Pension funds clamor for reform
Yet fund managers complain that over-regulation and a lackluster investment environment unreasonably ties up the industry's zł.44.83 billion of capital to the detriment of pensioners and pension fund companies (PTEs).
Despite the sweeping and mostly successful pension fund reform in 1999, under which the government set up a three-pillar scheme to revive an almost bankrupt social security system, there is still much for improvement, they say.
At the head of the fund manager's list of gripes is the Warsaw Stock Exchange and its lack of viable listed companies to invest in. And considering that pension funds (OFEs) comprise almost nine percent of the exchange's capitalization, this is becoming an increasingly important issue. Roughly one third of pension fund capital is in local equities.
"I think it's going to be the number one issue this year," said Tomasz Frontczak, chief executive of AIG PTE, which today manages some zł.4 billion in assets.
The quality and availability of investment opportunities is a hot-button topic in all maturing markets, but for the local pension fund companies (PTEs) it seems to take even greater precedence than usual. Especially given that OFE investors have for years been carping over the state of the country's equity markets - to almost no avail.
Indeed, hardly any substantial change has been made.
There are simply too few stocks worth investing in, Frontczak said. The only "real trading" is on the WIG20, which includes PKN Orlen and TPSA, he added.
And if pension fund coffers plump up over the next few years while the stock stays the same, fund managers warn that the phenomenon could create an over-inflated stock market.
"Sooner or later you create a bubble," he said, noting that it would be unfavorable for the entire country.
That's why Frontczak says: "Everyone should be interested in improving the financial instruments."
Pension fund managers intend to continue to dig their heels in over the reform of the investment environment.
"We need to be proactive or we will eventually be put up against the wall," he said.
Potential solutions include lobbying the government to decrease the number of investment limitations as well as pushing the ministry of treasury to finally embark on its much-talked-about privatization strategy, he said.
Piotr Kwiecinski, analyst at Dom Maklerski Banku Handlowego, thinks that there will be a combination of these two solutions.
"The liquidity of the market is a big problem for fund managers," Kwiecinski said. "If there is no privatization this year, then I think the government will have to let funds invest more than five percent abroad."
He expects this because the industry trend is moving toward increasing equity allocations. He explained that aggregate equity allocations have increased from 26.9 percent in 2002 to 31.6 percent last year. Given that shift, more funds are likely to invest their new capital in stocks. And should no more companies arrive on the Polish equity markets, the only viable equity targets will be abroad, where many markets are fairing better than Poland's, Kwiecinski says.
Given foreign investment and other limits, AIG's Frontczak is still somewhat optimistic.
"The government sees the necessity of lifting the investment limits," he said.
There is more, however, to the pension fund manager's wish list than simply lifting limitations.
Frontczak would also like to see the Securities and Exchange Commission (KPWiG) make it easier for small and medium sized companies to become listed on the exchange.
"We can present them with our ideas, show them our perspective," he said. "We would like more players to list."
He said smaller companies are attractive because pension funds are long-term investors. As such, pension funds can invest in a value fledgling company and bank on future growth.
One of the paramount problems here is that, even during the weak economy at the beginning of last year, company executives found cheaper avenues to capital than the WSE. What is more, he said, listing requirements are very strict and expose the company to scrutiny that is often too far-reaching.
He said that prospective market entrants often think twice before going to the KPWiG for documentation, and ask themselves: "Why expose myself?"
Listed companies are required to open up their balance sheets and operations to the public eye. "Therefore, many refrain from going public," Frontczak concluded.
Pension funds are also wary of too much scrutiny.
Fund managers believe that they are being unfairly watched over by the industry regulator (KNUiFE) as they are required to produce a mandatory minimum rate of return in their funds. Opponents comment that the fact that there is a weighted rate of return forces all the smaller pension funds to closely follow the investment strategies of the larger funds, lest they fall below the mandatory minimum. Should they violate this law, fund managers must pay the difference from their own coffers.
In this environment, it is the top three players that dictate the market: Commercial Union (zł.12.7 billion), ING Nationale-Nederlanden Polska (zł.10 billion) and PZU Złota Jesień (zł.6.3 billion).
No one would stray from the market trends, said Frontczak, "unless they wanted to commit suicide."
He agreed that some of the existing regulations were needed when the three-pillar scheme was launched because market players were then untried. But today the industry is maturing in terms of investment know-how. Thus, the regulator should relent.
"It was a political argument from the beginning," said Frontczak, referring to the mandatory minimum. "Now we should move forward. Our investment results are impaired (by the law)."
Sławomir Solarz, director at pensions regulator KNUiFE, countered that there will be some basic changes this year that will benefit wary fund managers. In September, management companies will begin to calculate their rates of return semiannually and over a three-year time horizon, compared to today's quarterly reporting over a two-year term. That, he said, will provide a better view of funds' long-term investment strategies.
