4 September
2013 might go down in the history as the day when privatisation of social
security management was effectively dismantled…
Last
Wednesday the government unveiled a draft of proposed changes in the pension
system. The proposal is a combinations of two out of three variants presented
to the public in late June. In brief, the fundamental changes are:
- 51.5% of
assets amassed in pension funds will be transferred to state-run social
security fund – this portion represents treasury securities currently held by
the pension funds, which will be cancelled upon the transfer; thus the
borrowing needs of the government and “overt” public debt will decrease and its
contingent liabilities towards future pensioners will increase, on the other
hard, the government will lose a strategic creditor, who could step in when
other institutions were reluctant to buy new issues of government debt,
-
private-run pension funds will be prohibited from buying securities bearing
sovereign credit risk of Poland, i.e. treasury bonds and debt securities
guaranteed by the government – this move increases risk profile of the pension
funds,
- other
assets amassed in the pension funds will stay intact (for the time being…),
- Poles
will have three months from the date the new pension law comes into effect, to
decide, whether to transfer 2.92% out of 19.52% of gross salary to private-run
pension funds, or to transfer the whole pension contribution to the state-run
social security system; those who do not bother to submit the declaration, will
have the whole contribution automatically transferred to state-run pillar of
the system; the decision will be irrevocable,
- assets
from pension funds will be moved in ten tranches to the state-run fund over ten
years prior to retirement,
- internal
benchmark (setting minimum required rate of return) and investment limits are
to be lifted,
- fees
charged by the pension fund managers are to be slashed by 50% and capped on
such level.
Markets’
reaction was predictably revengeful – on Wednesday and Thursday:
- share
prices on Warsaw Stock Exchange plummeted – on Wednesday WIG20, index
constituting of 20 blue chips, dropped by 2.5%, on Thursday it closed over 4.5%
below Wednesday’s close, hitting intra-day low of over –6.0%, on Friday it
rebounded by over 2.5%,
- zloty
depreciated slightly against major currencies,
- yields on
Polish government bonds rose sharply, with yields on 10Y securities reaching
5.0%, much more than 3.6% at the peak of bygone rally on Polish treasury securities…
The
government’s representatives said they had predicted the turmoil and Poland
would not lose on the rise of debt service costs, as 85% of borrowing needs for
2013 had already been financed at much lower cost.
I
personally can also boast about predicting the little market crash. Unlike in 2011, when the crash after US sovereign rating downgrade was more severe, I
sold out of almost all of my stock holdings and bought back much of them at
almost 10% lower prices, when panic on the market was reaching its height. The
stock market might stay volatile, but given the current economic recovery, if
stock prices keep going down, this will only create an even bigger ‘buy’
opportunity. In the mid-term I believe I will personally benefit from the
impact of the reform on the stock market. Fundamental value of a company does
not depend on obligatory participation in private-run pension funds. Market
pundits might tell you pension funds will not generate additional demand that
used to drive stock prices up, but it is no reason to worry. From now they will
stop inflating valuations of companies artificially and I find it a favourable
change for the capital market. Remember, every bubble has to burst sooner or
later. It has not swollen yet, however, if status quo was retained, demographic
changes (increasing outflows from and decreasing inflows to pension funds)
would exert downward pressure on stock prices anyway. So that unpleasant moment
has been brought forward and its magnitude lessened.
Actors on
the political arena in unison hold the view pension system needs a reform, but
their assessment of government’s plan vary:
- Leszek
Miller, president of SLD pledged to support the government in winding down the
reform engineered by Mr. Buzek and Mr. Balcerowicz, therefore the ruling
coalition faces no risk of the new law being voted down in the parliament, even
though it cannot reckon on support from Civic Platform’s conservative flank –
the key outsider / dissenter, not yet ousted from the party, Jarosław Gowin
announced he would not cast a vote in favour of the reform,
- PiS
politicians, who for a long time have called for freedom to choose whether to
participate in private-run part of social security system, when the government
pursues the project they have long advocated, refer to a (true) reasoning the
government pursues the reform only to loosen the tightness on public finances,
not out of care for future pensioners – the matter of the foremost rationale is
clear, but if the government implements the vital part of their agenda and they
try to oppose it, it means pursuit of power and making politics in more
important for them than welfare of Poland,
- Janusz
Palikot called for deeming the assets in pension funds owned by Poles and
giving them the right to handle them at their discretion…
Media
coverage was somewhat biased. Key headline were crying out “SKOK NA KASĘ”
(literally: “gripping / seizing the money”), so audience of such news could
have been convinced the government is about to steal their savings, while from
the legal point of view the government is just relocating means within public
finance system and takes them over not from private owner, but from private
manager. Imagine a state-owned motorway which until now has been administered
by a private manager and paid an administration fee for road maintenance. Is
moving the motorway under government’s administration and depriving the private
company of its fee a nationalisation? Oddly enough, there are economists,
including a renowned chief economist of Credit Agricole Polska, who say the change is neutral for future pensioners. And Moody’s rating agency in its comment
issued on Friday also presents a balanced picture of the reform. I must say
pension funds managers’ lobby is powerful and effective in crying out its
outrage at depriving them of state-secured huge revenues. May it exercise its
right to run an informational campaign encouraging citizens to stay in pension
funds and showing benefits of such decision. If it happens, do expect to have
it dissected on this blog.
Now baffled
citizens have a dilemma what to do with their future pension contributions. I
do not feel entitled to advise to what to do. If you favour interest of your
state (i.e. fellow taxpayers) and following ethical principles in business (the
government should not guarantee income to privileged companies), you probably
should have your whole pension contribution transferred to state-run social
security system. If you believe in superiority of private management (that
should have its investment restrictions and government guarantees for minimum
pension benefit lifted) and discern pension funds keep assets, not just book
records, you should have part of your contribution transferred to private-run
pension funds.
To be
sincere with you, I have not taken the decision yet. What the government
presented recently is just a draft of proposed reform, lacking important
details that can impact my decision. Only after I read the new law, I will be
properly informed to make any judgement. The key issue for me will be probably
the level of fees pension fund managers would be allowed charge. I recently
took the opportunity to summarise the pension account allocated to me and
learnt on 19 July 2013 (date is not incidental, as I used to be a “member” of
Polsat OFE, taken over by PKO Bankowy OFE and 19 July was a merger completion
date), after 3 years of paying contributions, market value of settlement units
allocated to me was 104.10 PLN (or some 2%) higher than sum of my contributions
(now, after yield on Polish government bonds have gone up and stocks lost a few
percent of their value I fear the balance of this account dropped below the
amount of contributions paid). The worst savings account in the worst bank
would fetch a higher return, even after taxes! In the meantime, sum of load
fees only was 175.71 PLN. I cannot count in management fee, as it is included
in settlement unit valuation, but it seems gain for my future pension would
have been at least three times higher, had it not been for the exorbitant fees…
The far too high fees are the key factor contributing to built-in efficiency of
pension funds. Even if underlying assets bring the desired rate of return, in
the long-run exceeding pace of economic growth, management costs will eat up
the excess return, making the whole fuss not worthwhile…
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