POLAND – The Polish government, with the first large tranche of second-pillar retirees due in mid-2014, has little time left to draw up legislation for the second-pillar payout phase, experts have warned.

The Labour and Social Policy Ministry is collating opinions from key stakeholders, including the finance, economy and treasury ministries, the Social Security Institution (ZUS), the National Bank of Poland, the Polish Financial Supervision Authority  (KNF) and the Warsaw Stock Exchange (WSE).

Little has emerged on an actual payout system, but the exercise has once again sparked debate about structure of the second pillar.

The most widely publicised proposal, from the Finance Ministry, is that 10 years before retirement funds accumulated in individual second-pillar (OFE) account should be transferred incrementally to the ZUS, which administers the first pillar.

With Poland currently under an EU excessive budget deficit procedure, critics view this proposal primarily as a solution for cutting the budget deficit, as was the case in 2011 when the mandatory OFE contribution rate was cut from 7.3% to 2.3%, with the remaining 5% sent to the ZUS.

The rate rose to 2.8% in 2013 and is set to increase to 3.5% by 2017.

In the context of the budget deficit, Paweł Pytel, chief executive at the Aviva Pension Fund Management Company, argues that maintaining the contribution at the present level is preferable to the Finance Ministry's proposal, which will lower the general budget deficit in the short term, but endanger PAYG payouts in the longer term.

The accumulated OFE funds are assumed to provide 20-25% of a final pension, which Pytel said should remain invested on the capital markets, while the deficit at the ZUS is projected to grow from PLN50bn (€12bn) to PLN90bn by 2020.

"Future taxes and employee contributions will have to rise to secure the first pillar's liabilities," he told IPE.

"We can generate better returns than the current ZUS indexation, and, from a client's view, it's safer if there are two sources of financing future pensions."

Fund managers have also long argued that replacing Poland's one-size-fits-all model with multi-funds would address the question of securing safer returns for members approaching retirement.

Grzegorz Chłopek, president of the board and chief executive at ING PTE, said: "We should have the opportunity to enable people to transfer from dynamic to more secure funds, but within a maximum five years – not 10 – in order to reflect the length of the economic cycle, accompanied by a programmed withdrawal with the same strategy as the distribution phase."

The Finance Ministry's proposal would also have negative short and long-term consequences for the local capital markets given that the OFEs are major investors in the WSE, and Polish government, corporate and infrastructure bonds.

Funds transferred to the ZUS in the implementation phase of this proposal would require the fund management companies to sell off assets, inevitably lowering prices.

There would also be fewer monies to invest, as it is widely assumed that clients approaching retirement would pay progressively lower premiums.

"There will be huge implications for the capital markets and Poland's GDP," Chłopek said.

He cited reduced bank liquidity – OFEs also invest in bank deposits – alongside less co-financing of infrastructure projects, a smaller market for IPOs and SPOs on the WSE, and problems for the bond market, with lower demand for issues replacing maturing debt and financing future deficits.

"After several years, we will see a deep recession due to lack of stable long-term capital enabled for borrowers," he said.

Some of the other stakeholder proposals have also met with scepticism.

The Economy Ministry has proposed making the second pillar voluntary – raising the spectre of an eventual Hungarian-style nationalisation – while reducing fees currently paid by the OFEs to the pension companies.

The central bank, meanwhile, has suggested a passive asset management system, with investment based on a predetermined benchmark rebalanced periodically, as a way of reducing fund management costs.

The pensions industry sees this as flawed.

Pytel said: "The pension funds' WSE and debt assets are too big to be managed passively. If pension funds are to be rebalanced at fixed dates to follow the benchmark, the market will know whether we will be buying or selling, and both IPO issuers and secondary market participants can play this to their advantage at the cost of the passively managed funds."

Chłopek added that ministries could exploit the benchmark for their own purposes.

"We can envisage having to invest in non-competitive assets, such as bonds with low interest rates or companies in trouble, issued only for pension funds," he said.  

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