Tim Gosling in Prague -

Poland's finance minister said April 16 that Warsaw intends to correct the "giant mistake" of setting up the country's private pension system - comments that are being regarded as a strange way to dampen growing speculation the government is planning a massive pension grab to help rescue the state's finances.

Claiming the pension system that was established through reform in 1999 is responsible for the bulk of Poland's public debt, Jacek Rostowski told TOK FM: "This entire intellectual construction that supported private pension funds is turning into rubble."

According to the Wall Street Journal, Rostowski added: "I used to support this system too, but - perhaps because I wasn't so personally engaged in its inception - I was able to analyze this mechanism and realize that it's bad."

Bloomberg reports that Rostowski then denied the government plans to scrap the system completely. "We need to find a way to lead Poland out of this trap," Rostowski continued. Local media reports that the Labour Ministry has proposed a gradual shift of state-guaranteed private pension funds (OFE) assets to the social-security system for people due to retire within at least 10 years. It may also scrap the fees that funds charge for contributions, according to Rzeczpospolita.

The government is engaged in a tortuous review of the country's pension system, which currently involves OFE receiving a percentage of gross salaries that is then invested in (mostly) the Polish capital market. Both the government and pension fund lobbyists have been throwing out dramatic statements, but while industry proposals - such as limiting payouts to a number of years - are clearly little more than negotiation tactics, there is form on the side of the region's governments for the radical moves the government is reportedly considering.

Temptation

The government reduced the flow of funds to the privately managed companies in 2011, cutting the payments that used to feed the companies' purchases of Polish sovereign bonds. In February, the finance ministry proposed giving workers the option of diverting their money from private funds to the state-run administration.

However, there is speculation of even more extreme action. Gazeta Wyborcza reported in early April that Warsaw is considering shifting the treasury bonds currently held by private pension funds to the state budget. Poland's OFEs have net assets worth PLN269bn, according to Reuters. Treasury bonds account for PLN126bn (€30bn) of those assets.

The temptation of all that cash for Warsaw is clear as it struggles to keep to its fiscal targets while the economy suffers from the European crisis. The government's goal of a 2.6% budget deficit in 2013, for instance, looks almost gone already. The gap rose close to 70% of the full-year target in just the first quarter, the finance ministry announced on April 15. The 2.6%-of-GDP deficit target equals just under PLN36bn. Shifting government bonds back to the treasury would also effectively cut state debt and therefore servicing costs.

Rostowski claimed in early April that Warsaw will not connect pension reform with the "tough" budget situation, but failed to categorically deny that a €30bn pension grab has not been discussed. "At this point it is sheer speculation," was the best he could muster. "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."

Coming in the wake of Prime Minister Donald Tusk's comment on April 2 that there is neither a doctrine that "OFE be liquidated, nor that they have to be preserved at any cost," it's little wonder that speculation is raging.

Regional precedents

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.

Poland is in no hurry to put investors minds at ease about that, nor the effects on the Polish equities market, on which OFE is one of the largest investors. The latest proposals in Poland are among "versions" being analyzed, Labour Ministry Spokesman Janusz Sejmej told Bloomberg. "We're still far from final proposals and the talks are still ongoing. Our draft document should be ready at the beginning of May."