POLAND - Poland's second pillar pensions landscape is set for further consolidation as the market becomes crowded.
In 1999 Poland introduced a funded second pillar scheme to run alongside the State PAYG scheme. Based on the Swedish model, this system is run on a notional defined contribution basis, calculating an individual’s pension on retirement by dividing the capital built up by the average life expectancy at the age of retirement.
The second pillar is financed by contributions of 7.3% channelled into private pension funds. At the outset 21 pension funds were set up, but since then consolidation has reduced these to 16. Of these, four have attracted the bulk of the participants - Commercial Union being the largest with two million members, followed by PZU, the former State monopoly, ING Nationale Nederlanden and AIG. The current number of players looks overweight for the size of the market.
Jim Kernan, a senior manager with PricewaterhouseCoopers, based in Warsaw, said: “I think over time we’ll get down to 10. I think some will ultimately want to get out of the market.”
Anyone under 30 in April 1999 had to sign up to the new funds and those between 30 and 40 had a choice. The scheme’s popularity exceeded all expectations with 10 million taking them up rather than the six million expected.
Currently allocations to Polish government bonds are unlimited; equities are limited to 50% of assets; and no more than 5% of the fund can be in one company. Only 5% of assets may be invested outside Poland but, with EU membership, investment rules are expected to fall in line with EU standards with up to 20% of assets investable in the EU. This should alleviate the problem of distortions caused to the Polish stock market by the scale of investment by pension funds.
Kernan said: “There is the risk of an asset bubble if they pump too much capital into the capital market. We have about US$2.5bn worth of funds going into pension funds every year.”
At the end of May this year the total value of Polish pension fund assets amounted to 38bn zlotys (around US$10bn).
The funds have a guaranteed minimum return, judged by comparison with their peers. If one fund falls below the minimum compared with other funds, the manager has to make up the difference out of its own reserves.
Kernan slams this guarantee: “It forces the herd mentality among pension fund managers. It winds up costing the system more and lowering the returns.”
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