EUROPE - Poland has wrested significant concessions from the European Commission on factoring in pension costs in its public debt and deficit.

European Commission president Jose Manuel Barroso informed Poland's prime minister Donald Tusk on 10 December that his country would be able to offset the cost of its pensions reforms - the creation of a privately managed second-pillar pension system funded by a portion of wage contributions that would have otherwise gone to the state pay-as-you-go account - against its government budget deficit and public debt calculations.

The EU Growth and Stability Pact limits public debt to 60% of GDP, and the deficit to 3%.

Breaching the deficit level triggers an Excessive Deficit Procedure (EDP) that may include sanctions and fines. The EU opened an EDP on Poland in 2009, giving it until 2012 to lower the deficit to 3%.

The concessions, to be written into the pact's code of conduct revisions in 2011, cover all EU members that have instituted pension reforms and have since argued for offsets against the limits.

The 2008 financial crisis intensified pressure on public finances, leading to a number of these countries reducing the contribution allocated to second-pillar funds.

Hungary, the first CEE country to establish a mandatory, privately funded system, took the most extreme step and effectively nationalised its second-pillar at the end of November 2010.
Poland has itself been in protracted discussions about revising its second-pillar funds (OFEs) since October.

The most radical proposal would suspend all contributions to the OFEs for two years, although it seems more likely that the contribution level would fall from 7.3% of gross wages to 5%. 

Also on the table is a new security - the non-tradable retirement (pension) bond, of 20 and 30 years' maturity - into which the OFEs would invest new contributions.

Yet even those most hostile to the second pillar - largely due to the absence of a guaranteed level of retirement income - have stopped short at recommending the Hungarian route.
The EC recently estimated Poland's end-2010 debt at 55.5% and its deficit at 7.9%.

The extent of the concessions' impact on these levels depends on whether all the OFE investments are taken into account or only the 50% or so invested in government bonds.

The most conservative estimate cuts the Polish deficit by 2.5 percentage points and the debt by 2 percentage points.

The concessions expressly do not change either the Stability and Growth Pact debt and deficit levels, or the way they are calculated statistically.

They also do not alter Poland's own constitutional debt level of 55% - a breach automatically triggers spending cuts.

As the Polish finance ministry noted on its website, the country's borrowing needs remain the same, as does the need for major changes in the second-pillar pension system.