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Polish pensions reform to hurt domestic bond market, Goldman Sachs warns

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Poland’s pension changes may generate some fiscal relief, but that will come at the expense of reduced bond market liquidity and equity price uncertainty, according to a recent economics comment from Goldman Sachs Global Macro Research.

The transfer of 51.5% of second-pillar pension fund (OFE) portfolios, including all Polish government bonds, to the first pillar will reduce public debt by 8-9% of GDP, additionally lowering debt service costs.

Further inflows will come from those workers who elect or default to putting all future contributions into the first pillar when the system becomes voluntary.

Finally, under the ‘zipper’ rule, the fund assets of those members with 10 years or less before retirement will transfer incrementally each year to the first pillar, generating an extra 0.3% of GDP in state revenue.

Senior European economist Magdalena Polan, the report’s author, said: “However, the impact on long-term fiscal sustainability will be small. Together with the asset transfer, the government will take on the associated pension liability. So, while net debt will decline, gross liabilities will not change, although their average maturity will be extended (as most people in the private pillar are more years from retirement than the average duration of government bonds).”

The new law bans the OFEs, which held 22% of long-term Polish government bonds, from further investment in this asset class.

The report notes that the share held by non-resident investors will rise from 33% to around 42%, while commercial banks will become the biggest investors. 

“With non-resident investors and banks preferring shorter maturities, the average duration of Polish bonds may fall, especially if government debt managers are price sensitive,” writes Polan.

Market valuations may not necessarily fall, but Hungary’s experience following its appropriation of second pillar assets points to a potential fall in liquidity, she says. 

The report adds: “An elimination of the largest local player, combined with a significantly higher relative share of non-resident investors, will make the Polish bond market even more sensitive to changes in global risk sentiment (our earlier research suggests Polish rates have a fairly high sensitivity to changes in global risk sentiment), with potential repercussions for Zloty and FX reserves volatility.”

The impact on the equity market depends on how many people stay in the second pillar, and future fund investment strategies.

Given that the OFEs have to invest 75% of their assets in equities in 2014 and have few alternatives, the report estimates that, even if only if 50% remain the second pillar, the funds could invest roughly the same amount as in 2013.

In the longer term, lower inflows and the growing impact of the ‘zipper’ will force the funds to liquidate equity holdings to raise the necessary cash.

Regulatory changes allowing the funds to invest more in foreign assets poses a further threat to the Polish stock market.

Polish equities used to benefit from the so-called ‘pension’ premium created by a steady inflow and investment rules confining the OFEs to domestic investment.

Lower inflows, concludes Polan, will reduce this premium.

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