10 September 2014
- Financial crisis fallout once again hits pensions
- Polish Government confiscates private pension assets to improve public finances
- Politicians have found many ways to raid pension assets when times get tough
I just thought I should put together a note following the sudden confiscation by the Polish government of all the bond holdings in Poland’s private sector pension funds last week. It seems to me that private pension savings are not safe in Europe and we need to find ways to improve protection for citizens’ pension money if we want more people to save for their retirement – and then have the money there for them when they reach old age. Several EU nations have forced their citizens to participate in pension schemes (just as we are doing in UK auto-enrolment), but have resorted to raiding them when times get tough. These long-term savings are not lasting that long!
Poland confiscates private pension assets: The Polish Government has announced plans to confiscate more than half the assets held in the country’s private pension funds. It will transfer all the Polish Treasury bonds held by fourteen private sector pension fund managers to a state pensions vehicle. This will reduce reported national debt to 49.9% of GDP, just below the crucial level which enables increased Government bond issuance.
Pension assets help fiscal position short-term as long-term liabilities ignored: Poland is restricted from issuing more debt once its debt-to-GDP ratio exceeds 50% so politicians needed to find creative ways to manipulate debt levels down. By taking pension fund bond holdings into public ownership, the state- guaranteed pension liabilities will be shown in Government accounts as national assets, rather than liabilities. This, of course, merely shifts larger costs onto future generations, rather than facing up to financial constraints now, but pensions are a tempting target to raid for any Government that can get away with it.
Private pensions used as politician’s emergency funds: It seems that Governments have been quite successful in encouraging or forcing citizens to participate in private pension schemes, with the aim of improving their retirement incomes, but have not been able to resist raiding them. They have become a piggy bank for politicians to raid in tough times – not exactly the long-term investments they are supposed to be!
Implications for the UK? The UK is just introducing a national system of automatic enrolment for all workers into workplace private pension schemes. Each worker will be able to build up private pension savings to supplement the declining future state pension payments and is intended to increase future pension incomes beyond that which the state can afford. How can we protect these pension accounts from public sequestration?
Other EU countries have recently confiscated pension assets but this has received scant attention: European countries, saddled with too much debt following the financial crisis, have also resorted to draconian pension asset raids to maintain short-term public spending in recent years. Each example has been relatively unnoticed outside its own country, but the trend is clear and could be of concern to other EU countries. Here are some examples of pension raids.
|2009: Ireland took Euro4.4bn National Pension Reserve Fund assets to bail out banks|
|2010: Portugal nationalised pension assets of Portugal Telecom|
|2010: Ireland took remaining Euro 2.5bn National Pension Reserve Fund assets|
|2010: France took Euro33bn from its National Reserve Pension Fund|
|2010: Hungary nationalised individual private pension accounts to reduce state debt|
|2011: Portugal confiscated pension assets of its largest banks|
|2012: UK took £24bn of Royal Mail pension assets and reduced current budget deficit|
|2013: Poland nationalised half private pension assets by confiscating bond holdings|
In reality, UK has actually already confiscated private pension assets: Apart from the Royal Mail pension asset transfer, the UK has effectively raided its private pensions in other more subtle ways. In fact, Quantitative Easing has been a means of confiscating pensions too. By lowering annuity rates and increasing pension deficits, many people’s pensions have been reduced, while lower gilt yields have helped fund ballooning public debt.
Poland move helps Polish Treasury market to facilitate state spending: Poland’s private pension funds, managed by global names such as Aviva, Allianz, ING and Axa, have a total value of more than 20% of Polish GDP. Just over half the assets (51.5%) are in Polish Government bonds. By taking these assets into the state pension system (ZUS), the government is effectively reducing Polish Treasury bond supply, and enabling increased issuance to fund public spending.
More Polish pension assets to be transferred to state in future as private pensions will dwindle: The 48.5% of private pension funds held in equities is not being sequestered at the moment, but from now on, all remaining assets in the Polish private pension funds will be transferred to the state during the ten years prior to each individual’s pension age. People joining the pension system in the future will not be obliged to pay into the private part of the system. Therefore, private pension funds will be significantly reduced over time and it is not clear whether any new members will be joining. So the inflow of funds will be sharply curtailed, which could significantly damage the Warsaw stock market and also lead to the closing down of Poland’s private pension system.
Polish Prime Minister ruled this out just a few weeks ago: The effective nationalisation of private pension fund assets was announced despite the Polish Prime Minister, in June this year, unequivocally ruling out nationalising the mandatory second pillar privately-managed pension funds (called OFE). He declared on national television ‘there is no way the State will take OFE’s money’. Less than three months later, he has done just that, although it is being called a ‘pension overhaul’ instead of nationalisation.
Government justification is to reduce costs and make pensions safer!: The Polish Prime Minister has attempted to justify this draconian move by suggesting that the old system was too expensive and made Polish public debt appear higher than it really is, thereby increasing the cost of deficit financing and state pension funding. He said “We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer.” In reality, this is mere smoke and mirrors. It just passes the costs of pensions onto future generations, without making them safer at all – but it does, of course, reduce pressure on today’s politicians to rein in public spending.
Private pensions increasingly vulnerable as countries struggle with fiscal deficits: This is the latest example of the lengths Governments are having to go to in order to manage excessive debt levels following the banking crisis and how vulnerable private pensions have become as a tempting target for cash-strapped politicians.