Polish securities sector comes out swinging against pension reform plan
POLAND – The Polish securities sector has urged the government to find a solution that preserves the stability of the local capital markets as the consultation period for reforming second-pillar pension funds (OFEs) draws to a close.
A document co-authored by the Chamber of Brokerage Houses, the Polish Association of Listed Companies, Polish Association of Brokers and Investment Advisers, Polish Private Equity and Venture Capital Association and the Individual Investors' Association stresses that one of the original purposes of the 1998 pension reforms that ushered in the second pillar was to increase future retirement income by diversifying risk through investment in Polish business and industry, thus underpinning the country's economic growth.
The document notes that OFEs have more than PLN100bn (€24bn) invested in Polish companies.
They hold shares in 372 companies listed on the primary Warsaw Stock Exchange (WSE) market, many of which would have been too small to raise capital abroad, but have since become international successes.
The authors argue that the OFEs were the main motor for the Polish capital market's growth, stimulating inflows of overseas capital and drawing in foreign private equity and venture capital firms.
"Without the OFEs, Poland would not be a regional financial centre," the document states.
At the end of 2012, OFE investment accounted for 19% of the WSE's capitalisation, including 15% of the main WIG20 index, and 29% of small and medium-sized companies listed elsewhere, alongside 40% of the free float.
At the same time, the OFEs have proved to be long-term investors, accounting for only 6% of WSE turnover, while their strategic holdings – the sector holds more than 25% of the equity in 62 companies – make them an influential player in corporate governance and maximising share value.
In addition to their role in equity investment, the OFEs are also the country's main investors in Polish bonds, including bank and corporate paper.
The paper is highly critical of the government's options for pension reform – the transfer of OFE assets prior to retirement to ZUS to service payouts, alongside barring the funds from state bond investment and introducing voluntary membership, with or without additionally contributions – and the government's exclusive focus on the second pillar.
The authors believe the introduction of voluntary participation could lead to the effective transfer of all OFE assets to ZUS.
It insists that the OFE must be able to continue investing in state bonds to maintain portfolio stability, as restricting OFE investments – to all intents and purposes to shares – would expose the portfolios to massive fluctuations and lead to the eventual liquidation of the second pillar.
Meanwhile the takeover of OFE assets by ZUS or any other non-investing public institution could undermine the capital markets through an oversupply of stock and dramatic price falls.
The authors also want the government to reconsider two earlier proposals that sought to resolve the issue of pension fund state bond investments.
One proposal, by the Polish think-tank Capital Strategy, would separate OFE bond holdings into individual pension member sub-funds under ZUS ownership, but managed by the pension companies, with their value treated as part of the total OFE portfolio and included in any performance benchmark.
The second, by Marek Góra, professor at the Warsaw School of Economic and co-author of the original second-pillar reforms, would shift the OFE's state bond holdings to a newly created retirement debt unit and convert the assets into retirement bonds that would not count towards public debt calculations.
This retirement bond fund would be passively managed – indexed to nominal GDP growth – thus protecting the payout value from market volatility.
Finally, the authors wants the government, as a matter of urgency, to stimulate the development of the third pillar, without which, states the document, "Poles' pensions will fall to a level unacceptable to a large section of society".