Poland Confiscates Half Of Private Pension Funds To "Cut" Sovereign Debt Load
While the world was glued to the developments in the Mediterranean in the past week, Poland took a page straight out of Rahm Emanuel's playbook and in order to not let a crisis go to waste, announced quietly that it would transfer to the state - i.e., confiscate - the bulk of assets owned by the country's private pension funds (many of them owned by such foreign firms as PIMCO parent Allianz, AXA, Generali, ING and Aviva) , without offering any compensation. In effect, the state just nationalized roughly half of the private sector pension fund assets, although it had a more politically correct name for it:pension overhaul.
By way of background, Poland has a hybrid pension system: as Reuters explains, mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE. Bonds make up roughly half the private funds' portfolios, with the rest company stocks.
And while a change to state-pension funds was long awaited - an overhaul if you will - nobody expected that this would entail a literal pillage of private sector assets.
On Wednesday, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings. The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.
But why is Poland engaging in behavior that will ultimately be disastrous to future capital allocation in non-public pension funds (the type that can at least on paper generate some returns as opposed to "public" funds which are guaranteed to lose)? After all, this is a last ditch step which no rational person would engage in unless there were no other option.Simple: there were no other option, and the driver is the same reason the world everywhere else is broke too - too much debt.
By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend. Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of GDP. This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government's own calculations.
To summarize:
- Government has too much debt to issue more debt
- Government nationalizes private pension funds making their debt holdings an "asset" and commingles with other public assets
- New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio
- Debt/GDP drops below threshold, government can issue more sovereign debt
And of course, once Poland borrows like a drunken sailor using the new window of opportunity, and maxes out its new and improved limits, it will have no choice but to confiscate more assets, and to make its balance sheet appear better, until one day, there is nothing left in the private sector to confiscate. At that point the limit itself will have to be legislated away, and Poland will simply continue borrowing until one day there are no foreign lenders willing to take the same risk as the nation's private pensioners. At that point, Poland, which is in the EU but still has the Zloty, can just go ahead and monetize its own debt by printing unlimited amounts of its currency.
Of course, we all know how that story ends.
The response to the confiscation was, naturally, one of shock:
The reform is "a decimation of the ...(private pension fund) system to open up fiscal space for an easier life now for the government," said Peter Attard Montalto of Nomura. "The government has an odd definition of private property given it claims this is not nationalisation.""This is worse than many on the markets had feared," a manager at one of the leading pension funds, who asked not to be identified, told Reuters."The devil is in the detail and we don't yet know a lot about the mechanism of these changes, what benchmarks will be use to evaluate our performance... (It) looks like pension funds will lose a lot of flexibility in what they can invest."
Catastrophic consequences for fund flows aside, the Polish prime minister had a prompt canned response:
Tusk said people joining the pension system in the future would not be obliged to pay into the private part of the system. Depending on the finer points, this could mean still fewer assets in the private funds."The (current) system has turned out to be built in part on rising public debt and turned out to be a very costly system," Tusk told a news conference."We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer."
You see, he is from the government, and he is confiscating the pensions to make them safer. Confiscation is Safety and all that...
Polish officials have tried to reassure investors, saying the overhaul avoids the more radical options of taking both bond and equity assets away from the private funds outright.They say the old system effectively made Polish public debt appear higher than it really is.
Well, once you nationalize private assets, the public debt will lindeed appear lower than it was before confiscation: we give them that much.
End result: "The Polish pension funds' organisation said the changes may beunconstitutional because the government is taking private assets away from them without offering any compensation.... This may lead to the private pension systems shutting down," said Rafal Benecki of ING Bank Slaski."
Unconstitutional? What's that. But whatever it is, it's ok - after all the public pension system is still around. At least until that too is plundered. But in the meantime, all such pensions will be "safer", guaranteed.
But best of all, in the aftermath of Cyprus, we now know what the two most recent European blueprints for preserving the myth of solvency are: bail-ins, which confiscate deposits, and pension fund "overhauls", which confiscate, well, pension funds.
And now, back to the global recovery soap opera.
http://blogs.wsj.com/emergingeurope/2013/09/05/polish-assets-tank-as-pension-overhaul-sinks-in/
WARSAW—Polish stocks and bonds continued to fall Thursday in the wake of the government’s announcement of detailed plans to shake up state pensions as it tries to cut debt.
