The Polish government unveiled the biggest shakeup of its pension system in nearly two decades yesterday, tightening its control of mandatory retirement savings and shutting down state-guaranteed private investment schemes.
Economists said the plan, which will go into effect in 2018, will give the ruling nationalist-minded Law and Justice (PiS) party more room to finance an ambitious welfare spending agenda.
However, the plan may also encourage Poles to save more by providing incentives to participate in voluntary schemes.
Pension savings are a ticking time-bomb in Poland, which has one of the lowest birth rates in the European Union and also faces a mounting burden of paying out state pensions to people who did not save enough under communism.
“There is a risk that some of the long-term pension saving may be used to cover (the government’s) pre-election pledges,” ING Bank economists wrote in a note.
“But the programme also addresses an important structural weakness of Polish economy, i.e. low savings, which is positive,” they said.
Under the plan, the government will transfer roughly a quarter of the 140bn zlotys ($35.2bn) of assets now held by state-guaranteed private pension funds, called OFEs, into a single investment vehicle, the demographic reserve fund (FRD). The OFEs will be shut down.
The funds will then be invested by a government-appointed manager.
The government will also be able to use the funds to remove some public debt from its balance sheet, thus allowing it to borrow more.
The rest, consisting mostly of Warsaw-listed shares, will be transferred to new mutual funds which will invest them on behalf of savers without state involvement.
“What we are saying is that roughly 100 bn zlotys worth of assets will not be sold to fund the budget, they will stay on the bourse and help develop it,” Deputy Prime Minister Mateusz Morawiecki told Reuters.
Immediately after the announcement of the plan, Poland’s WIG20 stock index fell sharply and the zloty currency lost some 0.5% against the euro.
They later regained some ground because the changes did not go as far as expected but analysts said uncertainty over how many people would invest in the voluntary schemes and other details could weigh on markets.
Market observers had feared PiS, which favours a bigger state role in the economy, would assume control of all current retirement savings held by the nationwide private pension scheme in a de facto nationalisation.
This would have given it more funds to shore up the budget, pressured by a universal child subsidy scheme introduced earlier this year.
Under current law, the result of a sweeping 1999 reform of Poland’s ailing communist-era retirement system, a state pension agency collects most of employees’ mandatory contributions equivalent to 19.5% of pre-tax earnings.
A smaller chunk is paid into the private OFE funds that are managed by mostly foreign players such as Nationale Nederlanden, Aviva, AXA, and MetLife.
These funds now hold up to 80% of some companies and account for about 20% of the Warsaw bourse’s value.
But many observers have questioned their investment results and have criticised the fees OFE managers charge.
By ploughing all future mandatory contributions into the state agency, the government could undercut the role pension funds have played in the growth of Polish capital markets.
But it gives it access to more cash for current pension obligations.
Economists welcomed the introduction of voluntary savings schemes.