Poland’s pension funds are looking to increase their overseas equity holdings over concerns a continued domestic bias could cause problems with liquidity.

The move to diversify comes after the private pension funds (OFEs) were stripped of around half their assets as the Polish government transferred all sovereign debt holdings to the state Social Insurance Institutions (ZUS).

The reform, now subject to a class action suit, also saw the pillar barred from investing in domestic sovereign debt, with minimum 75% exposure to equities.

Małgorzata Rusewicz, president of the Polish Chamber of Pension Funds, said the reform was having a negative impact on the Warsaw Stock Exchange despite the high minimum threshold.

“Pension funds are looking abroad to the UK stock exchange and the German stock exchange,” she told delegates at the second-annual pension funds in CEE conference in Prague.

According to her, OFEs currently hold 40% of Polish shares and 26% of free-floating shares – a figure she said would change in the near future.

She added that the reform was having an impact on overseas investors that were now less likely to invest in companies listed at the region’s largest stock exchange.

As a result, Rusewicz said the Warsaw exchange was dealing with “stagnation”, and that the question remained over what would step into the role previously played by OFEs in assisting the government with the privatisation of formerly state-owned assets.

For his part, Lucian Anghel, chief executive of Romania’s BCR Pensii, accepted that all Central and Eastern European pension funds were facing the “huge” domestic bias risk.

But he said it was a risk managers needed to take into consideration, given that governments often had the choice between keeping taxes low or maintaining the mandatory systems and increasing taxes.

“If we are not showing commitment to Romania, then we are facing a bigger problem than volatility risk and market risk, or exposure to the country,” he said.

Asked to explain why Romania’s small but growing pensions sector, estimated at €4.3bn, was more than 90% invested domestically, he said it was “a free choice, but a guided free choice”.

“We were more exposed outside Romania before we saw what happened in Hungary and Poland,” he said.