While Polish asset allocation strategy is in its infancy there are encouraging trends in the country's pension legislation, market de-regulation , privatisation and investment attitudes which are attracting investment expertise. Poland's economic prospects for 1998 are also looking good, according to figures supplied from Business Central Europe, at end 1997. GDP growth is estimated at 5%, inflation at 12%, and foreign investment inward flow is projected at $5.5bn building on current foreign investments of $16.3bn.
There is now significant professional asset management in Poland" exclaims Miroslaw Banek, portfolio manager of ABN-AMRO Asset Management Poland. To date, 10 mutual fund companies have been established, between them running 32 mutual funds with more expected to come, he says. There are also 20 licensed discretionary portfolio management companies, with the standard products offered ranging from 'aggressive' (mainly equities), to indexed, 'balanced' (30- 50% equities) or 'state debt'. The large life insurance companies such as PZU, tend to be oriented to relatively liquid assets such as treasury and government bonds and place only 4 to 9% in equities whereas for large investment funds, 40-60% is the norm. Almost all investible securities are Polish however, though mutual funds can invest up to 10% abroad.
The laws behind the private pensions system forms part of a reform package of the social security system. The first pillar will be a reform of the existing pay-as-you-go state pension scheme modifying benefits depending on the value of contributions paid. The second pillar is mandatory fully funded pension funds (MPFs) with the third based on individual saving, including employer-sponsored funds. Contributions will be invested to provide retirement benefits.
The two options being debated concern the second pillar: either everyone under the age of 30 switches to the new system with 20% of the existing state contribution channelled into private funds or everyone entering the labour market for the first time is compelled to go the private route. Others under the age of 50 could opt out of the state system into the new system with contributions again equal to 20% of existing social security contributions.
The starting date for social security contributions to be transferred to the second pillar is but less than a year away and providers are getting ready to compete for the new flow of money.
However the MPFs means that individuals will need to chose from around 15 different pension funds "for which the licensing process will be clear in a couple of months". It is clear that there will be many competitors for this select second pillar group as well as in the third pillar which is reflected in intense consumer marketing activity of mutual funds building up their profile on the one hand , and the energetic negotiations between banks, insurance companies and asset managers keen to complement strengths in customer base, distribution, and investment expertise.
Keith Exall, manager eastern and central Europe at William Mercer feels that whilst there are no pension funds as yet the potential is significant with new laws on private pension funds due to be implemented on January 1,1999: ""Whilst the stock market lacks depth, insurers such as Commercial Union, Nationale Nederlanden and AIG are distributing linked savings products with an endowment element and group life assurance, with funds of up to 15% in equities." He comments that insurance companies are "well positioned for the new pensions market".
The state owned insurance company PZU is regarded as somewhat archaic but it does hold 65% of the domestic non-life market and over 70% of the life market whilst the British insurer Commercial Union established in Poland 1991 already takes a 50% share of new life business with 12% overall. Henk Vaandrager, head of developing markets, eastern Europe at ABN-AMRO, takes a long term view on Poland's attractiveness though admits that the financial markets need further de-regulation. "At the portfolio level it's not so easy to do business as laws set up to protect individual investors are affecting institutions."
Currently, the levels of liquidity in the stock market are low and the market capitalisation of the better companies are still relatively small in a European context. Poland still lacks an active over-the-counter market and the success of a transaction depends on there being sufficient counterparties to the deal, says Vaandrager. But the banking sector he says is liberalising at a fair rate and will be opened up entirely in 1999.
Whilst only three banks have been listed on the stock exchange (Bank Rozwoju Exportu, Petrobank, and Bank Handlowy), the state has enforced some controversial consolidation in the banking and insurance sector in order to create sizeable Polish institutions before competition rules take effect on EU accession.
Banking is a leading indicator to likely foreign investment management activity as shown by the rising participation of foreign equity in the banking sector. National Bank of Poland statistics show that of the 81 commercial banks in Poland, 25 had a foreign majority share. These banks whilst representing only 15% of total assets in the system, their equity was rising twice as fast of domestic banks - a typical example would be Wielkopolski Bank now majority owned by Allied Irish Bank. The share of foreign participation in bank share capital by country was led by Germany (30%), US (18%), Netherlands (17%), France (14%), Austria (9%), and others, including European Bank for Reconstruction and Development (13%).
One Polish initiative - different from other central european countries - has been the mass privatisation programme (MPP) for 512 companies previously state owned, but now managed by 15 National Investment Funds (NIF's) who control over 70% of the equity in these companies. The NIF's in turn are 75% owned by many ordinary Poles who were granted certificates at nominal prices on application. The NIF's were then listed on the Warsaw stock exchange in June 1997. NIFs themselves are managed by firms specifically set up for the task usually with foreign participation for example: BZW (NIF 3), Paine Webber (NIF 8), Chase Gemina Italia (NIF 6) Banque Nationale de Paris (NIF 12), Creditanstalt Bank (NIF 15)."