The greatest deal ever struck...

The first association for some of you should be “a conspiracy theory”. “The greatest lie ever sold” (rings a bell?) is a title of the most recognized film about the events of 9/11 , which implies US government was involved in the attacks on WTC and Pentagon. That’ll be probably the topic for another post, but a few days ago I found myself in a state of let’s say elation at the news of our government’s decision to shave the commissions charged by companies which manage pension funds (Powszechne Towarzystwa Emerytalne). As future client, coerced to sink my money into such fund I was delighted to hear this, my joy is probably shared by millions of other Polish present and future participants of new pension system. The officials from Labour and Social Policy Ministry made indeed a step forward, but I have to say solutions implemented in Poland ten years ago still leave a lot to be desired.
Don’t think I’m against the reform – the previous pay-as-you-go system was undeniably cumbersome, was meant to collapse sooner or later due to the demographic changes (ageing of society), leaving millions of people destitute or weighing down the budget to the unbearable degree. I’m against the shape of what we call a second pillar of the new pension system – open pension funds. Let me present it divided in points:

1) Until now that was the state that forced us to pay several taxes, premiums and other kinds of “fines”, but the state was the recipient of all these transfers, in case of pension funds state entered into an agreement with private businesses and forced citizens to pay them their money, leaving only the choice which fund to choose – that’s the aforementioned “struck deal”.

2) The choice payers were given was illusory, because – as I think and as the example of Chile, where the pension reform was implemented in 1980 – funds in the long term report similar returns – so where is the difference?

3) Until today the pension funds’ managers were entitled to charge 7 per cent distribution fee. Obviously, the lobby of managers slated the authorities’ decision immediately, arguing that lowering distribution fee from 7 per cent to 3,5 per cent will have a miniscule effect on the future capital amassed by pensioners and will surely translate into lower management quality – are they going to spite us? Traditional mutual funds of similar profile (stable growth funds) charge people about 3%. For sure substantial commissions are reaped by the agents who take up to 900 zloty if they convince members of other fund to transfer money to the fund they represent. Here we have the first lot of spongers to get rid of… In the ideal scheme, funds should be entitled to charge only minimal fees and the lion’s share of their revenues should be made up by profit – sharing programmes – i.e., so if funds investments turn a profit of 15%, the participant would get let’s say 13,5%, the rest would go to the pension company as a remuneration. That would be an undisputed incentive for the managers, now they get their dough, irrespective of the fund’s performance. I know it’s cruel but it’s meant to protect particular interests of pensioners.

4) The next question that occurs to me is who exactly owns the money we pay into pension funds? A young, well-educated economist defied the legal obligation to pay his money into pension funds. After numerous legal tussles, the court has dismissed his case. In its ruling we’d read that it was not his money – as a result he had no right to have them in his command. Sorry, but I don’t get it. If I decide to invest in a mutual fund, I become an owner of a fraction of fund’s assets. In case of pension fund I think I am also an owner of a certain part of fund’s assets. If not the pensioners, if not the state, if not the pension companies, then who has a legal right to this money?

5) The cited economist argued he would invest his money better than pension fund and I share his belief, because I think I’m able to assess the risk (adjust it to my eagerness or aversion to take a risk), investment horizon, my needs etc. Pension funds lumping all the premium together the deprive us of the key choice. Regulators imposed various limits and set guidelines to the funds, as a consequence their portfolios consist mostly of government bonds and stocks listed on Warsaw stock exchange. Their performance is, therefore exactingly related to the performance of our national financial markets. The tumbling indices sparked off the discussion about the investment policies of pension funds. If people were given any choice regarding form of investment, some of them would not lose a single zloty within last 18 months. Besides, when somebody wants to acquire units of typical investment fund, she or he is bound to sign a document, in which she or he confirms she / he accepts and is aware of the risk taken by the fund and that it is possible to lose a part of invested sum… In pension fund we don’t even have to be aware that fund may turn a loss I estimate up to 20 per cent a year.

6) Ewa Lewicka, a president of Pension Companies’ Association asserts that government’s move to reduce to distribution fees is “an interference into an economic freedom”. How the hell can we speak about economic freedom when people are forced to sink their money is a flawed undertaking? The government has once given the pension companies the guarantee they’ll be able to sponge on our money. They’ll always be paid the commissions, simply because the number of new system’s participants will be increasing…

7) Some regulations were passed to protect the interest of future pensioners, One of them is the minimal rate of return, calculated on the 3-year-basis. If funds fails to fetch a minimal return, the pension company is obliged to pay into the fund. I only wonder what’s going to happen in about a year, when KNF announces the minimal rate much below zero. Some funds will be boasting they would have beaten the benchmark (the benchmark was minus 10 percent, but I’ve lost only 5 per cent of your money – dear client, aren’t you pleased?)

8) A few days before the last drawing (if someone doesn’t choose a fund within 6 months from taking his first job the person is drawn and her premiums are transferred to one of the funds) one of the funds advertised itself as one of the biggest. I just clutched my head… The bigger pool of assets has the fund, the more harder it is for the managers to modify the portfolio. It’s obvious that if you have 100 shares it’s easier to trade them than 100 shares. With time, we’ll probably witness deteriorating performance of the funds and the pension funds will resemble a bull in a china shop… Why the hell did they take pride in their size?

So called economists say people are stupid, so given the freedom they would consume the money they’re now obliged to save in pension funds. Some would surely do so – but why interfering in somebody else’s business? If you want to retire and scavenge – fire away! But don’t force me to sink my money into the wallets of fund managers – in fact into losers’ wallets. Participation in the new system will remain obligatory, so under these circumstances I can only put forward liberalisation of participation’s terms. The solutions in the second pillar should be similar to the ones in the third one. One should decide how to invest his money. The choice is wide – bank deposits, long-term insurance policies, investment funds of various risk profiles… I’m just yearning for more freedom…

And what do you think about or pension system? I consider this post extremely important so if something is blurred I’ll try to make it clear.