Poland said it would nationalize sovereign bonds held by privately managed local pension funds in order to cut public debt, confirming plans it first announced in June.
The government also said it would no longer force Poles to pay a portion of their tax money into private pension fund companies, a move likely to diminish the funds’ role as the largest stock-market investors in the country.
The announcement of details of Poland’s plan for the pension system sent shockwaves through the Polish financial markets. The blue-chip WIG20 index closed 2.5% lower on the day on Wednesday before losing another 4.6% on Thursday as investors expect the private fund companies to eventually have to sell down shares in listed companies. The yield on 10-year bonds jumped above 4.8% on Thursday from some 4.55% before the cabinet went public with the plan.
Introduced in 1999 to diversify risk for the country’s aging population, the fund companies have received part of Poles’ wages and now have about $86 billion under management.
The cash has been invested in stocks of companies listed on the Warsaw Stock Exchange and in Polish sovereign bonds, as well as other assets. It has helped propel Warsaw to the position of the largest stock market in Central Europe. But it has also stretched Poland’s public finances.
With money channeled into the private fund companies, the state-run social security administration that pays current pensions has had to share revenue. Its deficit has been financed by successive governments, which themselves have had persistent deficits and needed to issue bonds, until 2011 often for the same money they had previously transferred to the private element of the pension system.
In 2011, the current Polish government cut the flow of cash to reduce those bond issues. It said on Wednesday it will redeem all the bonds previously sold to the private pension funds over the past 14 years.
That bond pile is worth some $37 billion and its redemption will cut Poland’s public debt to some 49% of gross domestic product from some 57% expected this year, moving the figure closer to the level of the Czech Republic, which has enjoyed much lower financing costs than Poland.
The Polish pension overhaul will also mean that participation in the private pension fund scheme, stripped of the bonds, will become voluntary for employees, who will have to express their wish to continue paying money into it. Economists expect few of them will, while the government raised doubts about the companies’ ability to generate high returns.
“Those who believe the customer should be brought into the store in handcuffs don’t have a lot of faith in the quality of services they offer,” the country’s finance minister, Jacek Rostowski, said on Thursday.
He acknowledged that if less than 15% of current participants of the system opt to stay in the private funds, that part of the system is bound to wind down. At 62 years of age, the British-born Mr. Rostowski said he will rely on the state-run administration for his future Polish pension.
The Polish finance minister said he expects markets to stabilize and financing costs to fall due to lower nominal public debt. Moody’s Investors Service said the country’s public finances will benefit in the short term and its credit rating, at A2 with a stable outlook, wasn’t going to suffer. A government bond auction on Thursday showed stable interest in Polish bonds, with demand above the supply on offer.
But the overhaul will likely undermine investor confidence in Poland, while the share of Polish bonds in the hands of foreign investors will remain elevated, Moody’s also said. A higher share of bonds held by foreigners potentially exposes Poland more to shifts in international sentiment.
The business lobby of pension funds, the Economic Chamber of Insurance Companies, said Wednesday it’s “deeply disappointed” and that the government’s plan “raises serious legal concerns” and violates the constitution, which protects private property. The three largest private pension funds are companies owned by the local units of ING Bank NV, Aviva International Insurance Ltd, and local insurer PZU SA, servicing a total of nearly 8 million future pensioners.
Despite protests, their fate looks sealed. The country’s conservative opposition, usually at odds with the governing camp, is against the current system, with its leader, Jaroslaw Kaczynski, saying that Poles had been misled about it “like about no other matter.” Authorities promoted the new pension scheme in the late 1990s with television commercials showing senior citizens on exotic beaches. According to latest government information, current employees’ pensions will be a fraction of their final pre-retirement wage.
The European countries with funded pension schemes similar to Poland’s have mostly cut the flow of cash amid the Continent’s financial crisis, with Estonia suspending payments completely and Hungary scrapping the system in 2010, the Polish government said.
http://www.bloomberg.com/news/2013-09-04/poland-to-take-over-bonds-from-pension-funds-in-system-revamp.html
Poland to Cancel Bonds From Pension Funds in System Revamp
By Piotr Skolimowski & Marta Waldoch - Sep 4, 2013 1:40 PM ET
Poland will take over and cancel government bonds held by its privately managed pension funds, stopping short of fully “nationalizing” the system as it seeks to curb public debt, Prime Minister Donald Tusk said.
