Pension funds, which exist since 1999, could be included in an ambitious investment plan announced by the Deputy Prime Minister Morawiecki, increasing significantly the chances of the plan’s implementation. The question is whether the Government is inclined to do it by adapting the Open Pension Funds (OFE).
It has been three months since the public was shown a multimedia presentation containing the most important postulates of the Responsible Development Plan. Since then nothing new was announced and to learn the details we will probably have to wait until the end of the year. Meanwhile, at the end of the holidays, the Ministry of Family, Labour and Social Policy (MRPiPS) is going to announce the next review of the pension system. Between these two, emerging at a similar time, documents a significant synergy can be seen in at least two areas.
Firstly, the Morawiecki’s plan lists ‘savings programs for the employees with a default participation formula, based on Employee Pension Plan (PPE), An Individual Retirement Account (IKE) and An Individual Retirement Security Account (IKZE)’. The third pension pillar is mentioned in (also the third) pillar of a plan called ‘Capital for Development’, as one of the sources of savings that will finance a comprehensive investment program. Therefore we should expect that the long-awaited encouragement to participate in the supplementary private retirement savings plan will not only finally appear, but also will find its place both in the announced Strategy for Responsible Development and in the pension review prepared by MRPiPS.
The second area of the potential synergy is the Open Pension Funds. It is worth mentioning OFE, as they were not even acknowledged in the announced plan. This brought about speculations that the government – despite being warned that it would have disastrous consequences for the Warsaw Stock Exchange – plans for them the, so-called, third partition. Meanwhile, OFE, which still manage assets worth 143 billion PLN, are a pretty good fit for the Morawiecki’s plan. In fact, a better fit then a completely private third pillar, the construction of which will take years and that only if the government embarks on it right after the holidays. The vision of the active participation of OFE was presented in the recent PwC’s (a consulting company) report: ‘OFE in the Responsible Development Plan’. The report states that the funds will be prepared for investment in the three areas: venture capital, real estate and infrastructure projects. Those areas not only fit in the plan outlined by Minister Morawiecki, but also enable diversifying future pensioners portfolios, which are still mostly filled with shares. What then stands in the way and why the government is silent about the potential role of OFE in the Responsible Development Plan?
The first reason is most likely the odium cast on the funds by the previous coalition. OFE are a shameful topic and hardly any politician would be willing to advocate for them. And they would be hard pressed to explain to people that the ‘good’ Morawiecki’s plan is to be financed from the ‘bad’ funds. Would it be, however, so difficult to come up with a possible explanation, as long as OFE was included in the plan? For instance, it could be argued that it is Polish capital after all, or that OFE are incompetently regulated and after another amendment to the act, these entities will be ‘completely different’. It is worth producing such an explanation, as the funds have cash that could be mobilized in the areas pointed out by the minister almost overnight. For example, if 1% of the assets was to be invested in venture capital funds operating in Poland, the investments of this kind carried out in our country would double. What, then, can still prevent the government to go this way?
The problem are undoubtedly the regulations, which for now de facto prevent or at least significantly impede OFE’s involvement in real estate, as well as in venture capital or infrastructure projects. Direct involvement in any of these asset classes is not legally permissible, and indirect investing is not especially attractive. We can go over this on the example of the real estate market. From the two opportunities given by the law, one is disadvantageous for OFE member, and the other one – for General Pension Society (PTE). Because if the fund buys the shares in the joint-stock company investing in real estate, this company will have to pay CIT. That only would not present a problem – all companies pay it after all. However, other market participants (eg. closed funds, foreign funds or private individuals) are able to buy real estate directly and profit from it, without paying any taxes. It is then no wonder that purchasing real estate through a joint-stock company is not worthwhile for OFE.
Although, theoretically they could invest in the units of funds that acquire apartments, bureaux and hotels directly and without paying CIT. Unfortunately, this option is absolutely unprofitable for PTE, as the legislature forbade them from charging for management. On the surface it seems logical – if PTE thrown off the weight of managing the funds entrusted to them, they should not earn a profit from it. Assuming also that preventing OFE from investing directly in real estate is logical as well (too great a risk concentration, with the lack of sufficient knowledge in this matter), how is it possible that the final result of this logic – depriving OFE portfolio of real estate – seems to be somehow paradoxical?
The answer to this question is fairly simple. The new investment policy of OFE, which was hastily cobbled together at the end of 2013, is not well thought-out, and, till now, the current government did not think it prudent to consider it in more depth. Now, however, they can turn their attention to it due to the task of preparing two aforementioned important documents. On the other hand, it may be that what I consider to be the biggest advantage of inclusion of OFE in Morawiecki’s plan, i.e. regarding the initiatives of the Ministry of Development from the point of view of their long-term business profitability, is for the politicians an essential drawback. I hope, however, that the first eventuality is true and that in the course of ongoing work, the Ministry will endeavor to address the problem.
The author of the commentary: Maciej Bitner, Chief Economist in WiseEuropa. The text was published in Dziennik Gazeta Prawna on 28 June 2016.
