A storm is brewing in Poland as private pension funds fight government attacks, amid new fears for Warsaw’s highly successful capital markets.
The war of words began in April when finance minister Jacek Rostowski described as "deeply shocking" proposals by the Polish Chamber of Pension Funds (IGTE) to pay clients fixed-term annuities rather than life pensions.
Policymakers have also been highly critical of the pension funds’ fee structure – currently comprising 3.5% on new premiums plus an annual management fee – and the lack of competition in the sector.
A finance ministry official tells Euromoney: "It’s tough being a pension fund manager – you get up in the morning, you buy government bonds, you press enter, you go skiing, and you take 3.5% in fees for it."
Representatives of the second-pillar funds (OFEs) have hit back, accusing the government of deliberately misrepresenting their proposals as part of a propaganda campaign to prepare the ground for an expropriation of pension money to plug the growing hole in the country’s budget.
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| Piotr Krolikowski, CEO of Nordea’s Polish pension subsidiary |
"Claims by the ministry of finance that we only offered to pay pensions for up to 10 years are simply not true," says Piotr Krolikowski, CEO of Nordea’s Polish pension subsidiary. "We also offered options for 20 years or longer, which is far above the average life expectancy in Poland, and for the remainder of the pension to be paid to the recipients’ heirs. "In other words, we were proposing to return the entire amount of pensions, which appears to be unacceptable to the finance ministry because they want to be able to use this money for current pension payments or reducing the public debt and deficit."
He adds that the funds’ proposals did in fact include an option to pay pensions for life but via insurance companies rather than the state-owned Social Insurance Institution (ZUS). Under current legislation, the OFEs cannot make pension payments directly.
Fund managers also reject charges of profiteering and underperformance. Malgorzata Rusewicz, acting head of the IGTE, notes that nearly a quarter of the initial levy goes to ZUS and that annual costs – which averaged 56 basis points in 2012 – are in line with European benchmarks, while rates of return have averaged 6% a year in real terms since the creation of the second-pillar system in 1999.
Justified criticism
Nevertheless, analysts say the criticism of the pension funds is partly justified. "Their fees are very high compared with mutual funds, they clearly have a captive market, and a circular benchmarking system means there’s no incentive to improve performance," says Peter Attard Montalto, emerging markets economist at Nomura.
Krolikowski acknowledges that fee levels have historically been "very high" – the initial charge was set at 10% until 2008 – but says the blame for that and any lack of competition in the sector should lie with policymakers. "It’s not the pension funds that make the legislation governing their activity, it’s entirely in the hands of the ministry of finance," he says.
He adds that the IGTE has indicated its willingness to consider a "significant" reduction in the commission on newly acquired premiums. Indeed, one of the chamber’s recent proposals involved the abolition of the charge along with the removal of the obligation to make a payment to ZUS, although Euromoney understands the government rejected this.
According to Rusewicz, the concern for OFEs is that the current discourse "is not focused on what to do to increase the effectiveness and competitiveness of the funds, but on whether the funds should exist at all".
A ministry of labour and social policy review of the pensions system is under way, due by June, and options being mooted include a Hungarian-style nationalization of the entire second pillar. Analysts agree, however, that the solution adopted will likely be that proposed by the finance ministry, which would involve the transfer to ZUS of individuals’ pension portfolios 10 years ahead of their retirement.
This would likely involve some selling of the OFEs’ large equity holdings, which even supporters of the proposals acknowledge could threaten Warsaw’s status as a regional financial hub, particularly given the substantial reduction in inflows to the funds – from 7.3% of salaries to 2.3% – already implemented in 2011.
"Regulatory and microprudential changes make sense, but they will send Poland a step back in terms of financial market development," says Attard Montalto. "The pension system and the deep pool of local liquidity it provides have been a major saviour for Poland in terms of its financial markets being viewed as a safe haven over the last few years."
Meanwhile, Krolikowski describes the shortfall in pension funding that could result from the finance ministry’s proposals as "potentially devastating", given Poland’s unfavourable demographics – the fertility rate is less than 1.4 – and high emigration rates.
He also accuses policymakers of focusing on the OFE system because of reluctance to tackle the issue of the lavish, state-funded pensions still enjoyed by groups such as farmers, soldiers and miners. "These are the reforms that are really necessary to create a solid basis for future economic growth and stability, but the government doesn’t have the leadership or the courage to undertake them," he says.
