Poland’s weighted average 12-month second-pillar fund (OFE) returns soared to 17.6% as of the end of March, according to the Polish Financial Supervision Authority (KNF).

The figure compares to an average 6.6% loss recorded a year ago.

Of the 12 OFEs, MetLife generated the highest return – 19.5% – and Aegon the lowest, at 14.2%.

Three-year average returns rose from 6.3% to 12.9%, while 10-year results edged up from 48.8% to 49.7%.

The recent dramatic improvement was almost entirely due to the performance of the Warsaw Stock Exchange (WSE). Its benchmark WIG index grew by 18.1% over the 12 months to the end of March.

Since Poland’s 2014 pension reforms, the OFEs have been banned from investing in sovereign bonds of any origin, turning them into de facto equity funds.

The Polish brokerage house Trigon estimated that 85.2% of net OFE assets were invested in equities as of March, including 6.7% in foreign shares.

Under the KNF’s methodology of counting the WSE’s dual-listed companies as non-Polish stocks, the foreign allocation was around 11%.

As a result of the recent growth in investment returns, the OFEs total net asset portfolio grew by 16.8% year-on-year in local currency terms, to PLN167.6bn (€39.1bn).

The growth compensated for net outflows from the funds generated by the “slider”, a mechanism that incrementally removes the assets of those with 10 years or fewer left to retirement to sub-accounts at the first-pillar Polish Social Insurance Institution (ZUS).

In the first three months of 2017, according to Trigon, inflows from those members who chose to continue contributing to the second pillar totalled PLN786m against PLN1.0bn leaving under the slider.

Meanwhile, the current high equity allocation has raised a dilemma for the planned dismantling of the second pillar scheduled for the start of 2018.

Under the Capital Accumulation Programme, announced in July 2016 by finance and economic development minister Mateusz Morawiecki, 25% of all OFE assets would be transferred to the state-run Demographic Reserve Fund, which serves as a buffer for state pension shortfalls. The remainder would go to newly created and privately managed third-pillar accounts.

Morawiecki has continually stressed that the programme did not constitute nationalisation of companies, as the 25% of liquidated OFE portfolios would come from other liquid assets such as deposits and bonds.

Under the current investment structure, the OFEs would either be forced to sell off some of their shares, or the government would indeed end up being a significant investor in – and in some cases majority owner of – some of Poland’s leading listed companies.

The publication of the legislation for the OFEs’ liquidation, initially set for the first quarter of 2017, is now expected by the end of June.

One significant change announced since the programme was originally published is that the new third-pillar vehicles would be a variant of the individual pension insurance account (IKZE), not the individual retirement account (IKE), because both IKZE and OFE contributions are tax-deductible, whereas IKE contributions are not.

The coming legal overhaul would have to include an amendment to allow savers to have more than one IKZE.

According to the KNF, as of the end of 2016 some 643,100 individuals held IKZE accounts, with a total asset value of PLN1.1bn.

The overhaul, with its emphasis on privately owned third-pillar accounts, would also require overturning an earlier Constitutional Tribunal ruling that the OFE assets, funded from a portion of social security contributions, were public monies.

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