WARSAW - The Polish Parliament is expected to pass landmark legislation that would overhaul the country's ailing pension system by the end of the summer.
A major hurdle toward transforming the pay-as-you-go plan to a system with a mandatory private component was cleared in late June when the Treasury Ministry released the list of companies whose privatization proceeds would be used to finance the reform. The list spurred the lower house of Parliament to pass the legislation in early July.
"The process is going fairly smoothly," said Iain Batty, an attorney with London-based law firm Cameron McKenna, who helped draft the legislation.
Proceeds from 52 of Poland's plum companies will be dedicated to covering the estimated annual $1.4 billion shortfall in the pay-as-you-go system that will result from the reform. The companies include air carrier Lot SA, fuel distributor CPN SA, telecommunications company TPSA, and bank BGZ SA. Moreover, 25% of the proceeds from the sale of hundreds of smaller companies also will be earmarked to cover the shortfall.
"We are very happy. These are good companies that will bring in significant amounts of money," said Marek Gora, deputy executive director at the Office of the Government Plenipotentiary for Social Security Reform at the Ministry of Labour and Social Policy, Warsaw.
Investment bankers were busy trying to gauge the value of the companies on the list. Mr. Gora said the book value of the 52 firms combined with the portion of the other companies' proceeds is approximately $13 billion. But experts said the amount the companies will fetch in privatization is much higher.
Government officials are still trying to assess the extent of the social security system shortfall.
Last year, the government decided to switch pension fund indexation to price increases instead of wage increases. That change will be instituted next year, and is anticipated to save an undetermined amount of money.
The bill also allows the government to issue 10-year convertible bonds to finance the reform process if privatization revenues don't flow in fast enough.
The new private pension funds are not obligated to buy the bonds, which will be available to foreign investors.
"This is just an additional vehicle. We may not even ever use it," said Michal Rutkowski, executive director of the Office of the Government Plenipotentiary for Social Security Reform.
The legislation, which is expected to be implemented in January 1999, creates a three-tier pension system. Currently, companies pay a 42% tax on employees' salaries to cover pension, health and disability costs; 24% of which goes to the state-run pension fund.
Under the new law, an amount equal to that 24% will be given to employees so they can give 15% to the pay-as-you-go system and 9% to the new private pension funds.
Mr. Gora said nothing really changes financially, but that shift was made to discourage tax evasion. He said employees will be more inclined to pay taxes that are contributing to their own retirement funds.
Employees younger than 30 have to switch to the new system while those between age 30 and 50 have an option of staying in the pay-as-you-go plan. Workers older than 50 cannot switch.
Under the new system, employees will choose their own private funds. Funds will not be tied to any employer, but will be free-standing pooled funds supervised by a government regulator. Mr. Rutkowski believes there will be 10 to 15 funds initially. He estimates $2.5 billion will flow into the newly created funds annually.
"Everyone will be interested in the business, but we want to see what type of limitations they will place on us," said Xenon Slomski, deputy director of asset management at Bank Rozwoju Exporto, Warsaw.
But Jonathan Woollett, managing director of Credit Suisse Asset Management (Polska) Zp.Zo.O, Warsaw, said he is not worried about restrictions governing investments and fees. "The sheer volume of money that will flow into the funds makes this a substantial business," he said, adding that pension reform was a factor in CSAM's decision to set up shop in Warsaw late last year.
Pension funds will have to have a minimum of $3 million in capital and meet a minimum rate of return.