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12 bne IntelliNews Daily Central Europe and Baltic States May 14, 2015 Central Europe’s senior moment over private pensions
Benjamin Cunningham in Prague
Across central Europe the newest mem- bers of the EU are raiding their pension systems in a desperate hunt for cash to avoid harsh punishment under the EU’s excessive deficit procedure.
During an April 7 session of parlia- ment, Czech Finance Minister Andrej Babis pledged to table a new plan for reforming the country’s pension system by June. This would be the latest pension policy shift in Central Europe but hardly the first in recent years: it comes amid a general rolling back
itially the profits were high and pension funds made money,” says an economist at one major Hungarian bank. “But the gov- ernment played a game that made them out to be some kind of vampires.”
What was once controversial is now seen as commonplace. Poland took simi- lar steps last year. Unwieldy EU budgetary rules are at least part of the explanation for this change of course as governments look to meet tighter rules set in Brussels, but regional investors are left wondering what
time high and is still rising. Last year the WSE was Central Europe's great hope for its own vibrant equities market and now it is moribund. "The only explanation for the huge difference is pension reform,” says Adam Czerniak, chief economist with Pol- ityka Insight, a Warsaw based think-tank.
Second pillar reforms across the re- gion were meant to allow savers to divert a portion of their savings into private pen- sion funds. This is a step away from the existing pay-as-you-go systems where to- day’s workers finance today’s pensioners. Instead, a second pillar account is directly tied to its saver. And in Poland, pension funds overseen by Allianz, Aviva, Axa, Gen- erali and ING were required to invest do- mestically, a welcome source of capital for the WSE.
Without a functioning second pillar the WSE has lost its so-called “pension pre- mium” as pension funds shrank by some PLN2.1bn between February 2014 and Feb- ruary 2015. At the same time, the funds be- come more conservative, despite an easing of the restrictions on investing abroad. On the flip side, foreign investors remain hes- itant to invest in the WSE until some sort of “new equilibrium is achieved”, Czerniak says, which could take years.
At least Poland had a second pillar: in the Czech Republic the scheme barely got of the ground but will be wound up in Janu- ary 2016 after only 83,000 opted to put their pension money in private hands – about a
monetary policy, and changing it to give those powers to the European Central Bank requires a two-thirds majority in parliament. Neither the current coalition led by Civic Platform, nor any probable government formed after the elections, will have anything like the votes needed to push through such an amendment. “A specific Polish problem is that our constitution does not allow us to join the eurozone,” said incumbent president Bronislaw Komorowski.
The Czech Republic meets all the Maastricht criteria for joining except for the requirement to be in the ERMII exchange rate mechanism for two years. This means keeping the koruna stable against the euro and not devaluing in the two years prior to entry, a task that is not insuperable in present conditions.
The economy is also in good shape, with growth of 2.6% expected this year; it is competitive in export terms; and it has 80% of the average GDP per capita in the EU, though the convergence has stagnated since the global financial crisis. Czech business is also much more dependent on the Eurozone than most of the new member states – 30% of exports go to Germany alone.
The obstacles in Prague are mainly political, with arguments based on how the currency should be stronger, or how public debt should be reduced further, or how structural reform is needed, acting merely as economic excuses for political prevarication. Much of the resistance to the euro can be traced back to Eurosceptic
tenth of the number originally envisaged, says Pavel Racocha, CEO of Komercni ban- ka’s pension arm, one of the five firms li- censed to offer a second pillar fund.
Of the 28% of Czech workers' income paid as social security, they had the option of diverting 3% into the second pillar funds, which they then matched with an additional 2% contribution of their own. The workers can get the cash they invested back, but the funds they invested into are facing big losses.
Slovak workers are in the same boat. The government has introduced a second pillar four times since 2005, but once again has decided to abandon the scheme and work- ers have until June 15 to pull their money out. The government hopes to recoup about €400mn. Despite the government vacilla- tions on running a second pillar about five- times more Slovaks than predicted actually opted into it, which will lead to a big hole in the state budget so the government is trying to push savers back into the public pension system. Slovakia’s three licensed pension fund providers, Allianz-Slovenska Poisovna, Generali and Union, are also fac- ing big losses.
Of all the countries in the region, the Baltics are doing best. They too raided their second pillar funds for cash during the crisis years, but as they emerge from the worst the tiny northern states have begun to bolster second pillar policies once again.
former premier and president Vaclav Klaus, whose thinking lives on in the rightwing Civic Democrats that ruled from 2007-13 and the current central bank board that Klaus appointed.
Milos Zeman, the current president, and the ruling Social Democrats (CSSD) favour the euro, but the coalition has agreed not to join in this parliamentary term, instead talking in terms of 2020. “We must overcome the legacy of Mr Klaus,” Jan Mladek, the Social Democrat economy minister, told bne IntelliNews at the end of last year.
Though the CSSD-ANO coalition looks likely to win re-election in 2017, it is still far from certain that it will be able to take the country in. Adopting the euro does not require a change to the constitution or a referendum, but a nervous government might feel the need for this kind of political backing, which would be very hard to win. Three-quarters of Czechs currently remain opposed to the euro, according to recent opinion polls.
“The government played a
game that made private pension providers out to be some kind of vampires”
by governments of plans to divert pension savings into private funds, in an attempt to shore up state finances.
Hungary started that ball rolling when seized private pension fund savings back in 2010 were dressed in populist rhetoric that spooked international investors. “In-
comes next as demographic trends make additional reforms inevitable.
The most obvious manifestation of the resulting Polish investment lull is the stagnation of the Warsaw Stock Exchange (WSE) – the WIG index ended 2014 flat, even as Frankfurt’s DAX reached an all-
Poles and Czechs: we need to talk about the euro
Jan Cienski in Warsaw and Robert Anderson in Prague
When the EU expanded into Central Europe in 2004, the new member states committed to adopting the euro, though no deadline was imposed. While the smaller economies of the Baltic countries, Slovakia and Slovenia have all adopted the euro in recent years, today, more than 10 years after accession Poland and the Czech Republic look no closer to joining than they ever were.
The Polish government and central bank have devoted almost no effort to selling the idea of the euro in recent years and opinion polls show the results. A poll taken by the CBOS organisation last year showed 68% of Poles are opposed to joining the euro.
The business argument for joining is also less clear than for some of the smaller Central European members. Poland's internal market is large – merchandise trade as a percentage of GDP comes to 77%, while in the three Baltic countries and Slovakia it ranges from 101% to 170%, a sign of how much more those economies rely on imports and exports.
There is a slow shift taking place in official thinking, especially in the ranks
of the ruling Civic Platform party, in part driven by security worries because of Russia's aggression in Ukraine and in part fuelled by worries that a consolidating Eurozone will leave it permanently on the outside.
Poland is also edging closer to meeting the criteria for joining. At the moment it meets interest rate and inflation targets, but is under the EU's excessive deficit procedure for running a deficit above 3% of GDP. However, the finance ministry estimates that the deficit this year will be below the EU's 3% limit. Public debt, at about 53% of GDP, is well below the EU's maximum of 60%. That means by next year the decision on whether or not to join becomes more one of politics and less of economics. “Adopting the euro is a political decision,” Marek Belka, the central bank governor, recently said in Brussels. “It will not be taken by economists but by political leaders.”
The problem is that Poland's constitution makes such a decision very difficult. The constitution grants the National Bank of Poland the right to issue currency and set