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IPE special report May 2018

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Polish pensions reform draws more flak from within government

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The Polish government’s second-pillar pension reform plans continue to draw fire from within its own ranks.

The Government Legislation Centre, whose tasks include coordinating the legislative work of the ministries and other bodies subordinate to the prime minister, has raised constitutional doubts about the proposed ban on second-pillar pension funds (OFEs) investing in sovereign bonds, as well as the requirement that they invest a minimum 75% of net assets in equities.

It has also criticised the three-month period during which second-pillar members will have to decide whether to continue to have part of their contributions invested in the second pillar or shift this portion to the Polish Social Insurance Institution (ZUS) as far too short – especially given that the fund values may change radically should the law come into place.

The Ministry of Administration and Digitisation has also raised constitutional issues, including inheritance rights.

Under current legislation, a fund member’s asset pool can be passed on to heirs irrespective of whether the fund member survives to retirement age.

This would not be the case under the proposed change, transferring assets to the members’ sub-account at ZUS prior to retirement.

The ministry has also questioned whether the proposed transfer of sovereign bond assets from the OFEs on 31 January 2014 – based on their valuation on 3 September 2013 – is compatible with the principle that laws cannot be retroactive.

Minister Michał Boni, generally viewed as a supporter of the second pillar, has long wanted the OFEs to play a greater role in infrastructure investment, including the planned rollouts of local high-speed broadband, part of his ministry’s remit.

The Treasury Ministry, for its part, has stated its reservations over the proposed law on future stock market prices.

This ministry’s responsibilities include privatisations, and representing the state as shareholder, so arguably it has the greatest interest in ensuring attractive stock market valuations and stable institutional investors.

If the majority of fund members switch from the second pillar, the investment pool for shares would shrink, leading to an oversupply, the ministry argues.

For those approaching retirement, the incremental transfer of OFE assets to ZUS would inevitably lead to stocks having to be sold off at a discount.

The ministry has also warned about some consequences of forcing the OFEs to keep of assets 75% in equities.

Should stock prices start falling, the funds would be forced to liquidate the rest of their portfolio in order to buy more shares, at a time when they should be doing the opposite to protect portfolio values.

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