Poland cuts down private pension scheme, sends bonds back to state
September 5, 2013
Finance Minister Jacek Rostowski and PM Donald Tusk
The Polish government will turn back its 1999 partial privatization of the social security system, sending the portion of the private pension funds (OFE) invested in Treasury bonds back to the social security board ZUS and making further participation in the system optional, top officials said Wednesday of a long-awaited policy decision.
“The OFE system is built on rising public debt and proved to be very expensive,” Prime Minister Donald Tusk said in introducing the pending changes at a press conference held jointly with Finance Minister Jacek Rostowski
“The state debt issued to maintain the privatized funds “bar Poland from attaining the next jump in [economic] growth,” Tusk added.
The government will transfer all the Treasury holdings of OFE to ZUS. In doing so the government eyes debt reduction in the neighborhood of 8% of GDP, Rostowski said.
The bond portfolio (estimated at 51.5% of assets) will be handed to ZUS to match levels from December 31, 2012, Tusk told reporters.
The value of the 51.5% end-2012 allocation is PLN 139.8 billion versus current, end-July, T-bonds and cash at PLN 140 billion.
"Transferring the bond portion to ZUS is a swap of bonds at the disposal of OFE into future obligation, guaranteed by the state at the level of an act of law," Tusk said.
At the same time the government will leave existing equity holdings untouched, PM said.
"We determined in light of this that in building the bill we rule out the possibility that the state would take over the equity stakes which are currently in the portfolio," Tusk said.
Future pensioners will also decide whether they want to transfer full pension premium to ZUS or allocate a portion of it to OFE for it to be invested on the capital market.
They will have three months to declare their desire to remain in the rump system and will be switched to a ZUS-only system if they fail to declare. Should they stay in the OFE fund, their premium to be sent to OFE will be at 2.92%. Future pensioners will retain OFE account with the non-Treasury portion of assets even if they decide to switch to ZUS, according to the proposals.
Means transferred to ZUS will fall under the same inheritance rules as the premiums collected at OFE, Rostowski said.
The officials also said that the government will have OFE funds transferred to ZUS for a ten-year period ahead of a person's retirement, 10% per year except for those individuals already within 10 years of retirement.
As for OFE investment strategy, Poland will try to liberalize the rules, dropping the benchmarking system and allowing investment in corporate and municipal bonds, but banning OFE funds from further investments in Treasury bonds or Treasury guaranteed bonds, officials said.
The Polish government had made waves in 1999 with its switch from a pay-as-you-go system. It forced younger workers to send a portion of their social security premiums on to the newly created and highly regulated private pension funds.