Poland Pension Reform

[The Economist, A Survey of Poland, October 27, 2001]


If there is one area where the new government should resist the urge to undo its predecessor's reforms, it is the new pension system. Poles have two reasons to be proud of this. It was a triumph of cross-party consensus, and it was sensible.

Like most of Western Europe, before the reform Poland was facing a fiscal time-bomb, with the number of active workers for each pensioner expected to fall from four to three by 2020. But unlike its EU neighbours, Poland has now taken radical steps that will defuse the bomb. Under its new “multi-pillar” system, workers pay contributions into their own accounts rather than into a vast pool. These funds are invested in non-tradable bonds that pay a rate of interest linked to Poland's GDP growth. On retirement, the proceeds are turned into annuities. On top of this, 30-50-year-olds may contribute a portion of their retirement savings to private pension funds that invest in shares and other securities; for the under-30s, this extra pillar is compulsory.

At a stroke, Poland has done away with pension redistribution: what you get out is what you have paid in, plus interest and capital gains. The cost of providing pensions for those with nothing to pay in is borne by the central budget, not the new pension system, so the hidden debt in the system is no longer growing. Some 10.5m Poles have signed up with a pension fund—far more than envisaged—and 2-3% of GDP is now flowing into the privately managed funds each year.

One initial worry was that fly-by-night fund managers might jeopardise workers' savings. The system's designers got around this by insisting that funds meet performance targets or else make up the shortfall. That narrowed down the field to well-capitalised international companies, such as Nationale Nederlanden and Commercial Union. These two firms alone employ more than 12,000 local agents.

If the new pension regime has an Achilles heel, it is the state-owned institutions still associated with it. The reform relegated ZUS, the state social-security fund, to the role of a mere money-collecting agent, but ZUS is still causing problems. This year it has failed to pass on 5 billion zlotys that it owes to pension funds, citing computer problems. However, there are suspicions that the money is being deliberately kept back to help plug gaps in the central budget. Also, some of ZUS's government-appointed managers are cosy with those ailing state-owned companies that receive implicit subsidies by building up social-security arrears.

Marek Gora, one of the new system's market-minded architects, argues that ZUS will remain hidebound so long as it is in state hands; but privatisation remains politically unthinkable for now, even though ZUS is no longer at the centre of the system. Mr Gora also berates the state pension-funds watchdog, UNFE, for its “political and interventionist” style. For example, it wants to limit funds to a certain size, and to keep a lid on their investment abroad. But even Mr Gora admits that these flaws can be remedied without reopening the whole debate. The new system may not be perfect, but it works.


Poland’s changing capital markets
Patriotic pensions

[The Economist, August 30, 2001]


The rise of pension funds helps a weak stockmarket

WITH a budget crisis looming, a finance minister sacked this week and more emerging-market jitters, Poland’s economy is looking decidedly febrile. A falling stockmarket has deterred western investors, and the opposition ex-Communists look set to win a big majority in next month’s parliamentary elections. Through all this, Marcin Krupa, a director at Poland’s pensions watchdog, UNFE, is a contrarian. He says things have changed since the Russian financial turmoil three years ago this month: domestic pension funds are a point of stability in the country’s wobbly capital markets.

Two years ago the government licensed 21 privately managed pension funds, hoping that they would defuse a potential demographic time-bomb. Based on Chile’s heavily regulated model, a three-tiered pension system was introduced, melding the state-run, pay-as-you-go scheme with a compulsory private savings plan for all new entrants into the labour market, and also for all aged under 30 at the end of 1999.

Though the reforms are recent, fully 10.5m Poles have signed up for private pensions, exceeding the government’s wildest expectations. While a foul-up in transferring contributions to the funds has yet to be sorted out, a recent report by UBS Warburg, an investment bank, extolled the Polish pension system as “a benchmark for many euro-zone economies to aspire to”. Particularly impressive is the funds’ freedom to invest up to 40% of their portfolios in domestic equities (the rest is parked mainly in government bonds).

Even in today’s bear market, the funds hold nearly a third of their $3.5 billion under management in Polish shares. That provides a steady flow of institutional cash to an erratic stockmarket that had, until a few years ago, seen foreign portfolio investors calling most of the shots. Polish pension-fund investments today account for roughly 10% of the free float on the Warsaw bourse. That could reach 40% by 2004 if the funds maintain their current 25-30% equity weighting.

All the more reason, say the funds, for the government to lift their 5% cap on foreign investments, lest the funds outgrow the local bourse—especially given the present dearth of public offerings and privatisation opportunities. The OECD recently argued that the 5% limit breaks laws on the free movement of capital and should be revised upwards. The government’s rejoinder is that its private pensions are not voluntary schemes in the Anglo-Saxon mould. Rather, they are compulsory, state-backed plans that guarantee minimum rates of return.

Stick-at-homes
The pensions watchdog, with the government’s support, is wary of the funds dabbling in foreign assets, fearing big losses and possible damage to confidence in private provision. It believes that there is plenty of investing to be done at home before the funds shift assets to more tempting places. This at least sounds patriotic, even if it is not sound economics.

For the majority of pension funds, in any case, this is hardly an issue: they are too small and inexperienced to contemplate investing abroad. But the “big four”, Commercial Union, ING’s Nationale-Nederlanden, AIG and Poland’s dominant insurer PZU, chafe at UNFE’s restrictions. Together, they account for over 70% of total pension-fund assets and have the global networks to target foreign stockmarkets.

The flag-waving seems to be paying off in some respects, at least. It is, most notably, helping to improve shoddy domestic corporate governance. Several pension funds have brought errant managers to task, especially in smaller companies on the Warsaw bourse, in which they have amassed sizeable stakes. Yet UNFE frowns on overbearing shareholders. It threatens to reduce the maximum stake a fund may hold in a listed company.

Rights for minority shareholders in Poland have certainly got more attention since the funds started to pour money into stocks: a number of high-profile corporate battles over the past few months were triggered by assertive pension funds. But pension funds need more listed companies to invest in, and less dominance of minority shareholders by “strategic” investors. Otherwise who can blame them for casting their eyes abroad?