Imagine if your clients woke up one morning and found that half the value of the 401(k) plans or IRAs you are managing for them was gone.
That would be pretty shocking — since the devastating financial crisis from which Americans are still recovering wiped out “just” a third of the average value of retirement acounts from market top to March 2009 low point.
But something like that happened just last week in Poland, a nation of more than 38 million, when Prime Minister Donald Tusk announced a pension reform that would transfer the assets held in private pension accounts to the state.
A Reuters news report says the move would improve the nation’s balance sheet, reducing public debt by 8%, thus enabling Poland to access international credit markets on more favorable terms.
Poland has a two-tier pension system. The first tier consists of mandatory pay-as-you-go defined contribution accounts to the nation’s Social Security system. The second tier consists of mandatory individual accounts invested through privately managed funds run by companies such as Allianz, ING and AXA.
It is from that second category that the government transfer is occuring—specifically from the private accounts’ bond allocation. Equities, currently about half the value of the private accounts, would remain as assets of the private funds.
Reached for comment, Professor Agnieszka Chlon-Dominczak (left), of the Warsaw School of Economics’ Institute of Statistics and Demography, said the move will weaken trust in Poland’s Social Security system.
“I expect that people will seek ways to reduce their contributions,” Chlon-Dominczak told ThinkAdvisor. “We have a system that in general makes it very difficult not to contribute. If someone works officially, he is automatically covered by social insurance.”
But, she warned, more affluent Poles will likely look to stash more of their wealth in individual retirement accounts outside the mandatory system, “which in the future may lead to a further rise of inequalities,” the Polish economist says.
The move, Chlon-Dominczak says, has regional repercussions and should not spark anxiety among U.S.-based investors.
“I think that Polish actions, similarly to the ones we have seen in Hungary, set a bad precedent in the region, she says. "In the case of America, I would not worry—their ownership rights on private savings are not questionable.”
Paweł Strzelecki (left), another professor at the Warsaw School of Economics, offered a practical and contrarian spin on the Polish government pension proposal.
“If the system is reformed it will result in an increased supply of shares of good Polish firms…on the Warsaw stock exchange,” he told ThinkAdvisor. “So I see here the opportunity to buy good shares [at] a discount.
“In the short term this reform should also increase the financial standing of the Polish government,” he added.
Markets appear to have come around to Professor Strzelecki’s thinking. The WIG20—the Warsaw Stock Exchange’s 20 largest stocks by market capitalization—which initially reacted on Thursday with its biggest decline in two years, fully recovered the loss by the end of Monday’s trading.
And while the 10-year Polish government bond yields initially soared 20 basis points after the announcement to 4.94%, by Monday’s close the yield had fallen to 4.67%, or 7 basis points lower than Thursday’s starting point.
The Polish asset transfer, what some commentators and bloggers are calling a government confiscation of private wealth without compensation, seems to have attracted less international press attention than a move by the smaller European island nation of Cyprus in March to levy bank deposits. The government eventually backed off of initial plans to tax even accounts holding less than 100,000 euros, placing instead a heavier burden on accounts holding more than that amount.
Commentators at the time worried aloud that the move would set a precedent for other indebted nations to seize private assets. Separately, conservative and liberal bloggers have traded radical ideas, condemning U.S. 401(k) accounts, from opposite perspectives.
We invite readers’ thoughts on the safety of U.S. retirement savings.
Check out Kill Your 401(k), Conservative Author Says on ThinkAdvisor.