A costly scheme to patch up Polish public finances
The changes in operation of the public pensions system in Poland will affect not only citizens in their capacity as members of the open-ended pension funds (OFE), but also entities investing and operating in the private pensions sector in Poland. While the former may not feel the actual effects of the legislative changes for quite some time, the latter – or at least the general pension societies – will experience effects immediately. According to some commentators, the legislative amendments may actually precipitate complete liquidation of the private pensions sector in Poland. Also, the measures taken by the Polish government in this regard may open the State Treasury to liability for damages vis a vis foreign pension fund investors under international law. Given the number of pension funds concerned and the value of the assets affected by the reforms, such damages may conceivably run into the billions of PLN. Arbitration more common
It is becoming increasingly common for foreign investors to pursue their claims vis a vis states by way of international arbitration. Disputes of this sort have departed beyond spectacular cases such as nationalisation of oil assets in Venezuela or aggressive take-over of private property from the owners of Yukos in Russia and now involve more mundane matters, with foreign investors bringing claims concerning internal economic reforms or legislative overhauls affecting their investments. As for the governments concerned, such changes are often rationalised in reference to the necessity of adapting national law to European Union requirements or, increasingly, to the need to shore up public finances.
Where the foreign investor succeeds in its claim, the damages awarded can be substantial, amounting to a considerable burden on the state budget. A case in point is provided by the arbitration award from December 2013 obligating the Romanian government to pay USD 250 million in damages to Swedish investors in the country’s foodstuffs sector; the Swedish investments suffered consequent to amendment of Romanian laws associated with the country’s accession to the EU.
The shareholding structures of the pension societies now active in Poland include a sizeable proportion of foreign capital, and the entities contributing this capital benefit from legal safeguards under a number of bilateral investment treaties, or BITs. The underlying idea of the BITs is that they ought to facilitate and protect free flow of private capital and guarantee minimum standards for treatment of the investors by their host countries. In particular, the BITs are meant to obviate detrimental interference by state authorities (also via legislative amendments) in economic matters relating to the foreign investments, discrimination referring to national origin, or – first and foremost – nationalisation of investments and/or expropriation of the investors without damages. Poland is party to approximately 60 bilateral investment treaties, also with countries from which the main foreign shareholders of the pension funds originate, such as France, Germany, Holland, Spain, Sweden, Switzerland, or Great Britain.
Whether or not the foreign investors in Polish pension funds will be able to claim damages for losses resulting from changes to the pensions system on the basis of bilateral investment treaties will depend on certain preliminary questions of a formal nature, specifically on whether they are recognised as foreign investors, and whether their shares in the pension funds are recognised as investments within the meaning of the relevant BIT. If yes, then the next question will be whether the changes to the Polish pensions system actually violate Poland’s obligations concerning protection of investments, as assumed under the BIT. It will have to be established whether the investors, as they committed their assets to the pension funds, had reasonable grounds for expecting that the basic premises of the Polish pension system as established in 1999 will remain in place for a certain length of time, with any subsequent changes being evolutionary rather than revolutionary in nature.
Given the trends in international investment arbitration outlined above, the risk that the Polish State Treasury may be held liable vis a vis foreign investors on account of the present reform of Poland’s pensions system looms large. In such cases, damages are assessed as covering not only the actual harm already sustained by the investor, but also lost profits which would have accrued to the investor; the idea is that the investor has not realised a return on its investment but, were it not for the unlawful interference of the state, it could reasonably expect to do so.
While quantification of the damages possibly encumbering the Polish State Treasury to any degree of accuracy would be impossible at this early stage, it is readily apparent that the legislative changes presently introduced may precipitate a significant drop in returns from investments in the pension funds. This is due not only to the reduction (from 3.5% to 1.75%) of the maximum fee which a fund may charge on contributions. The new legislative solutions also decrease (from 3.5% to 2.92%) the percentage of an employee’s / pension society member’s overall social insurance contribution which is channelled to the private pension funds by the Social Insurance Institution. In other words, the pension funds will find themselves collecting a smaller percentage of a lower base amount. Apart from that, participation in the open-ended pension funds – hereto mandatory for persons working in the Polish economy – will now be elective. These provisions are likely to result in a drop of membership in the private pension funds, leading – as an obvious corollary – to lower fee revenues, a lower capital base and to reduced investment clout. In the longer term, then, not only will the OFEs collect less fees and have less funds at their disposal for investment, their members will be left with a substantially smaller nest egg once they retire and step forward to collect what they invested.