Poland’s pension system is tantalising. The money is there and its strong economy enables more people to start saving for retirement. For asset managers, however, it has been a difficult market to penetrate. But this could soon change, making Poland one market to keep a close eye on.

Everything changed in 1999, when the state made its first move away from the unaffordable pay-as-you-go system and set the framework for the arrival of second pillar defined contribution (DC) pensions.

The moves had immediate repercussions. Previously, the Social Security Institution (ZUS) collected 45 per cent of workers’ gross salaries. Today, that has been reduced to 12 per cent, indicating that the state will rely on the second pillar to make up the difference.

Since 1999, the second pillar has been growing rapidly, driven by obligatory membership and the growth of a Polish middle class, thanks largely to a booming economy and equity market. An unexpected 10.5m people joined second pillar schemes in the first year. As a result, foreign financial firms have rushed to Poland, to the effect that $700m (€448m) has been invested by them in establishing pension fund companies in Poland.

The number of members of second pillar schemes is now approaching 15m, with an average growth of 400,000 new members a year. There are 21 funds for them to choose from, and those that do not decide are automatically placed in a fund via a ‘lottery’ system.

One interesting figure shows that the number of people falling into the lottery system has grown considerably in the last four years. Of last year’s 800,000 new members, around 200,000 were placed via lottery. This indicates that there needs to be more engagement and communication with the general public, and that a sizeable chunk of the population is effectively up for grabs for a fund that can be most persuasive and aggressive in its marketing.

So while the system appears to be working and growing, there are some obstacles.

Investment rules are tough, with strict limits. Equity can only make up 40 per cent of assets, while the same is true for mortgage bonds. Bank deposits have a ceiling of 20 per cent, while 15 per cent can be put into open mutual funds. Real estate and derivative investments are strictly forbidden.

However, the hardest rule of all is the 5 per cent limit in foreign investments. This is not a 5 per cent limit per asset class but rather an overall limit, meaning that if 5 per cent of assets are invested in foreign equities, the fund will not be able to make any other foreign investments of any kind.

Jerzy Kozlowski, strategy and compliance director for Poland’s largest fund, the €10bn Commercial Union, expresses frustration with the regulations, but he is optimistic that this will change in the short term .

He says: “Nothing is certain, but the minister of finance and the regulator are trying to get the government to change its approach. This is a self-declaration, but I think some changes will be taken in the second half of this year. I would like to invest more abroad but we’ll probably have to wait another year.”

Mr Kozlowski indicates that if these barriers come down, several funds will be interested in expanding their foreign assets across the spectrum.

However, it is not a sure bet that things will change. Poland’s economy and equity market continue to roar along, which has become a good argument for those opposed to the easing of restrictions. Yet most fund managers are eager for change, and believe that no matter how good the previous years’ returns have been, it is simply more prudent to diversify outside of the domestic economy.

One impetus for change could be that while returns have been impressive, they fell considerably in 2007 while inflation went up. Polish pension funds have had spectacular returns since 1999. Amazingly, last year was only the second time since their inception where returns were not in double digits. Polish fund members have done exceedingly well, and a dip in performance could create some public support for change.

And it is far from certain that the good times will continue. Poland is currently suffering a brain drain, with thousands of both skilled and unskilled labourers moving to western Europe for jobs and higher wages. This could cut into the number of members of DC schemes, which despite the exodus has remained stable.

In March, Polish pension fund assets under management hit an eight-month low of e40bn. This prompted an increase in equity allocations, which rose to 31.8 per cent of assets of all Polish funds, and since the start of April they have managed to claw back nearly €1bn.

Printer friendly version

Email this article to a friend