In the world of Waldemar Pawlak

This is a short text that we published in the most recent offline issue of The Insurer magazine some weeks ago. Although the Polish government doesn’t seem so radical anymore, discussions of the role of second pillar pension funds in the country are still quite heated, which makes the story rather relevant even now.

Channeling part of second-pillar moneys into the state social security system is by far not the most revolutionary change in the pension segment that the Polish government is considering. According to the country’s media, deputy prime-minister and economy minister Waldemar Pawlak suggests that every Polish citizen should pay a small contribution to the Social Insurance Institution (ZUS) and receive a similarly small pension. Citizens that want to have a higher standard of “golden years”, according to economy minister, would need to make voluntary contributions to private savings and investment funds. To put things differently, in the world of Pawlak, the mandatory private pension funds (OFEs) would be abolished.
The proposal voiced by the minister is too radical to be implemented; however, it gives a perfect reason to think about what Poland would lose if its OFEs indeed disappeared. Smaller pensions and a fast growing disbalance of the social security system would be the most obvious, but by far not the most disastrous consequences – at least, it would take several years before the age pyramid completely destoys the system. More dangerously, abolishment of OFEs would undermine the development of the Polish stock market, currently the largest in CEE – by this July, the market value of domestic companies listed at the Warsaw Stock Exchange came to EUR119.9 billion, its trading volume reached EUR64.2 million. Both figures far exceed those of the Vienna Stock Exchange, for example – largely, thanks to Polish mandatory private pension funds.

Under the country’s legislation, OFEs are obliged to invest no less than 40% of their (quite substantial) assets in quoted stock. This regulation makes mandatory private pension funds one of the most important sources of capital financing for 363 domestic companies, 23 foreign-based firms – and the Polish government. In the first half of 2010 alone, approximately US$4.5 billion was raised for the country’s budget through privatisation of several large Polish players at the Warsaw Stock Exchange: apart from CEE’s largest insurer PZU, the state floated the shares of oil refiner Grupa Lotos and mining company KGHM Polska Miedz, both considered jewels of the Polish industry.

Destroying this money-machine because Poland needs spare details for repairing a dated social security engine would be a rather inconsiderate move. But, who knows, maybe in the world of Pawlak, there is no crisis at all.