Jan Cienski in Warsaw -

Poland's government has long treated private sector Open Pension Funds (OPFs), a pillar of the decade-old reformed pension system, as quasi-public institutions, an approach that is now being challenged by the European Commission and by the funds themselves.

The Commission in April said it was referring Poland to the European Court of Justice for restricting the free movement of capital by limiting the funds to investing only 5% of their assets outside of Poland. "The Commission considers that limits on investment of Polish Open Pension Funds constitute an unjustified restriction on the free movement of capital, insofar as they are liable to dissuade or prohibit OPFs from obtaining loans or making investments in other member states," said the Commission in a statement.

The funds have long complained that the restriction leaves them over-exposed to the Polish market, which can be dangerous for the pensioners relying on the funds to make sensible investments for them. During the go-go years of the Warsaw Stock Exchange (WSE) from 2004 to 2008, the heavy presence of the funds on the market was seen as driving the over-valuation of Polish stocks. Following the market crash last year, though, the funds have pulled back from the market, and the worry is that if they are allowed to increase their investments outside of Poland, the WSE, already one of the world's worst performing markets in dollar terms, would suffer further.

"Poland is likely to continue to defend its stance that pension funds are in fact a part of the 2nd pillar and as such are not bound by the EU's

regulation on the freedom of capital movement," says Dariusz Gorski of the Prague-based brokerage Wood & Co. "The risk remains, however, that if the European Court of Justice finds against Poland, it could lead to a sudden relaxation of foreign investment limits instead of a gradual release of those the government is planning anyway.

Cash cows

The government has tended to view the funds, which manage the mandatory second pillar of the pension system, as a handy source of capital that would help turn Warsaw into a regional financial centre - a long-running goal of many past governments. The Commission sees the funds very differently: "The OPFs cannot be classified as public entities since they do not replace the state in the performance of the obligation to set the social security system in Poland. Although they are part of the pension system in Poland, they remain economic actors and compete with each other on that market," it said in its statement.

In another example of treating the funds as convenient cash cows, the treasury is hoping that the OPFs will be enticed into getting involved in the upcoming privatisation of state assets - a process that has been endangered this year by a lack of enthusiasm from more conventional investors during the economic crisis.

The OPFs are also seen as a soft target during a time of increasing anger at large financial institutions. Last year, the funds generated a loss for investors, thanks mainly to the steep decline in the stock exchange, which has damaged their already tattered public image - however, the institutions themselves generated fat profits because of their guaranteed fee structure. As a result, the government's proposal of slashing the fees charged by the funds is finding strong support from both the left and right-wing opposition. "It's not right that the remuneration of the funds is so large," Aleksander Natalli-Swiat, an MP from the conservative Law and Justice Party, said during a recent parliamentary debate.

The government is proposing to cut the one-time fee imposed by the OPFs on payments into the system from the current maximum of 7% to 3.5% by 2010, and also reducing the annual fee charged by the funds.

Yet the funds counter that the government is changing the rules mid-game for private companies which were promised entirely different business conditions when they got involved in the market a decade ago. "It discriminates against us because we had to pay a cost to enter this market," said Maciej Jankowski, the CEO of Commercial Union, an affiliate of Aviva which runs Poland's largest OPF. "It will affect the value of the funds and it seems like a partial expropriation because we will be losing money due to an administrative action."

The industry estimates that the cuts in fees will save future pensioners PLN57bn (€13.2bn), but that the new fee structure will dissuade the funds from being more aggressive investors, which would cost pensioners much more in foregone gains.

Screeches of protest from the industry are cutting little ice with the government, which is determined to push through its fee cuts, but it is creating another potential problem with the Commission. Charlie McCreevy, the commissioner for the internal market, recently wrote to Poland's government to say that the step may violate economic freedom.

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