The future for Poland’s voluntary second-pillar funds (OFEs) under the Law and Justice (PiS) party elected in October 2015 looks increasingly grim, with some market players forecasting a rapid demise.
The Polish private equity and equity mutual fund company Towarzystwo Funduszy Inwestycyjnych Capital Partners (TFI CP) maintains that the system will be liquidated in the coming two years and is adjusting its portfolios accordingly.
Joanna Kwiatkowska, a member of the management board and portfolio manager at TFI CP, said: “We see the final dismantling of the OFEs as a significant risk factor for the Polish equity market that we take into account when constructing our fund portfolios.
“We avoid companies in which the OFEs have a significant stake.”
The PiS government’s electoral promises included a significant increase in social and other expenditures, including a monthly PLN500 (€115) subsidy for every second and subsequent child designed to boost the country’s current low birthrate.
Kwiatkowska regards the government’s assumptions on increased revenues from tax increases as optimistic.
“Selling off OFE assets in tranches would enable the government to ‘patch up’ the budget over the next few years,” she explained.
Other market analysts have also pointed to the OFE’s vulnerability as a result of the PiS’s spending plans.
The brokerage PKO Dom Maklerski, which in its 2016 CEE strategy paper estimates that the budget deficit will rise from a projected 2.9% of GDP in 2016 to 3.2% in 2017, cites an overhaul of the OFE system as a means for the government to avoid breaching the EU’s 3% deficit limit.
In addition to budgetary constraints, Kwiatkowska points to the antagonism expressed by PiS politicians towards the current private pension system, which comes up for its statutory three-year review in the second half of 2016.
PiS politicians have proposed extending the choice between OFEs and the first-pillar Polish Social Insurance Institution (ZUS) to cover a member’s entire savings, not just annual contributions, as is the case now.
Meanwhile, as dictated by the 2014 reforms, Poles have their next opportunity to choose whether to direct their contribution of 2.92% of gross wages to the OFEs or ZUS in April-July 2016.
Unlike the previous window in 2014, the OFEs will no longer be banned from advertising over this period as a result of the Polish Constitutional Tribunal’s ruling in November 2015, but they still face an uphill task given last year’s Polish stock market slump.
The reforms’ removal of all sovereign bonds from OFE portfolios essentially converted them into equity funds with highly volatile results and negative 12-month returns in 2015.
“The OFEs were created as balanced funds, which, thanks to the relatively high share of bonds in the portfolio, generated a fairly stable rate of return,” Kwiatkowska said.
“This change is a kind of breach of contract, and members of the fund were unprepared for such an OFE investment profile. Therefore, we believe many of them will opt for ZUS.”
She added that the Tribunal’s judgement ruling that the sovereign bond removal complied with the constitution opens the way for the government to take further steps.
PKO Dom Maklerski has a similarly downbeat outlook, noting that there are no optimistic scenarios for the OFEs.
For instance, the “slider” under which those with 10 or fewer years left to retirement have their OFE savings transferred to ZUS under the current legislation would see an accelerated asset depletion if the PiS’s proposal to reverse the previous government’s retirement-age increase becomes law.
The brokerage also suggests the slider could be lengthened to 15 years before retirement.
Its most pessimistic scenarios include ZUS ending up with 75% of OFE assets.
In such a case, one risk is that international index compilers may question whether such assets should be treated as being in free float, and lower Poland’s weighting in international indices accordingly.