Earlier this month, the Polish president signed into law pension reforms which lower the proportion of an individual’s salary that can be paid into private pension funds from 7.3% to 2.3%. The difference will instead be paid into Poland’s national social security scheme (ZUS). The Government will also allow pension funds to invest up to 15% in foreign equities, lifting the previous cap of 5%.

At the end of March, the Polish parliament adopted the controversial pension reform piloted by the centre-right government which is seeking to cut the national debt. The law was adopted by Poland's lower house (Sejm) in a 237-154 vote with 40 abstentions.

According to the Government, the reform is crucial to enable the state to keep paying out state pensions from the indebted ZUS scheme, and will save the state 195 billion zloty (€48 billion) by 2020.

The Polish pension system, dating back from 1999, is based on two pillars, the public ZUS scheme and private funds known as the OFE. In total, an individual must pay 19.5% of his or her salary into the two schemes combined.

The Government has decided on this drastic measure because the Polish population is aging rapidly and therefore the ZUS scheme might take the debt level well over the limit set by Poland’s constitution and European Union rules, which is 60% of GDP. The country's debt in 2010 was 753 billion zloty, or 53.3% of GDP, according to a finance ministry estimate.

Krzysztof Walenczak, undersecretary of the Treasury, said: “This might not be the best solution, but it is in order to fight government debt, the root of all evils.” The new legislation will also mean that there will be lower cash flows into pension funds, but Walenczak pointed out that joining the Eurozone will benefit everyone in Poland, but that this is only possible if government deficit is under 3% of GDP.

The undersecretary also mentioned that the current 5% cap on foreign equities will be changed, so that pension funds will be able to invest up to 15% of their portfolio in foreign equity.

Earlier this month, this 5% cap was one of the criticisms of Professor Krzysztof Rybinsky, former deputy governor of Poland’s central bank and currently director of Vistula University in Warsaw. Rybinsky was also reported saying that the Government was promising very high returns, but that given the demographic changes occurring in Poland, these are unsustainable, which will eventually result in future governments cutting pension promises.

Most critics believe that the legislation change is not in members’ best interests and some are now even looking into whether reversing the pension promise is unconstitutional.

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