign bonds, and obliged to hold a minimum 75% of their portfolio in equities. The limit will be reduced by 20 percentage points each year to 15% in 2017, and will be removed in 2018. 

These limits have made the funds’ returns vulnerable to equity downturns. At the end of September 2015, the  WSE’s 12-month weighted average return had fallen to -5.92%, from +7.19% a year earlier. The three-cumulative return plunged from 31.99% to 12.72% over the same period. Equities were outpaced by Polish government bonds – as of September 2015 the FTSE Poland Government Total Performance index’s cumulative three-year growth totalled 19.0%.

In practice, with few alternative investments available, the funds have remained heavily weighted in equities – around 83% of the total portfolio in 2014 and 2015. “Our asset allocation has been stable throughout 2015 with exposure to equities staying above 80%, while the allocation to foreign shares increased slowly but steadily at the expense of local ones,” explains Wojciech Rostworowski, CIO of PKO BP Bankowy PTE. 

In 2015, aggregate OFE equity holdings shrank by 8.9% to PLN120bn, and deposits by 25.5% to PLN8.1bn, while bond holdings grew by 5% to PLN14.3bn. Corporate bonds are the biggest sector in the market, accounting for more than two thirds of new issuance in the first nine months of 2015, according to Fitch Polska, representing one of the main sources of diversification for OFE portfolios. The instruments range from large, liquid issues by the likes of banks and utilities to high- yield bonds from real estate developers and debt collecting companies – but they are not popular with all OFEs. “Our aversion to Polish corporate bonds, which do not offer in most cases enough liquidity and a proper risk premium, results in a relatively high share of bank deposits in our portfolio,” says Rostworowski.

Increase in third-pillar individual accounts

Poland’s third-pillar pensions include occupational schemes as well as individual retirement accounts (IKEs) established in 2004, and the individual pension insurance accounts (IKZEs) launched in 2012. A key difference between the two is that IKE profits are exempt from capital gains tax, whereas IKZE contributions are tax deductible. Both vehicles can be offered by Polish pension fund companies, brokerages, banks and investment fund managers. 

According to KNF data for the first half of 2015, the number of IKE account holders grew by 5.2% to 838,200, and IKZE accounts by 12.4% to 554,600. IKE assets increased by 18.1% to PLN5.5bn (€1.3bn), and IKZE holdings by 154% to PLN392.5m.

“The growth is from a low base, but it at least shows a higher interest from clients,” said Sołdek. 

“We can attribute that to the hot topic of the pension debate and the need to make more savings in the voluntary pillar to replace the reduction of the importance of the second.”

Foreign assets offer another source of diversification. Following the reforms, the foreign investment limit was raised from 5% to 10% in 2014, 20% in 2015 and 30% the following year.

‘Foreign’ includes the significant number of listings by foreign companies on the WSE – 53 of the 479 companies listed on the main and parallel markets as of November 2015, accounting for 52% of the capitalisation. Overall, the foreign share rose to more than 7% of aggregate portfolios, excluding WSE foreign listings. 

Wojciech Rostworowsk

“All Polish OFEs are now, in fact, equity funds, so we do welcome the opportunity to diversify our equity portfolio outside the WSE,” says Rostworowski. “Polish large-cap stocks are mostly banks, utilities and mining companies – sectors that face significant market, regulatory and political headwinds. We focus on the US and main west European markets, which offer excellent liquidity and analytical coverage. Although the limit is not fully utilised, we consider the trend of swapping local shares into global investments will continue.”

Sołdek adds: “We choose European markets and look for stocks that are positively correlated to European economic growth and should benefit from conditions like cheap oil, a cheap euro and low interest rates.”

Andrzej Soldek

The OFEs, nevertheless, face a problem in overseas investment because they are not allowed to hedge currency risk. The ban affects potential investment in foreign securities. “Comparable corporate bonds issued on foreign markets offer better spreads but, without the possibility to hedge the currency risk, these spreads can be consumed by the high volatility of the foreign currency,” says Sołdek. 

The Polish second pillar faces further uncertainty following the election of Law & Justice, a party that could prove even less well disposed to the system than its predecessor. The party has already mooted a financial transaction tax on equities and derivatives, and its policies include reversing the previous government’s gradual raising of the retirement age, both of which would further drain on OFE assets.

“In our opinion the possibility of transaction tax introduction is minor,” said Rostworowski.  “On the other hand, the return to previous retirement age rules was one of the main promises in presidential and parliamentary campaigns, so it is almost certain. Assuming, of course, that other regulations implemented in the recent pension fund system ‘reform’ remain unchanged, that automatically results in more money being transferred from OFEs to ZUS under the ‘slider’ mechanism.” 

