Poland unveils long-awaited draft legislation of pension system overhaul
October 11, 2013
Under the draft legislation published by Poland’s Labor Ministry Thursday the country’s privately-run pension funds will have to shift 51.5% of their end-January 2014 assets back to the state pension vehicle ZUS in the opening shot of a reform that will make participation in the partially privatized portion of the system optional and free the rump pension funds from a highly regulated investment regime.
The bill largely meets the outline set out by policy makers in early September and confirms heady fiscal gains for Poland on the move.
According to the bill, the changes will lower the country’s public debt by 9.2% of GDP and reduce annual borrowing needs by 20-25 billion zlotys in the years 2014-2017.
The 13 regulated funds will be forced to hand over the assets by February 3, reaching first for Treasury debt and Treasury-backed securities, then dipping into cash and other assets to make the 51.5% mark. They will be banned from investing in treasury debt and state-guaranteed bonds from Feb. 3 and required to put at least 75% of their assets in stocks.
By law, the funds will have to plot their investments to secure an allocation in Treasury papers, state-backed infrastructure bonds and other state-guaranteed financial assets to match or exceed the allocation they sported on September 3, 2013, the day before the reform was first announced.
The funds will be allowed to invest as much as 10% of their assets abroad in 2014, up from a 5% limit this year. To meet a European Court of Justice ruling, the maximum foreign-asset allocation will be put up to 20% in 2015 and 30% in 2016.
The funds will also be required to gradually transfer the assets of workers' to the state starting ten years prior to retirement.
The draft will be sent to parliament in mid-November following a month of consultations, Prime Minister Donald Tusk had earlier told reporters in parliament.
The new legislation is likely to be passed by parliament, but may face some opposition from the President Bronislaw Komorowski, who agreed to meet an opponent of the pension overhaul on Friday.
Poland made the shift from a full pay-as-you-go system to a partially privatized system in 1999, forcing younger workers and allowing older workers to have a portion of their social security premiums redirected to highly regulated private pension funds with a mix of fixed-income and equity investments.
Poland has previously taken one swipe at the system to bolster public finances, cutting the portion of social security premiums sent to the private funds from 2011 and setting a path for their eventual increase.
This time around, rather than cut the size of the premium transferred, Poland has made participation in the system optional. While every OFE account remains in place with its rump equity assets, Poles will have three months to determine if the portion of their future social security premium - 2.9% - should continue to go to the OFE funds.
If they fail to declare, their premiums go to a virtual individual account at the social security office.
They will be allowed to review their decision in 2016 and every four years afterward, according to the document posted on the Labor Ministry’s website.