PensionsEurope warns of contagion after Polish raid

POLAND – Concerns over Poland's proposed changes to its privately funded second-pillar pension system has spread beyond its borders, according to Matti Leppälä, secretary general and chief executive at PensionsEurope.

Leppälä told IPE of his fears that other governments might follow suit and take over the assets of their second-pillar pensions to fix their short-term fiscal problems.

"The major concern is that, if Poland, as the biggest economy in the region, goes ahead with such drastic changes, it could have an impact in the long run on the future of privately funded workplace pensions," he said.

"Other governments might see this as a tempting option."

Many Central and Eastern European (CEE) countries adopted second-pillar pensions to address demographic challenges and, in the long term, reduce pressure on the publicly financed first pillar.

"Poland, even more than many other countries, was relying on these changes from a publicly funded system to a privately funded one," Leppälä said.

"The building up of funded pensions provision is one of the key elements of European pensions policy, which has been adopted for more than a decade, because we know the public [pay-as-you-go] system will not be adequate or sustainable, while purely private pensions savings are too costly and fail to cover enough of the population."

He was also highly critical of the government's proposal to remove the pension funds' Polish sovereign bond assets, effectively restricting them largely to equity investment.

"A good pension fund needs a well-diversified portfolio in various asset classes," he said.

"Forcing pension funds to take too much risk will lead to sub-optimal returns, or at least very high hedging costs."

PensionsEurope wrote to the European Commission just before the Polish government announced its reforms to express its concerns, and it now intends to use its voice to lobby the Commission, the European Parliament and other bodies.

"European pensions policy and strategy over the decade, culminating in the White Paper adopted last year, has been based on funded occupational and supplementary pensions," he said.  

"Following Poland's changes and Hungary's earlier and more drastic measures, the future would look like we don't have funded occupational pensions for millions of European citizens.

"The outlook for providing sustainable public pensions looks very bad.

"We are then risking the sustainability of public finances and introducing massive old-age poverty, which would be destabilising for many of these countries."

Poland, in Leppälä's belief, is unlikely to have broken any EU laws, as social policy is part of the competence of individual member states.

However, employment and economic policies are both subject to EU legislation.

"The EU can recommend what is good or best practice," he said. "What Poland is proposing looks like bad practice."

In addition, the Commission's own strict economic governance criteria – such as keeping the general government deficit to within 3% of GDP – have not generally taken account of the budgetary costs for countries introducing second pillars funded from social taxes.

In one notable exception in May, the Commission abrogated its excessive deficit procedure for Lithuania after correcting for the net costs of its systemic pensions reform.

This exercise cut the country's 2012 deficit by 0.2 percentage points to 3%.

The same leeway was not extended to Poland.