At e10bn in assets under management, Poland’s Commerical Union pension fund is the largest in the country. In only its ninth year in operation, the defined contribution (DC) fund has grown spectacularly, much of which is due to the country’s booming equity market. With 2.7m members, the fund represents 20 per cent of the Polish pension market in terms of membership.

However, things are changing. Depite Poland’s economy and equity markets being far less exposed to the credit crunch and mortgage-backed assets, pension fund returns have steadily declined after years of double-digit numbers.

Commercial Union’s returns were a strong 7.1 per cent in 2007, beating the country average of 6.2 per cent. But this was a marked decline on 2006, where since 2002 the average return for Polish funds was between 11 per cent and 16.3 per cent. Perhaps most worrying is the inflation rate, which was at 4 per cent in 2007, compared to just 1.4 per cent in 2006 and 0.7 per cent in 2005.

This has created a clamour for de-regulation to allow Polish funds to invest in a more broad range of assets.

The fund and other open funds in Poland have stringent rules. For starters, only 5 per cent of all assets can be invested abroad. There is a 40 per cent ceiling on equities and mortgage bonds, while any investment in real estate, private equity or derivatives is forbidden.

Jerzy Kozlowski, strategy and compliance director at the fund, believes this will change, hopefully within 12 months’ time. When it does, he would like to invest more abroad and diversify his risk. Most of this is a reaction to what he calls an unsuccessful year.

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 would also like to add more investment options for members. Currently, there is only one default option available, and he is keenly aware of the fact that risk profiles differ dramatically, particularly in age and income brackets. Again, this is a question of government regulation, but managers in Poland are optimistic that this too will change.

Until those changes take place, Commercial Union has 35 per cent of its assets in equities, 60 per cent in government bonds and the remaining 5 per cent in money markets, treasury bills and mortgage bonds. From the outside, it would appear that the vast majority of its assets are invested in emerging markets, since, for many, Poland is part of emerging Europe. However, the reality is simply a question of regulation, as the fund’s ability to invest outside of the country is severely hindered.

Strategically, asset allocation changes have been in very small increments. Equities have ranged from between 28 per cent and 35 per cent of the portfolio since inception, something that Mr Kozlowski says is a result of limited (though attractive) opportunities in the Polish market.

Commercial Union’s second pillar fund is a by-product of a reformed Polish system that changed dramatically in 1999. Prior to the reforms, the only pension provider was the state-run pay-as-you-go Social Security Institution (ZUS). As has come to pass nearly everywhere in Europe, this system began to malfunction when the number of contributors decreased while the number of pensioners increased. The system was also vulnerable to government corruption.

Under the new system, all Poles born after 1968 must join a second pillar scheme where they contribute 7.3 per cent of their gross salary. The reforms were aimed at switching to more of a DC system, and it appears to have worked. The funds have had a high take-up, partly because they are mandatory. More than 10m people joined second pillar schemes in the first year of the system and $700m (€450m) was invested by foreign financial institutions to establish pension fund companies in Poland.

So while returns remain relatively robust, and Polish second pillar funds may be on the verge of a regulatory breakthrough, there are several challenges facing the future of Commercial Union and second pillar Polish funds.

Obvious problems are falling returns and rising inflation. These have cut into assets and it will be a challenge to maintain solid returns in the face of worsening market conditions coupled with stiff regulation.

However, one of the largest challenges could be the brain drain on Poland’s most valuable asset: its people. Currently, thousands of workers, both blue and white collar, are seeking jobs abroad in more lucrative markets in Germany and the UK. This could significantly cut into the number of people who will sign up for a second pillar scheme.

Yet, for the moment, the system appears to be working and Commercial Union’s membership remains strong. The fund added more than 20,000 new members in the last quarter of 2007, while on the whole nearly 800,000 Poles joined schemes during the year.

Location: Warsaw, Poland Assets: €10bn Members: 2.7m

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