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.”