But for Frontczak and others, that's not enough - now that the industry's more mature, it's about time the regulator let market forces dictate the situation.
Despite the sweeping and mostly successful pension fund reform in 1999, under which the government set up a three-pillar scheme to revive an almost bankrupt social security system, there is still much for improvement, they say.
At the head of the fund manager's list of gripes is the Warsaw Stock Exchange and its lack of viable listed companies to invest in. And considering that pension funds (OFEs) comprise almost nine percent of the exchange's capitalization, this is becoming an increasingly important issue. Roughly one third of pension fund capital is in local equities.
"I think it's going to be the number one issue this year," said Tomasz Frontczak, chief executive of AIG PTE, which today manages some zł.4 billion in assets.
The quality and availability of investment opportunities is a hot-button topic in all maturing markets, but for the local pension fund companies (PTEs) it seems to take even greater precedence than usual. Especially given that OFE investors have for years been carping over the state of the country's equity markets - to almost no avail.
Indeed, hardly any substantial change has been made.
There are simply too few stocks worth investing in, Frontczak said. The only "real trading" is on the WIG20, which includes PKN Orlen and TPSA, he added.
And if pension fund coffers plump up over the next few years while the stock stays the same, fund managers warn that the phenomenon could create an over-inflated stock market.
"Sooner or later you create a bubble," he said, noting that it would be unfavorable for the entire country.
That's why Frontczak says: "Everyone should be interested in improving the financial instruments."
Pension fund managers intend to continue to dig their heels in over the reform of the investment environment.
"We need to be proactive or we will eventually be put up against the wall," he said.
Potential solutions include lobbying the government to decrease the number of investment limitations as well as pushing the ministry of treasury to finally embark on its much-talked-about privatization strategy, he said.
Piotr Kwiecinski, analyst at Dom Maklerski Banku Handlowego, thinks that there will be a combination of these two solutions.
"The liquidity of the market is a big problem for fund managers," Kwiecinski said. "If there is no privatization this year, then I think the government will have to let funds invest more than five percent abroad."
He expects this because the industry trend is moving toward increasing equity allocations. He explained that aggregate equity allocations have increased from 26.9 percent in 2002 to 31.6 percent last year. Given that shift, more funds are likely to invest their new capital in stocks. And should no more companies arrive on the Polish equity markets, the only viable equity targets will be abroad, where many markets are fairing better than Poland's, Kwiecinski says.
Given foreign investment and other limits, AIG's Frontczak is still somewhat optimistic.
"The government sees the necessity of lifting the investment limits," he said.
There is more, however, to the pension fund manager's wish list than simply lifting limitations.
Frontczak would also like to see the Securities and Exchange Commission (KPWiG) make it easier for small and medium sized companies to become listed on the exchange.
"We can present them with our ideas, show them our perspective," he said. "We would like more players to list."
He said smaller companies are attractive because pension funds are long-term investors. As such, pension funds can invest in a value fledgling company and bank on future growth.
One of the paramount problems here is that, even during the weak economy at the beginning of last year, company executives found cheaper avenues to capital than the WSE. What is more, he said, listing requirements are very strict and expose the company to scrutiny that is often too far-reaching.
He said that prospective market entrants often think twice before going to the KPWiG for documentation, and ask themselves: "Why expose myself?"
Listed companies are required to open up their balance sheets and operations to the public eye. "Therefore, many refrain from going public," Frontczak concluded.
Pension funds are also wary of too much scrutiny.
Fund managers believe that they are being unfairly watched over by the industry regulator (KNUiFE) as they are required to produce a mandatory minimum rate of return in their funds. Opponents comment that the fact that there is a weighted rate of return forces all the smaller pension funds to closely follow the investment strategies of the larger funds, lest they fall below the mandatory minimum. Should they violate this law, fund managers must pay the difference from their own coffers.
In this environment, it is the top three players that dictate the market: Commercial Union (zł.12.7 billion), ING Nationale-Nederlanden Polska (zł.10 billion) and PZU Złota Jesień (zł.6.3 billion).
No one would stray from the market trends, said Frontczak, "unless they wanted to commit suicide."
He agreed that some of the existing regulations were needed when the three-pillar scheme was launched because market players were then untried. But today the industry is maturing in terms of investment know-how. Thus, the regulator should relent.
"It was a political argument from the beginning," said Frontczak, referring to the mandatory minimum. "Now we should move forward. Our investment results are impaired (by the law)."
Sławomir Solarz, director at pensions regulator KNUiFE, countered that there will be some basic changes this year that will benefit wary fund managers. In September, management companies will begin to calculate their rates of return semiannually and over a three-year time horizon, compared to today's quarterly reporting over a two-year term. That, he said, will provide a better view of funds' long-term investment strategies.
But for Frontczak and others, that's not enough - now that the industry's more mature, it's about time the regulator let market forces dictate the situation.
