From being joint top-of-the-class Poland is now the subject of disapproving looks from the headmasters of Brussels. Having taken on an enormous reform of the social security, education and health system in 1999, the new government which came to power in September last year is grappling with macro economic problems which may yet affect its plans to join the European Union by 2004.
Although assets held in second pillar funds have multiplied seven fold during the past three years, the ambitious third pillar plans have floundered. Analysts have blamed this on the high cost of these products in an immature market, the lack of incentives for employers and low development; a mere 68 companies were involved by last September. The result is that the anticipated increase in assets has failed to materialise. This has led to a worrying knock-on effect.
A number of western financial institutions have decided to close their brokerage and asset management houses. In mid-November, Raiffeisen Capital & Investment Polska (RCI) wound up its brokerage operation. The RCI office, which chiefly serviced institutional investors, was one of the smaller houses representing a foreign financial group in the Polish market. In October, the brokerage’s share in the total volume of stock trading on the Warsaw Stock Exchange was less than 1.3%, with only 0.3% in the futures market.
RCI representatives declined to comment on the causes behind the closure, but they are not alone. Wood & Company, Robert Fleming and Global Capital Partners Poland have all closed their Warsaw offices. The Polish-owned Dom Inwestycyjny BWE
has also pulled out. At the start of
the year, 38 houses made transactions on the WSE; their number has now fallen to 30.
Raimondo Eggink at ABN AMRO Asset Management (Polska) SA is scathing. “We are closing our business down here, purely because there are just not enough assets to manage! Although a number of brokerages have closed, our decision is probably the first to come from a company of our size, but it will almost certainly not be the last.” Eggink says the market is under-developed, and the leaps forward anticipated in 1999 have simply not taken place. “The government is facing a double problem, in that it has major economic problems which it needs to address sooner rather than later, but also it needs to have an education in what the pension business is all about, and this really needs to be a fast-track operation.”
“They need to encourage investment in the market, as the volume of fund investment lags way behind neighbours such as Hungary and the Czech Republic,” Eggink adds. For holdings to be more in line with western funds convergence with the euro is needed, he believes, coupled with a fall in interest rates. On this latter point the new government is determined to bring rates down.
Any such move by the government could well have a profound effect on the asset management industry. Miroslaw Panek at ING BSK Asset Management says that the industry has seen a significant turnaround since its inception. “Historically most people see asset management as the aggressive management of investment in equities. This was certainly the case in Poland during the early 1990s when we once saw equity values rise tenfold in just one year. This was the time when individuals and companies began to seek out professionals to manage their investments for them, and equities were the asset class that dominated. Now, however, it has been surpassed by others.”
Unlike many countries where fixed income is often used as the base for a portfolio, then topped up with equities for added value, Polish investors have worked the other way around. “People now realise there is value in fixed income products, especially during a period of high interest rates. Even mutual funds began as equity vehicles, but they too are moving towards fixed income investments,” Says Panek.
The arrival of pension funds three years ago has also had a major impact. “Life insurers and pension funds are now very important to the industry, but the situation is far from balanced,” he says. “Equity holdings are falling steadily as these investors look to the long-term. Fixed income products are the basis of their portfolios. The mandatory nature of the pension funds means their assets have grown steadily to around s2bn, with the predominant part of this sum invested in government bonds.”
The development has been marred, however, by IT problems. This has meant that although sums deducted from salaries and from employers has reached the government, it has not been transferred into the separate pension accounts. “The sums are not being assigned, and of course this creates a problem for the government because of the interest payable. The aim is to get around this by giving the funds government bonds in lieu of the cash. These naturally will carry a lower interest rate,” Panek explains.
Most of the mutual funds were initially retail funds, but now some are addressed toward the institutional investor. “Originally these were seen
as vehicles to reduce tax liability, but now they have grown into more sophisticated vehicles, although tax reduction remains a priority for the investor,” he says.
The government’s latest tax plans caused a storm in the industry in November last year. The government announced that as of the first of last December income from bank deposits, government bonds and mutual funds would be taxed at the rate of 20%. Any investments made before that date would remain, however, tax-free. “People took money from their bank accounts and from under their beds and rushed to the fixed income mutual funds,” says Panek. “In just one day we saw an increase in investment in these vehicles greater than the previous quarter. Even when things settle down I think we will see a five fold increase quarter on quarter.”
Even after the deadline the mutuals retain a tax advantage, tax being payable on liquidation, hence more flexible for the investor. The rush to invest did not affect equity holdings, however, income deriving from equities being tax-free. “This was a crash course in investment for the public, who learnt more in a few days than they have done from years of advertising from the government and the industry,” says Panek.
The downturn in the economy has affected other parts of the industry, in particular life insurance. The general economic problems have affected the dynamics of the sector, and Panek says many policies have been cancelled.
Bogdan Lapinski at Hewitt Associates in Warsaw does not believe the latest moves will have a positive effect on business confidence in the market. “Everywhere you turn firms are pulling out, not just local companies, who are not really that active in the asset management business, but multinationals, and that is the worst possible sign. There are macro economic problems that need to be tackled, but the government also needs to be more hands-on in its management of pension pillars. There must be incentives to invest in retirement provision.”
He blames the government’s short-term views. “When they came to power they even talked about changing the rules of the game for pension funds. Obviously those connected with the industry were mortified. It was another example of instability, and a lack of a long-term strategy on spending and the currency weakness.”

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