Poland reportedly mulling €30bn pension grab

By bne IntelliNews April 4, 2013

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Warsaw is mulling a PLN126bn (€30bn) pension grab in a bid to help it hit fiscal targets, local press reported, citing an unnamed official, on April 3. The finance minister called the claim "speculation... at this point," but did not appear to deny the move is under consideration.

According to Gazeta Wyborcza, the Polish government is considering shifting the treasury bonds currently held by private pension funds to the state budget. As part of a long struggle by the government to draw up pensions reform, Warsaw may also make another cut to flows into the second pillar and restrict private pension funds to investing in equities, the source said.

Poland's state-guaranteed private pension funds (OFE) have net assets worth PLN269bn, according to Reuters. Treasury bonds account for PLN126bn of those assets. Shifting them back to the treasury would cut state debt by the amount of bonds reallocated, helping Warsaw to hit the 3% budget deficit target for 2013 - a task becoming more challenging as the stuttering economy continues to lower tax revenue - by cutting debt servicing costs.

It would also reduce the total volume of state debt, which sat just below the constitutional limit of 55% of GDP in 2012, according to local accounting standards. Officials complained last year that the limit - which would trigger automatic stabilizers should the threshold be breached - prevented Poland from taking full advantage of the emerging market bond boom that pushed yields to record lows, and the government has been seeking ways to alter accounting practices in order to continue borrowing.

Insisting that the government won't connect the upcoming pension system overhaul with its "tough" budget situation, and that it stands ready to increase the planned PLN35.6bn budget gap if necessary, Finance Minister Jacek Rostowski said, "at this point it is sheer speculation," referring to Gazeta Wyborcza's claims. According to Dow Jones, the minister continued: "I don't know what are the sources of this story. We are only beginning to review the system and it is too early to speculate what changes will be implemented."

Prime Minister Donald Tusk said on April 2 that the government would present its proposals for the pension system in May. He added that there is neither a doctrine that "OFE be liquidated, nor that they have to be preserved at any cost."

Last week, Tusk said Warsaw is also set to decide on which institution will become the payment agent of pensions run by OFE, which are due to start making outgoing payments to savers on July 1, 2014, with analysts betting that the issue will again be leveraged to help the government hit its fiscal targets. "We see it as very likely that ZUS (the Public Pension Fund - pay as you go) will be chosen," suggested ING. "As a result, capital of workers who are approaching pension age should start flowing from OFE to ZUS and be changed to pension liabilities. That would provide a major improvement in ZUS' cash position in 2013-2014 (after many years of subsidizing the OFE from the central budget). So ZUS will need a smaller subsidy from the budget and the central deficit would be subject to a smaller revision or none at all."

Rolling back reform

Poland joined the trend amongst Central European states for raiding the second pillar in 2011, when it slashed inflows from 7.2% of gross wages to just 2.3%. With the crisis hitting government budgets across the region, Slovakia and Hungary have also rolled back pension reforms implemented in the early 1990s to help rebalance their assets and liabilities - for the meantime at least.

While Slovakia's populist government sufficed with a cut to 4% of wages, the Poles have remained restrained compared with Hungary, which obliterated the second pillar when it halted all mandatory contributions and essentially nationalized over €10bn in private pension assets. Budapest has spent the time since mopping up those fund mangers that remain.

Yet the Polish plan risks damaging the country's reputation with investors by moving it closer to the territory occupied by Hungary - which is now practically the EU's standout pariah state. The market was relatively understanding over the 2011 moves given the budgetary pressure exerted by the crisis and the long political game that private pensions represent. However, the building demographic problems building in the background in Europe remain, no matter the current fiscal challenges, and indeed represent elevated risk of the same sort of crisis in future.

At the same time, recent press reports suggest Poland's private pension funds have been making unrealistic demands of the upcoming reform, including a politically impossible suggestion that pension payouts could have limited spans. As Civic Platform faces growing opposition to its liberal agenda - both economic and social - from both across the lower house and within its own ranks, it is being forced to choose its battles carefully. The funds would likely be well warned that pensions are a topic that could play well in currying favour with the nationalist and conservative forces opposing issues such as euro adoption and gay rights.

That appears to be playing out, with Warsaw reportedly mulling a raft of moves to bring more of the pension system and its assets back under state control. While the government was forced in January by EU legal threats to cut the funds a little more slack on investing outside Poland, it is now considering limiting them to putting their capital in equities - a move that would help protect the shaky Warsaw Stock Exchange, but likely have limited effect on the ongoing appetite for Polish debt. "We want to legislate in such a way to allow the open pension funds to invest only in stocks after the transfers are cut again," the source quoted by Gazeta Wyborcza said.

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