Pick-pocketing pensions

Since the financial crisis, several governments have been appropriating private pension assets. Ilonka Oudenampsen looks at the latest case in Poland and what this might mean for occupational pensions across the continent

Organisations such as the OECD, the European Union and national governments have been promoting workplace pension saving, in light of longevity expectations and the outlook on government spending on pensions. However, a worrying trend can be spotted across the continent that might undermine confidence in workplace pensions saving and result in worse retirement outcomes for future pensioners. While most instances have gone relatively unnoticed except in their own country, several cash-strapped governments seeking quick and easy fixes to plug their deficits have been unable to resist the temptation of the millions held in private pension schemes.

To date, several nationalisations of second pillar assets have taken place. The first took place in Ireland in 2009, when the government bailed out banks with €4.4 billion taken out of the country’s National Pension Reserve Fund. A year later, the remaining €2.5 billion was taken out of the fund, while Portugal nationalised the assets of the Portugal Telecom pension fund and France took €33 billion from its National Reserve Pension Fund.

In 2011, Portugal confiscated the pension assets of its largest banks, comprising around three quarters of private pensions, while last year the UK reduced its current budget deficit by taking £24 billion of Royal Mail pension assets.

However, the worst case yet was Hungary, where in December 2010 the government nationalised $14 billion of private pensions to reduce the budget deficit and public debt. The state threatened to bar anyone from the state pension system if they did not agree to transfer their private individual account.

Poland is the latest addition to this list, as it has made plans to appropriate half of the country’s private pension funds by nation-alising its bond holdings, which will reduce reported national debt to 49.9 per cent of GDP.

Former UK government adviser Ros Altmann explains: “Poland is restricted from issuing more debt once its debt-to-GDP ratio exceeds 50 per cent, so politicians needed to find creative ways to manipulate debt levels down. By taking pension fund bond holdings into public ownership, the state-guaranteed pension liabilities will be shown in government accounts as national assets, rather than liabilities. This, of course, merely shifts larger costs onto future generations, rather than facing up to financial constraints now, but pensions are a tempting target to raid for any government that can get away with it.”

The Polish private pension funds have a value of over 20 per cent of GDP, with 51.5 per cent of assets invested in Polish government bonds. These assets will be taken into the state pension system (ZUS), which will effectively reduce Polish Treasury bond supply and enable the government to increase issuance to fund public spending. Furthermore, all remaining assets in the private pension funds will be transferred to the state during the 10 years prior to an individual’s pension age.

Justifying the proposal, Polish Prime Minister Donald Tusk said that the old system was too expensive and made Polish public debt appear higher than it actually is. “We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer.” However, Altmann disagrees and says that this is “mere smoke and mirrors”. She notes: “It just passes the costs of pensions onto future generations, without making them safer at all - but it does, of course, reduce pressure on today’s politicians to rein in public spending.”

The Polish Chamber of Pension Funds (IGTE) has been trying to convince the government to vote against the plans by showing the negative impact the nationalisation will have on future pensioners and on the sustainability of public finances in the long term.

Head of the association Małgorzata Rusewicz says: “When the 50 per cent in treasury bonds will go to ZUS it will mean that pension funds will need to sell additional equity in a very forced way. And it means that probably foreign buyers would buy those equities and also for lower prices. So we try to show those kind of risks, not for the pension funds but for the future pensioners. However, the parliament didn’t want to take this into account.”

Rusewicz points out that a survey by the association found that from 35 different age groups only seven will gain under the proposed plan, while more than 20 will have a lower pension in the future. “We are also afraid that when the government will push pension funds to invest only in equities, it will create a danger from the perspective of the future pensioner and that’s why one of our goals is to convince the government to let pension funds buy at least 5 per cent or 10 per cent of treasury bonds, to create diversification in portfolios.”

At the moment the upper house of Polish parliament has agreed to the proposals, so the association will try to discuss this in the lower house as well, but Rusewicz believes nobody in the parliament is prepared to listen, so she has instead fixed her hopes on the president. “What I hope is that the president will not sign this act and will send it to the constitutional tribunal to find out if this legislation is in line with the Polish constitution.”

While the IGTE is lobbying its government, countries surrounding Poland are keeping a close eye on the developments. With Poland being the biggest economy in the region, it can lead to spill over one way or the other in the neighbouring countries, PensionsEurope secretary general Matti Leppälä says.

“We’ve seen that in the debate in Lithuania already. After the Polish reform at least some people in the government or close to the govern-ment are considering whether that should have an impact in Lithuania.” In the CEE country they are currently in the middle of a reform, so developments in a neighbouring country are naturally “interesting and relevant”, he adds.

Leppälä explains that it also creates concerns around possible impacts on deciding on future pension legislation at a European level. “They are full member states of the EU and making legislation just as the other countries. So if we have member states who don’t believe in occupational pensions, who have more or less abolished the occupational part of the pension system, I would think it’s natural that they would not have the same interest in developing a good framework for those pensions as the countries who do have this part of the pension system in place.”

At the moment the final details of the Polish proposal are not known yet. The European Commission has said it will look at its compatibility with relevant EU legislation, but added that, in the end of the day, it is up to the member states to decide the structure and financing of its pension system.

However, Leppälä points out it could do more. “In reality the EU has seen that it has the possibility and capability to give recommendations and put political pressure on the member states on different parts of their pension system, be it retirement age, especially early retirement age, and in some countries also in relation to the contributions to the private funded system. So in some cases the EU seems to have a lot of competence and willingness to tell the member states what they should or should not do, and then in a situation like this, they will say that it’s up to the member states.”

He believes that the European Parliament can play an active role in the debate and that, if deficit levels and a desire to ease the burden on public debt are the driving factors behind these measures, the industry needs to think about what it can do about this if that is a problem other countries will be faced with as well.

“We think that the Commission should, even in these difficult devel-opments, really support [second pillar pension provision] and put pressure on the member states not to abandon these systems. If the Commission thinks that they are not adequate, if they are not the best possible, I think they should aim to improve the systems, but to abolish the second pillar or occupational pensions, I think, leads to increasing problems with the sustainability of the total pension system.”

Written by Ilonka Oudenampsen

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