Poland announced quietly that it would transfer to the state 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). In effect, the state just nationalized roughly half of the private sector pension fund assets calling it a "pension overhaul."
In Poland, mandatory contributions are made into both the state pension vehicle, known as ZUS, and 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.
Nobody expected that this would involve private sector assets.
Private funds within the state-guaranteed system 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.
The reason - 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.
- 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
The response to the confiscation was, naturally, one of shock:
Catastrophic consequences for fund flows aside, the Polish prime minister had a prompt canned response: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."
You see, he is from the government, and he is confiscating the pensions to make them safer. Confiscation is Safety and all that...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."
Well, once you nationalize private assets, the public debt will appear lower than it was before confiscation.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.
End result: "The Polish pension funds' organisation said the changes may be unconstitutional 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."
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.
**********Have a Nice Day**********