Wiatrowski:

Poland's 17 pension funds have come under heavy fire for their poor returns since the previous government overhauled the pension fund system four years ago. Otwarty Fundusz Emerytalny (OFE) Pocztylion (Pocztylion Open Pension Fund) has yielded the lowest returns of all the funds after two years of activity. With 475,484 clients at the end of 2001, the fund yielded only 9.66% compared to the industry average of 15%. Mariusz Wiatrowski, the president of OFE Pocztylion, and Jan Woźniak, a member of the board of Poczta Polska-Cardif (Grupa BNP Paribas) Arka-Invesco Powszechne Towarzystwo Emerytalne (PTE), which manages OFE Pocztylion, talked to the WBJ's Jakub Szwajka about the pension funds' barriers and investment prospects. The following is a translated and edited version of their conversation.

Q: What steps could be taken to increase the yields of pension funds? Wiatrowski: Resignation from those apparent guarantees, such as the reserve account and guarantee fund (devised to be the ultimate source of support for pension funds going bankrupt). This amounts to 1.6% of the assets paid up front.

Q: Why are the guarantees only apparent? Wiatrowski: Because the system is constructed in such a way that the profit, which is really connected with management quality and its effects, should be the guarantee of operations and not the fee that in reality decreases the account balances of our clients. If we are out of funds in our reserve account, we face an obligation to increase equity (a minimum of which is already established at E2 million). Therefore, there is no threat for the clients of an OFE, who are taken over by another PTE. This is only a matter of finding another PTE that could take over. Woźniak: All the assets that are collected in the OFEs are owned by its clients. Because they are managed by a PTE, we receive a management fee amounting to 0.05% of the value of the assets each month. All the financial problems of a PTE are the matters of its shareholders, and OFE as a fund cannot go bankrupt. This is only the problem of the asset manager. Today, we are mainly focused on managing funds because the acquisition of new clients has lost importance as only people entering the labor market for the first time are targeted. OFEs are subject to the supervision of so many institutions that this reserve fund is only an unnecessary obligation.

Q: What are the obstacles to changing the pension fund system? Wiatrowski: Changes to already functioning conditions must be accepted by all the players in the game … All of the elements of the system are currently criticized. The problem is how to make all the participants happy with the results of a possible amendment. Nevertheless, we evaluate the (pension system) reform as successful because now, in fact, only pension funds are able to invest in private assets. Those assets are real; they can be inherited. Assets collected by the Social Insurance Administration (ZUS) are still a promise based on an assumption that future generations will be able to finance our pensions. This is not the same as the real money invested in the private sector. Woźniak: The president of ZUS promised us that the outstanding payments would not be transferred to pension funds earlier than next year. Three years have passed and we still do not know the efficiency of the investment and what our balance is in ZUS's accounts.

Q: Your OFE was created through the merger of Pocztowo-Bankowe PTE and Arka-Invesco last year. Do you expect further consolidation among pension funds? Wiatrowski: The former pension fund market watchdog wanted to have more PTEs, especially smaller ones. I think that now the situation will be evaluated by PTE's offer. If a possible merger will not lead to a shrinking of the market, I think that the Office of the Insurance and Pension Funds Supervisory Commission (KNUiFE) would allow it. It is hard to try and guess the target number of PTEs acting in the market. In practice, there is a reasonable number of PTEs, perhaps acting as elements of larger capital groups, which will be running that business in order to have a pension fund in their offer. Woźniak: I think that the number will hover around 10. The need for consolidation is derived from the level of salaries in Poland. According to the law, only 7.3% of a (person's) salary can be directed to OFE, and the salaries have not been raised within the past three years as had been previously expected. The average monthly sum transferred to OFE from an average Pole is about zł. 180. Business plans that forecast reaching a break-even point once 500,000 clients had entered OFEs, are now unfeasible due to the low level of salaries and high unemployment. That is why we have to almost double the number of customers in our projections. If an OFE has 800,000 or 1 million customers, it can survive after cost cutting. Smaller (funds) or those that are ineffective will have to disappear from the market. The problem is that there are currently no PTEs that would like to take over the smaller ones since the evaluation of the (pension fund) business has been significantly reduced.

Q: Analysts estimate that this year's privatization revenue will not reach the planned level of zł. 6.8 billion ($1.66 billion). Pension funds have always been active on the Warsaw Stock Exchange (WSE). How will this privatization slowdown impact them? Wiatrowski: We are interested in a deeper and more attractive stock exchange - that could be the effect of privatization … But recently we have experienced privatization not necessarily bound with public offerings. Of course, any sort of privatization is interesting for us because it means a possible issue of bonds, even if the company is not listed. Woźniak: If the Warsaw Stock Exchange (WSE) does not have new public offerings, there is no other possibility of purchasing shares other than in second-hand transactions. We deeply regret that. We have no chance to participate in the privatization of G-8 (the country's largest electricity supplier), (oil refinery) Rafineria Gdańska or other enterprises of this sort, which would be attractive options for pension funds. On the contrary, many companies are being withdrawn from the WSE. This is an alarming problem. Within the past five years the stock exchange has been living on what had already been privatized.

Q: Why do you want to invest more on the WSE? Woźniak: As the demographic structure of our customers indicates, we should have about 80% of assets in shares. The law forces us to invest only 40% of them in this manner. History has shown that it is difficult to reach for higher rates of return by investing only in treasury bonds. That would mean a return to the ZUS-based system where the money for pensions was financing the budget deficit and, therefore, it was a sort of a loan granted to the state. Recent data show that the most profitable ventures are local utility companies, communal ventures. For some reason, this sector is not privatized. Wiatrowski: The demographic structure means that we have customers who are on average 32 years old, and payments for 80% of them are scheduled not earlier than in 30 years. That is why we are interested in long-term investments and stock exchange yields with a better rate of return than other financial instruments.

Q: What about investing abroad? Wiatrowski: The high equity of all OFEs (makes) for better conditions for investing abroad. (But) we are a fund, (and) the cost of entering a foreign market is so high that it makes such a venture not so attractive, although it certainly would give us the opportunity for the diversification of our portfolio. For example, investment in industries that are not present in Poland, like companies producing pharmaceuticals or running genetic research. Woźniak: First, our calculations show that profits from investing abroad, taking into consideration a list of necessary intermediaries, would appear if the value of investment surpassed $10 million. Second, it was assumed in the bill (the first bill for pension reform) that the costs of foreign investment are covered by shareholders of PTE, not the members of OFEs. This is a barrier. Third, we do not want to invest abroad. We would prefer foreign companies to enter the WSE. Or they could become really engaged in Poland and then we could purchase their bonds. It's not about making our money work, let's say, in London; it's about making it work here. Of course, we could use a little help from the WSE itself. For example, we would like to invest in securities like Global Depository Receipts (GDR).

Q: If you were able to invest abroad starting next month, what would you do? Woźniak: We already can invest 5% of our assets abroad. Some time ago we considered investing abroad using foreign investment funds, (but) it has proven too costly. As for investing in foreign companies on our own, this still lies in the future of our fund. Wiatrowski: We are not using the 5% limit. There is also a different phenomenon. As we all know, the world is withdrawing the money it has put in shares. Everybody is buying bonds, and especially Polish bonds, as they have been the most profitable for the past 18 months. It's not so important to invest abroad. It's more important to invest and have the greatest possible profit.

- Greg Goodale contributed to this interview