INVESTING/PORTFOLIO STRATEGIES

Poland to take over bonds from pension funds in system revamp

Poland will take over and cancel government bonds held by its privately managed pension funds, stopping short of fully “nationalizing” the system as it seeks to curb public debt, Prime Minister Donald Tusk said.

Pension funds will keep current assets that they invested in stocks, and future contributions to the system by Poles will be “voluntary,” Mr. Tusk told reporters in Warsaw on Wednesday.

The government, gearing up for elections in 2015 and trailing the opposition in polls, is seeking to spur recovery in the European Union's largest eastern economy, which this year is forecast to expand at the weakest pace since at least 1997.

“The privately run pension system is partly built on expanding debt and that has turned out to be very costly,” Mr. Tusk said in a press conference. “The system's impact on public debt is crushing and has effectively prevented us from making another civilizational leap.”

The economic slowdown has forced the government last month to widen the budget deficit by 16 billion zloty ($4.9 billion) and suspend thresholds limiting increases in public debt.

The government in June outlined three options for overhauling the country's three-tier pension system, which was set up in 1999. Contributions to privately managed funds have reduced funding for the pay-as-you-go state system that delivers benefits to current retirees, forcing the government to cover the shortfall through bond sales.

The 14 privately managed pension funds in the mandatory system held 281 billion zloty in assets, including 111.4 billion zloty in equities and 121.2 billion zloty in bonds as of July 31, data from Poland's financial markets regulator show.

The state will take over the amount of bonds that pension funds held as of the end of the day on Sept. 3, which would reduce the public debt by about eight percentage points, according to government officials.

The pension changes will take effect by mid-2014.