Stock market spooked as Poland outlines pension reform plan

Stock market spooked as Poland outlines pension reform plan
The Polish stock market is highly sensitive to issues surrounding pensions
By Wojciech Kosc in Warsaw July 4, 2016

The Warsaw Stock Exchange reacted with fear on July 4 to the Polish government's plans for further reform of private pensions. Officials are seeking to soothe investor worry, but that will be a tough call given the lack of clarity.

Poland will transfer nearly PLN139bn (€31.4bn) amassed in the second pillar funds, known as OFEs, to individual pension schemes and state demographic reserve fund FRD, Deputy Prime Minister Mateusz Morawiecki told reporters on July 4. The comments covered the "preliminary assumptions" of OFE reform under a new government capital building programme.

The announcement follows recent suggestions from the chairman of the ruling Law and Justice (PiS), Jaroslaw Kaczynski, that the OFE system does not work. Capital manage by Poland's 12 OFEs would better be used to fund important state investment, the effective leader of the country claimed.

Although still vague, the plan instantly spooked investors and sparked a drop of over 3% on the WSE's main index the WIG20. OFEs own some 20% of listed stock, and it was only in 2012 that a pension grab of around €35bn - mostly in the form of sovereign bonds - by the previous government hit Polish equities hard.

Kaczynski’s words were widely interpreted as mooting further nationalisation of assets managed by the private funds, with which Poles are still required to save 2.8% of their income. Little wonder given his statist outlook on the economy and common complaints over the OFE system.

However, other officials sought to deflate those fears. Morawiecki said the bulk of the OFE capital – PLN103bn - will be handed to the third pillar IKE funds. The voluntary funds have never been popular with Poles, however, having stockpiled no more than PLN20bn.

The remaining 25% or so of the OFE assets - PLN35bn - will go directly into the state’s demographic reserve fund FRD, which was set up in 2002 to build up capital to help with pension payments should demographic trends worsen. Morawiecki also said Poland will support the creation of universal capital-based company pension schemes.

However, some PiS officials have suggested that the capital held by FRD could be used for other purposes, including financing of the government's social spending pledges. Warsaw is struggling to pin point the revenue to roll out election promises, including lowering the retirement age.


“OFE do not work, they have not ensured higher pensions, neither have they financed economic development,” Morawiecki insisted. Indeed, since the system was established in 1999, OFE has not come near market rates of return, Puls Biznesu reported on July 4.

It was little coincidence that the former banker was speaking at the WSE. The official will have seen the market response: the blue-chip WIG20 dipped over 1.5% as trading began. The euro and the dollar both gained against the zloty.

Since the 2012 reform, the Warsaw bourse has become highly sensitive to all mention of pension plans, suggests Mateusz Sutowicz at Bank Millennium. “With WIG starting the week losing up to 3% in the morning trade, it is clear the market perceives any changes negatively,” he notes to bne IntelliNews.

The third pillar IKE funds are also active on the Polish equities market, he points out, but the lack of details has investors in retreat. “It will all depend on particulars of the plan to move the OFE money. We don’t have them at the moment, hence the uncertainty to which market reaction is typically negative,” he says.

There will be some relief that the government appears ready to leave 75% of the OFE assets in the hands of private managers. Many had feared PiS would seek to grab the whole lot. However, the independence of those managers, and the rules governing the assets the funds into which the funds can be invested, is yet to be made clear.

Officials sought to back the deputy PM up by talking up the relief. The head of Poland's development fund PFR claimed to PAP that the plan is positive and will put "an end to the risk of supply [overhang] on the WSE" because the capital "would still be managed by private funds".

Pawel Borys also tried to assure the market that IKE will be left to make its own decisions, but struggled to present a convincing case. "It would be the fund participants that would decide about investment policy [by choosing from products offered by investment funds]," he claimed, before adding that "in time, some limitations should be introduced in order to avoid an [overhang]."