Around the region

Carlo Svaluto Moreolo 


Republika Srpska, one of the Bosnia’s two political entities (the other being the Federation of Bosnia and Herzegovina), is working with a Slovenian bank and the European Bank for Reconstruction and Development to set up a mandatory second-pillar pension system, as the country attempts to modernise a pension system under severe demographic stress. In 2000, the entity implemented a framework whereby state-owned companies would give 10% of their capital to the state pension fund. This was intended to complement the tax-based, pay-as-you-go (PAYG) system. In 2010, the Republika Srpska established the Pension Reserve Fund Management Company, essentially a sovereign fund, to manage a portfolio of about €130m for the PAYG system. Saša Stefanović, CIO of the fund, explains that his duty is to support the state pension system by distributing dividends from the portfolio, of between €3m and €4m per year. Stefanović says the process is difficult, as the return on equity of companies in the portfolio is relatively low, and it is difficult to monetise companies’ shares given the shareholding structure, which often consists of one major family shareholder. But so far it has worked and the company is looking for new ideas to develop the portfolio, including taking on more assets from the government.   


This year Croatia’s mandatory second-pillar pension funds will participate in an IPO of Croatian Motorways Maintenance and Tolling (HAC-ONC), a company jointly owned by Hrvatske Autoceste (HAC), the national motorway authority, Autocesta Rijeka-Zagreb (ARZ), the state-owned company that operates the Rijeka-Zagreb motorway. This is assuming the plans announced by the outgoing Croatian government are followed through – an election late last year resulted in a hung parliament. The plan for the motorway network was to get pension funds to invest in the motorway companies’ €4.3bn debt. But this changed when the government announced an IPO of 51% of the company’s shares, which would still ease the debt burden on the government. Pension funds would be offered 80% of available shares.

Czech Republic

After only two years, the Czech Republic’s voluntary second-pillar system came to an end last year. The county’s lower house approved a law to ban new entrants into the system. Lawmakers are now working on a framework to reimburse pension fund members, which will include choosing between having the funds moved to the first pillar or the third pillar. Assets in the second pillar barely reached €100m, with 100,000 members. The government is working on boosting membership and savings in the third pillar, which have been dwindling. In October 2015, the Czech government voiced its discontent with parts of the revised IORP Directive.

Republic of Macedonia

Last year Macedonia was “tarnished” by political turmoil, says Janko Trenkoski, general manager of KB First Pension Company, one of the two mandatory pension funds. For that reason, he adds, efforts to develop the system were thwarted. “We have not implemented lifecycle fund reforms, nor have we talked about expansion of diversifiers within the pension fund portfolios, such as alternatives.” In the meantime, KB First Pension Company approached the limit of 30% exposure to international equity, having rebalanced twice within the year owing to strong growth in the asset class. The limited exposure to local equities is still declining, while the rest of the portfolio is in domestic debt, which is yielding more than 3%, much higher compared to similar developed country debt. “The returns are robust, once again, prompted by the strong dollar and European equity returns,” adds Trenkoski. The market as a whole had another year of strong growth in assets under management, given that the system is still in an accumulation phase. Fees paid to the mandatory funds are also declining, and will continue doing so until 2020.


During 2015, Slovakia implemented a new framework regulating pension benefit payments, effective from January. Until last year, the country’s young second pillar system only administered inflows. In the third pillar, pension funds implemented significant regulatory changes, including tax benefits and management fees. Vladimír Baláž, product pension manager at NN Slovakia, says both are significant but the priority should be “creating conditions for alternative savings” to tackle the country’s demographic problem. “It is also necessary to disseminate information among citizens,” adds Baláž. But most importantly, says Baláž, it is necessary to stabilise the system, given that the laws regulating the second pillar were changed more than 25 times during the system’s 10-year lifespan. As of November 2015, second-pillar funds managed €6.3bn of assets; third-pillar funds managed €1.5bn. 


The pensions debate focuses on state benefits, says Nataša Hajdinjak, marketing director at PRVA, a voluntary pension fund company. Pension funds are implementing legislation passed in 2013 that sanctioned the shift to lifecycle asset allocation strategies. Hajdinjak says the country needs legislation to increase savings and participation in private schemes. “Falling state pensions are leading to poverty among the elderly,” says Hajdinjak. Recent tweaks in legislation mean savers are no longer able to withdraw their pension pots after 10 years of contributions. Because funds have to offer a minimum guarantee, risk tolerance is low, and about 85% is invested in fixed income. “This will be changing rapidly since lifecycle funds will not be obliged to offer guaranteed yield”, says Hajdinjak. Allocation to equities has risen to over 10% in recent years and assets under management were €2.5bn at the beginning of 2015.