Jan Cienski in Warsaw -

The Polish government's budget saving plan to seize most of the assets in privately run pension funds and shift them to the state-run retirement system is leaving the rump of the privately run system gasping for cash – something that is also likely to have negative consequences for the Warsaw Stock Exchange.

Last year the government shifted 51% of the assets held by the funds – about PLN146bn (€35bn) – largely in government bonds, to the state-run system. The government argued that the funds, formed in 1999 as part of a wide-reaching reform of the pension system, had been badly thought out and so were too costly.

In addition to grabbing more than half of their assets, the government also forced the 14m Poles with accounts in the private system to make a choice about whether to stay there or to transfer all of their retirement savings to the state ZUS system. The initial response was very tepid, and there had been fears that only about 300,000 people would remain in the privately run OFE system when the deadline expires at the end of July.

However, there has been an uptick of interest in recent days, and assumptions are now that about 1m people will stick with OFE. That means the government is unlikely to completely eliminate the OFE system, as had been done with a similar retirement programme in Hungary. Even so, the emaciation of the OFE system will still have some serious side effects.

Taking stock

On the positive side, from the government's viewpoint, is that a smaller OFE system will help Poland's fiscal situation. Accounting rules treat obligatory social security deductions flowing into the ZUS system differently than those diverted to the OFE system – a matter of treating the ZUS money as a contingent liability instead of an outright liability. By cancelling the bonds held by the OFE system, Poland reduced its government debt by 8 percentage points of GDP.

The ZUS system will also absorb a growing portion of the funds held in a worker's OFE account a decade before retirement, eventually taking on the full obligation to pay out a pension.

On the negative side, the 16 privately managed funds are going to have to consolidate as they will manage a much smaller pool of money after July.

As well, the WSE will see significantly less new money flowing in than before the government's changes.

In 2011, under pressure from the first wave of the economic crisis, the government slashed obligatory transfers to the OFE system from 7.3% of a worker's salary to only 2.3% – dropping monthly inflows into the WSE from PLN1.7bn to only PLN700m, according to an analysis by Open Finance, a financial advisory. That also marked a peak in the WSE's valuation. Until then shares traded in Warsaw had benefited from an OFE bonus, thanks to rules making it almost impossible for the funds to invest in shares not traded in Poland.

Now, the smaller size of the funds plus the new system of gradually shifting the pensions of older workers to the ZUS system means that the WSE will see an annual net outflow of about PLN4bn, predicts Ryszard Petru, head of the association of Polish economists. That means the days of the OFE bonus are gone. “The remaining people in OFE are more than previously estimated, but it will still not be enough and will affect the WSE,” says Petru.

As the lacklustre response from current OFE holders has filtered in, the WSE has responded. The exchange's broad WIG index has been flat for the last six months and has fallen by 2.6% over the month to mid-July.

The government's original hope had been for many people to abandon the OFE system, which was why people had to actively intervene to keep their privately managed accounts – otherwise they would be folded into the ZUS system. But counting on Polish lethargy was so successful that it looked as though almost no one would stick with the OFE system, which could be unexpectedly detrimental to the WSE. As a sop, fund managers were allowed to directly contact their account holders and even to send along stamped envelopes, making the renewal process slightly less onerous – one of the reasons for the increase in people staying with their OFE accounts.

The Polish reforms were part of a broader trend that saw countries transforming their pay-as-you-go pension schemes, in which today's workers finance the pensions of today's retirees, into a system where a portion of workers' deductions go to pay for their own future pensions. While the reformed system has long-term benefits, especially in countries like Poland with a shrinking population, the up-front costs, as governments have to borrow to finance existing pensions while shifting some savings for future use, are difficult for governments to stomach.