Poland’s second-pillar pension funds (OFEs) generated poor results over the last year, with all the 12 funds recording negative returns.

According to the Polish Financial Supervision Authority (KNF), the weighted average 12-month return, as of the end of March 2016, fell from 2.52% in 2015 to minus 6.63%, while the three-year return plunged from 25.13% to 6.34%.

The constraints imposed on the funds by the 2014 pension reforms were largely to blame.

The OFEs were banned from investing in domestic and foreign sovereign bonds, which, in 2013, accounted for more than half of the aggregate portfolios, while the lack of suitable alternative investments converted them to equity funds.

As of the end of March 2016, Polish equities accounted for 76.5% of the PLN143.1bn (€33.3bn) investment portfolio, despite the legal minimum equity requirement’s falling to 35%, from 55% in 2015.

Foreign equities and other foreign securities accounted for a further 7%, and around 11% of the shares listed by the 50-odd foreign companies on the Warsaw Stock Exchange (WSE) were taken into account.

Although the total foreign investment limit increased from 20% in 2015 to 30% in 2016, the continuing ban on OFEs using derivatives, even to hedge their currency risk, has in practice restricted the appetite for this asset class.

Bank deposits, at 7.1% of the portfolio, constituted the only other significant investment.

As a result, the OFEs’ returns have mirrored the WSE’s recent performance.

The benchmark WIG index fell by 9.3% over the 12 months to end-March, following an 11-month bear run that only reversed this February.

If the WSE maintains this trend, subsequent returns will show a marked improvement.

A further positive development for the OFEs’ otherwise barren investment landscape is the amended legislation on covered bonds and mortgage banks that came into effect on 1 January.

The amendments, aimed at regenerating Poland’s moribund mortgage-backed securities market, include making the issues a permissible investment for OFEs.

Meanwhile, the recently published results coincide with the current four-month transfer window for workers deciding whether to opt into or out of paying their 2.92% contribution into either an OFE or the first-pillar Polish Social Insurance Institution (ZUS).

The Polish Chamber of Pension Funds (IGTE) recently launched an Internet-based campaign entitled ‘Add an OFE’.

Its focuses include the risk diversification provided by the second pillar, and benefits that OFE investment provide for the Polish economy and industry.

As of the end of March, the OFE system had 16.5m members, of which around 2.5m had elected in the first window, in 2014, to continue contributing into the second pillar.

Since the window opened on 1 April, only around 10,000 workers have changed their contribution destination, the vast majority in favour of an OFE.

Many are reportedly younger workers previously unaware of a privately run pensions saving alternative to ZUS.

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