Fears for the future of Poland’s capital markets were eased in August after the number of workers opting to stay with the country’s private pension funds topped expectations.
After a three-month opt-in period that ended on July 30, social security unit ZUS announced that more than 2.5 million Poles – 15% of the working-age population of 16.7 million – had chosen to continue making contributions to second-pillar pension funds know as OFEs, rather than to the state system.
Forecasts had been for a maximum retention rate of 10%, given that not only were workers required to source and return lengthy forms in order to remain in the OFE system but the funds themselves were banned from advertising during the application period.
Analysts also noted that the proportion of inflows into the OFEs is expected to be even greater, as those deciding to opt in are reported to be more financially literate and drawn from Poland’s higher income brackets.
The result was welcomed by the OFEs. Robert Garnczarek, CEO of Axa’s Polish pension arm, says: “The number of people who have submitted their declarations on further opting in to the open pension funds have so far exceeded our expectations. We expect both their number and the value of new premiums to remain within the limits of our natural share in the market, that is, between 6% and 7%.
“Even though it is not a great success in general, we are satisfied with that result and thank these people for their determination in spite of the many obstacles along the way and limited access to information.”
The opt-in process was the latest stage in a radical overhaul of Poland’s pension system that has already seen the OFEs shrunk by more than half. Following a lengthy and rancorous consultation last year (see Euromoney, June 2013, page 50), the Polish government passed a law in January allowing for the nationalization of the second-pillar funds in order to reduce the country’s rising public debt burden.
|Our market should react to the same factors that will |
determine the behaviour of other exchanges
In February, 51.5% of the funds’ assets, worth Z153 billion ($47.8 billion) and consisting mainly of government bonds, were duly transferred to the state system and redeemed. As a result, Poland’s government-debt-to-GDP ratio, which had been creeping up towards the constitutionally mandated ceiling of 60%, fell from 57.1% to 48.7%, according to Fitch Ratings.
Policymakers then turned their attention to diverting new pension contributions away from the OFEs and into the state system, making a transfer to the latter the default option. This sparked fears for the future of Poland’s stock market, which has relied heavily in recent years on the deep pockets of the private pension funds – replenished with inflows in excess of Z2 billion a month – to provide a base of local demand for a steady stream of primary listings.
The fact that such a high percentage of workers opted to stay with the OFEs is therefore good news for local capital markets, says Garnczarek, given that inflows to the funds should remain sufficient to offset the automatic transfer of assets to the state system that will take place 10 years before workers’ retirement, particularly when dividend payments on existing holdings are taken into account.
This means, he adds, that the OFEs will not be forced to generate any “artificial stock supply” at the Warsaw Stock Exchange for the next few years. “Our market should react to the same factors that will determine the behaviour of other exchanges,” he says. “Therefore, the Polish stock exchange will behave in line with the natural economic cycle.”
Andrzej Powierza, an equity analyst at Citi Research in Warsaw, says the changes could even improve the functioning of Poland’s capital markets by boosting turnover. “In the past the private pension funds had large, regular inflows and no outflows, so they were able to adopt a buy-to-hold strategy,” he says. “That was good for the WSE in that it provided a ready market for IPOs but it had a negative impact on turnover.”
Indeed, according to WSE data, while OFEs’ share of free float on the exchange has increased steadily from 28% in 2008 to 43% last year, their portfolio turnover rate has dropped from 28% to 14% over the same period.
As Powierza points out: “Now that the pension funds will have much lower inflows and regular outflows they will have to sell down some of their stakes, which could boost the ratio of turnover to market cap to closer to that of global peers.”
A reduction in funds’ holdings of Polish equities will remain a possibility, however, as limits on investments in both foreign and alternative assets are progressively relaxed. Until last year, non-Polish assets were allowed to comprise a maximum of 5% of OFEs’ holdings. That was increased in January to 10% and is due to rise to 20% in 2015 and 30% the following year.
Similarly, the current requirement for OFEs to hold a minimum of 75% of their assets in equities will be relaxed to 55% in 2015, 35% in 2016 and 15% in 2017. The funds will, however, be prohibited in investing in government bonds and other securities guaranteed by the state.