POLAND - Current restrictions on pension funds for investment in foreign equities and the use of derivatives could lead to a crisis on the Warsaw stock exchange, Krzysztof Rybiński, deputy president of the National Bank of Poland, has warned.

Speaking at a financial markets conference in Warsaw, he urged the new government to raise the cap on foreign equity investment from 5% to 30% and allow the use of derivatives.

The supervisory system would have to be changed for the changes to work,so  funds are judged on their risk profile rather than on their investments, Rybiński noted.

"I believe that joint actions must be undertaken in order to minimize the threats of asset bubbles resulting from regulations in the sector of open pension funds, to better diversify investment portfolios as well as to enhance the sector's prospective levels of return," he said.

He pointed out the recent subprime crisis had only a very limited effect on the domestic financial market "thanks to the low exposure of Polish financial institutions to the main infected markets and good economic conditions in".

"Nevertheless, some negative effects of those turbulences may yet materialize," Rybiński added.

One of the main dangers was the large exposure of pension funds to the Warsaw stock exchange. Currently the 15 funds with combined assets of PLN142.8bn (€38.8bn) at the end of October invested PLN51.5bn or 36% of their assets in equities.

Together they owned 22% of the shares listed on the Warsaw stock exchange as investment in foreign equities is limited to 5%.

The ban on the use of derivatives also means in times of market downturns the funds have no other means to hedge their portfolios than to sell some of their equities.

"Given a high value of share portfolio, such a sale would significantly aggravate the decline," the director of the national bank explained.

And assets in Polish pension funds are growing rapidly. Over the last year assets grew by 30.6%.

Asset growth was fuelled mainly by a "record-breaking transfer" from the social insurance agency ZUS, research group Analizy noted in its last statistical update on the Polish pension fund market.

In the first 10 months of this year, the ZUS transferred PLN15.5bn to the 15 pension funds which is 24% more than in the same period last year.

The ZUS transfers mandatory contributions made by employers and employees to the second pillar pension funds which, in turn, pay the ZUS for collecting the fees.

The analysts pointed out "almost 10% of this year's transfers is a settlement of financial obligations" which the ZUS did not pay last year for technical reasons and because of administration problems.

The pension fund with the biggest asset increase in October is Generali OFE, growing 2.7% compared to an average growth over the last month of 2.5%.

Second in the growth ranking came the three biggest funds - ING NNP OFE, Commercial Union OFE and OFE PZU "Zlota Jesien", Analizy pointed out.

Meanwhile, Eureko has won another round in the conflict with the Polish government concerning the insurance giant PZU, which reported a 25% rise to PLN3.36bn compared to last year.

The Brussels Court of Appeal rejected a claim of lack of impartiality in the case of a judge appointed by Eureko for the International Arbitral Tribunal. The court decided in August 2005 it was in breach of a bilateral treaty on the part of the Polish government by not fulfilling its promise to privatise PZU. [see earlier IPE article: Polish treasury stays tough in Eureko dispute]

Eureko bought a 30% stake in PZU in 1999 agreeing with the government to eventually increase it by another 21% after the flotation of the insurer.

However, subsequent governments pulled the privatization promise and prevented Eureko from gaining more influence in PZU. [see earlier IPE article: Outgoing gov't pulls PZU privatization]

The Dutch insurer will now start talks with the new Polish government, inaugurated last week, to try and resolve the conflict.

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