A SUPPLEMENT TO EUROMONEY/APRIL 1999: EASTERN EUROPE
Poland’s pension plans have been on and off more times than a light switch in the past three or four years. Now the scheme is up and running and in May the first zlotys will start dropping into the coffers of the 16 pension fund companies formed to manage Poland’s new private pension scheme.
It consists of three parts. The existing pay-as-you-go system stays as it is for those aged over 50. The second part involves people paying into one of the private pension schemes: for those aged under 30 this will be mandatory; those aged between 30 and 50 – and, in a late concession, all the country’s coal miners – will be able to opt out. The third element is a voluntary scheme for those wishing to make additional contributions.
It is the second part that investment companies, insurance groups and banks are focusing on because it is here that the biggest profits will be made. Western banks and insurers spent last year tripping over each other to get a licence to collect contributions under the scheme. Most have joined forces with local banks or insurers to gain access to valuable branch networks. “We need the combination of our own know-how from other countries with the local market knowledge,” says Harald Ruckle, head of pension funds in central and eastern Europe at Citibank Polska.
The funds should also provide a major boost to Poland’s financial sector. Indeed the scheme was deliberately designed to provide a fillip for the domestic capital markets. But the big question is, how much of a boost?
The way the system is regulated may drive pension money into lower-yielding assets such as government bonds rather than into equities or corporate bonds. Tight restrictions have been imposed on how fund managers can invest the money. No more than 20% of assets can go into bank deposits and securities, for example and no more than 15% into municipal bonds. Investment in shares will be limited to 40% of a fund’s assets. Other investments such as derivatives and real estate are banned altogether.
In addition, a rule that funds must show a minimum rate of return for the first two years may have the effect of dissuading higher-yielding investments. Funds must make a minimum return of either half the average for the whole sector or four percentage points below the average (whichever is lower). That may persuade all the funds to play it safe, choosing investments which can guarantee a positive short-term return rather than pursuing longer-term gains. “Nobody wants to have any flops in the beginning,” says Grzegorz Swietlik, chief executive of CA IB Investmentbank in Warsaw. “If you go into equities and the market goes down at the very beginning, you are in deep trouble.”
The funds are acutely aware that the Warsaw Stock Exchange looks vulnerable to a downturn. “Nobody,” says Ruckle at Citibank, “will want to be too far above or below the industry average for the first year, so there will probably be a herding effect away from equities.”
ABN Amro calculates that fund allocation to the stock market this year and next will be about 10% to 15%, increasing demand for listed equities by between $114 million to $171 million this year. That figure is equivalent to less than 1% of the market capitalization of the stock exchange. But the true impact on the stock market may come after two years, when the minimum-return restriction is ended and by which time the size of the funds may have reached such a point that equity investment becomes unavoidable. “It is then,” says CA IB’s Swietlik, “that pension funds will be able to see how the rest of the field is doing and perhaps take a little bit more risk.”
But other factors could yet boost the Polish stock market in the short term. The government has pledged to privatize some major companies this year, including a second tranche of telecommunications operator TPSA, oil refinery Petrochemia Plock and the national airline Lot. “Every large privatization is a step in the right direction,” says Wojciech Kostrzewa, president of BRE bank. “There is a visible preference in the stock market for high liquidity and these big privatizations will bring just this.”
But if the pension funds choose to avoid buying equities in the near term, where will Poland’s new pension money go?
“For about the first two to three years, the funds will invest first in treasury bills and government bonds,” says Jacek Adamski, chief executive of Pioneer Polish Securities. “The government bonds in particular will be popular because of their low risk and reasonable rate of return.” He also thinks that municipal bonds will become popular as they too are considered reasonably safe.
Johannes Wehringer, capital markets analyst with RZB bank in Vienna, believes that for the first year at least, 80% to 85% of funds will go into treasury bills. That will not only lower borrowing costs for the government but will have a knock-on effect, allowing other high-quality borrowers to access the capital markets, particularly by issuing commercial paper.
The impact of Poland’s pension reforms on all areas of the capital markets will depend on how much money goes into the pension funds. Few exact figures on the volume of funds will be known until late this autumn when the first sign-up deadline passes. The first of these, for those aged under 30, is not until the end of September with a second deadline due in December for those between aged 30 and 50. The funds are unsure what proportion of this second group will choose to join up. Estimates vary from 40% to 60%.
These uncertainties makes it difficult for the fund managers to work out whether this will be a profitable business. Some are likely to capture just enough clients to break even, a figure calculated at around 300,000. So far, the state run supervisory board, UNFE, has granted licences to 16 pension fund companies, and is likely to grant up to a further six. This, most market participants believe, is too many for a potential market of some nine million people to support. “The market will verify how many funds we need,” says CA IB’s Swietlik. “After six months we will see that some of them are not economically viable.”
Some foresee a market with a top tier of eight or nine companies. Others believe that market share will be more concentrated, with three to five companies taking 80% of contributions between them. The likely leaders include Nationale Nederlanden, a joint-venture between ING and Poland’s Bank Slaski, the Polish fund PZU, Poland’s Bank Handlowy and, possibly, Norwich Union.
