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The Polish government unveiled on June 26 its long-awaited - and feared in some quarters - plans for pension reform. While the market was relieved to hear that Warsaw is not plotting to grab all of the assets in the privately-managed "second pillar," the three options it has put on the table will reduce its role significantly.

The reform of Poland's private pensions system (OPF) - first introduced in 1999 - has been a point of hot debate this year between a government watching the billions it collects each year with envy, and markets warning of the effects on the stock and bond markets. As it turned out, Finance Minister Jacek Rostowski presented three options, which the government will decide on after another month of public debate.

As expected, the proposal includes a phased transfer of assets for the last 10 years of a saver's working life from OPF to the state system (ZUS). Two of the options presented would make participation in OPF voluntary, while the third would shift the PLN120bn or so in government bonds held by OPF into ZUS.

"The key for us is that the changes don't lead in any way to nationalizing the shares," said Rostowski - who oversaw a reduction in the flows to OPF (from 7.3% of salaries to 2.3%) in 2011.

While the pension fund operators that have been fighting the reform process warned of apocalypse, the equities market exhibited relief that the proposals are relatively moderate compared with the potential scenarios that have been sketched out over the past few months.

The Warsaw Stock Exchange (WSE) tumbled to a 10-month low just ahead of the release of the proposals, before recovering most losses. The equity market is highly vulnerable to the reform given the high volumes invested by OPF.

In fact, the review seeks to offer further support to the WSE - unsurprising, given that successive Polish governments have long pushed the exchange to dominate the region. Under the recommendations, the current cap on equity holdings by OPF would be lifted, but they would be banned from buying bonds.

However, Warsaw has managed expectations well, and thus far has avoided a significant sell-off on financial markets. It has taken advantage of the emerging market bond rally to allow it to provoke the long and heated debate that preceded the recommendations, without disturbing yields. That kerfuffle set the scene for the markets to more readily accept the relatively modest proposals that have now been issued.

The major point for Warsaw, however, is to help the government's fiscal management efforts. Like CEE peers Slovakia and Hungary, as it battles the crisis Poland has been gazing wistfully at the huge capital flows the private pension system diverts into private hands. The finance minister has been a particular critic of the 1999 reform, blaming it for boosting public debt.

By way of contrast, the Czech Republic introduced its first private pensions system at the start of the year. While it has certainly not caught the population's enthusiasm yet, Prague is moving to circumvent the long-term liabilities that the traditional pay-as-you-go system stores up. Yet the assets in private hands have proved too tempting for its neighbours.

Reiterating that OPFs lost PLN20bn during the most recent sell-off on the WSE, although he admitted that the private funds have had a positive impact on economic growth, employment and the savings rate, the finance minister laid the blame for destabilization of public finances squarely at their door once more.

"We want to curb the growth in public debt caused by the pension system," Rostowski added, reports Bloomberg. "If we hadn't introduced the capital pillar in 1999, our public debt would be below 40% of GDP, less than the Czech Republic's, and our debt service costs would also be lower."

Poland's state debt stood at just over the constitutional limit of 55% of GDP in 2012. Having complained during the recent emerging market bond rally that the constraints were preventing it taking full advantage of record low borrowing costs, Warsaw has been trying to engineer more flexibility by juggling accounting methods of state debt, and on June 26 the finance ministry also suggested it will push for changes in the rule.

As analysts at Erste Bank point out however, whatever tinkering Warsaw performs merely kicks the bigger issue - how to cover the cost of an ageing population down the line - into the long grass. What the current government takes out of the pension system now to help it through the crisis, future administrations will have to find to cover liabilities. "There is no free lunch related to this move," they note, "due to equivalently increased future liabilities. These will become a problem only in the future, however, and they will be magnified by pressure from an ageing population."