Polish pension confiscation – a threat to funded private pensions or a one-off?

by Dr. Ros Altmann

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Pensions pole-axed with hardly any fuss!

Polish Government transferslong-term private pension assets to help short-term public finances

As former Finance Minister denounces pre-funding of pensions as too ‘costly’ is this a fundamental challenge to all funded pensions and what safeguards could help?

The Polish government’s confiscation of private pension assets has gone ahead almost unnoticed. Eur36 billion of Polish Treasury bonds held by Poland’s second pillar of mandatory private sector pension funds (called OFE), comprising more than half the assets of the country’s fourteen private sector pension managers, were transferred to the Government and all the bonds have been cancelled. This reduces Poland’s reported national debt from around 57% to 49.9% of GDP. There has been remarkably little fuss about this sequestration of pension assets, but surely it raises important issues for anyone involved in private pensions.

Using long-term assets to fix short-term deficits: Poland cannot easily issue more debt once its debt-to-GDP ratio exceeds 50% so politicians needed to find creative ways to manipulate debt levels down. The Finance Ministry decided to take pension fund bond holdings into public ownership and create state-guaranteed pensions instead, which do not show as liabilities in Government accounts. In June 2013, the Polish Prime Minister ruled out nationalising these pension fund, declaring on national television ‘there is no way the State will take OFE’s money’. A few months later, that is exactly what it did, by using assets set aside for long-term pension payments to fix short-term fiscal deficits.

Polish Finance Minister justifies move by denouncing pre-funding of pensions: Writing in the Financial Times, former Polish Finance Minister Jacek Rostowski responded to criticism of this move by saying ‘it is important for Poland to stop this costly pre-funding of pensions.’ The Polish Government no longer wishes to pre-fund future pensions, despite previous assurances that this was needed in order to protect them. It is focussing on funding today’s pensions only. If politicians decide that pre-funding of pensions is unnecessarily expensive is this not a fundamental challenge to the wider international private pensions industry?

The end of Poland’s private pensions industry? Poland’s private pension funds are managed by global names such as Aviva, Allianz, ING and Axa, and had a total value of around 20% of Polish GDP. The Government has taken 51.5% of the assets and converted the liabilities of the second pillar OFE, into liabilities of the first-pillar state pension system (ZUS). The remaining 48.5% of private pension assets (primarily equities) will be gradually transferred to the state during the ten years prior to each individual’s pension age. People will not be obliged to pay into the private part of the system in future, thereby curtailing the inflow of funds and potentially damaging the Warsaw stock market. This, of course, merely shifts larger costs onto future generations, rather than facing up to financial constraints now, but politicians do not see it that way – they see it as being fiscally responsible and cutting costs (on their watch).

How safe are private pensions? In the past two decades, many countries have encouraged or forced their citizens to participate in private pension schemes (just as the UK is doing with auto-enrolment). Is there a danger that future politicians will be tempted to raid private pensions in tough times? Can we improve protection for citizens’ pension contributions as more people are encouraged to save for their retirement and can we ensure the money will be there for them when they reach old age?

Other countries have recently confiscated pension assets too: Private pensions have been raided by several countries over the years. In 2001, Argentina confiscated $3.2bn of private pension savings and then seized $30bn of pension fund assets in 2008, ostensibly to protect people from the volatile capitalist system, but the money was just used to fund current spending to compensate for falling tax revenues. More recently, several EU countries, saddled with too much debt following the financial crisis, have also raided pension assets to shore up short-term public spending – or fund bank bail-outs. Each example has been relatively unnoticed outside its own country, but the trend is clear. Here are some examples of pension raids.

IRELAND 2009: Took Eur4.4bn National Pension Reserve Fund assets to bail out banks. The Fund was established in 2001 to ensure the Government could pay pensions in 2025-2050

PORTUGAL 2010: Nationalised pension assets of Portugal Telecom

IRELAND 2010:Took remaining Euro 2.5bn National Pension Reserve Fund assets

FRANCE 2010:Took Euro33bn from its National Reserve Pension Fund that was intended to fund pensions in 2020-2040 but used the money to fund today’s pensions instead

HUNGARY 2010:Nationalised $14bn of individual private pension accounts which had been set up in 1998 to limit state pension liabilities and used the money to reduce state debt

PORTUGAL 2011:Confiscated pension assets of its largest banks which comprised around three quarters of private pension assets

POLAND 2011: In 2011, Poland reduced the mandatory contributions into its second pillar privately-managed pension funds from 7% of salary to 2.3%, with the balance being paid into the state pension system

UK 2012: Transferred £24bn of Royal Mail pension assets to the Treasury and used the funds to reduce the current budget deficit

POLAND 2013: Nationalised half private pension assets by confiscating bond holdings

UK has raided private pension assets too: Apart from the Royal Mail £24billion pension asset transfer, the UK has effectively raided its private pensions in other more subtle ways. Quantitative Easing, by lowering annuity rates and increasing pension deficits, has reduced pensions, while the lower gilt yields resulting from QE have helped politicians fund ballooning public debts. In reality, this just passes the costs of pensions onto future generations and reduces pressure on today’s politicians to rein in public spending. The UK is just introducing a national system of automatic enrolment for all workers into workplace private pension schemes. Each worker will build up private pension savings to supplement declining future state pension payments and to increase pension incomes beyond that which the state can afford. Do we need to find ways to protect these pension accounts from public sequestration in future years?

Private pensions increasingly vulnerable as countries struggle with fiscal deficits: The Polish move is the latest example of the lengths Governments are having to go to in order to manage excessive debt levels following the banking crisis and how vulnerable private pensions have become as a tempting target for cash-strapped politicians. Anyone involved in private pensions needs to consider the implications of these moves, particularly in light of how little effective opposition there seems to have been to protect private pensions.

22 February 2014

ENDS
Dr. Ros Altmann