Pension funds will keep current assets that they invested in stocks and future contributions to the system by Poles will be “voluntary,” Tusk told reporters today in Warsaw.
| Sponsored Links | |||||||
|
Top CFOs Discuss the 2013 Financial Outlook. Watch Vi...
| |||||||
|
If you owe less than $729k, you probably qualify for ...
| |||||||
|
Do you hate overdraft fees? Us too. Click to see GoBa...
| |||||||
| Buy a link | |||||||
The government, gearing up for elections in 2015 and trailing the opposition in polls, is seeking to spur recovery in the European Union’s largest eastern economy, which is forecast to expand this year at the weakest pace since at least 1997. The owners of companies running Poland’s pension funds include Aegon NV (AGN), Allianz SE (ALV),MetLife Inc. (MET), Aviva Plc (AV/), AXA SA (CS), Assicurazioni Generali S.p.A., ING Groep NV and Nordea Bank AB. (NDA)
“The privately run pension system is partly built on expanding debt and that has turned out to be very costly,” Tusk told a news conference. “The system’s impact on public debt is crushing and has effectively prevented us from making another civilizational leap.”
The shift would reduce public debt by about 8 percentage points, Finance Minister Jacek Rostowski told reporters.
Yields Rise
Yields on the government’s 10-year zloty-denominated bonds increased 13 basis points, or 0.13 percentage point, to 4.79 percent, the highest since October 2012. The zloty pared its gains, trading 0.1 percent stronger against the euro at 4.2763 at 6:04 p.m. in Warsaw. The WIG20 Index of the country’s largest and most-liquid stocks declined 2.5 percent, the lowest close since July 30, data compiled by Bloomberg show.
The economic slowdown forced the government last month to widen the budget deficit by 16 billion zloty ($5 billion) to 51.6 billion zloty. It also suspend thresholds limiting increases in public debt, a move Fitch Ratings said Aug. 23 “reduced fiscal credibility.”
The government outlined in June three options to overhaul the country’s three-tier pension system, which was set up in 1999. Contributions to privately managed funds have reduced funding for the pay-as-you-go state system that delivers benefits to current retirees, forcing the government to cover the shortfall through bond sales.
The 14 privately managed pension funds in the mandatory system held 281 billion zloty of assets, including 111.4 billion zloty of equities and 121.2 billion zloty of bonds as of July 31, data from Poland’s financial markets regulator show.
State Takeover
The state will take over the amount of bonds that pension funds held as of end of Sept. 3 and turn them into pension liabilities in the state-run social security system, Deputy Finance Minister Wojciech Kowalczyk told today’s news conference.
The state will assume control of 51.5 percent of pension-fund assets, including bonds guaranteed by the government and “other non-stock assets,” he said in an e-mailed statement. The changes were designed as to “avoid negative market impact,” he said.
The security system will also gradually absorb pension-fund assets for people due to retire in the 10 years prior to reaching the official pension age, Tusk said.
The pension changes will take effect by mid-2014, Labor Minister Wladyslaw Kosiniak-Kamysz said at the briefing.
Foreign Share
Pension funds will continue to hold about 48.5 percent of their current assets, Rostowski said. While the funds won’t be allowed to buy government bonds, they’ll be able to buy more corporate debt and will be freed from having to comply with performance benchmarks, according to comments from the labor and finance ministers.
While the cancellation of bonds cuts public debt, it would also increase the share of outstanding bonds held by foreign investors to about 45 percent from 36 percent as of July 31, according to Rafal Benecki, chief economist at ING Groep NV (INGA)’s Polish unit said in e-mailed comment.
“Pension funds will no longer work as shock absorbers,” Benecki said today. “The relative exposure of foreign investors on the zloty debt market should grow.”
Poles will have three months to declare whether they still want to save for their retirement with privately run funds, Tusk said. If they opt not to, their future contributions will go to the social security system, he said.
The Polish chamber of pension funds said it was “deeply disappointed” with the plans outlined by the government and said they raise “serious legal doubt,” according to a statement e-mailed today.
No comments:
Post a Comment