(Updates with background, quotes)
By Dagmara Leszkowicz
WARSAW, Sept 4 (Reuters) - Poland is to shrink the role of private funds in its pension system by transferring the bonds they hold to the state and abolishing a rule that required all citizens to contribute.
The changes, announced by Prime Minister Donald Tusk, went much deeper than many in the market expected.
The overhaul will help the cash-strapped government push down public debt, giving it scope to increase public spending at a time when it is trying to restore its flagging popularity with voters.
The risk is that, by squeezing the private funds which hold assets equivalent to about one fifth of economic output, the changes will distort markets and dent Poland’s reputation as a pro-market haven.
“This means a complete marginalisation of the private pension fund system,” said Urszula Krynska, economist at Bank Millennium.
Tusk tried to reassure markets by saying the government had rejected any notion of nationalising the pension system, and by saying it had decided not to transfer the private funds’ holdings of equities to the state pension vehicle, only their bonds.
The benchmark stock index initially lost some ground while Tusk was unveiling the plan and was flat on the day. The zloty currency was a touch weaker, while the bond market was largely unchanged.
Tusk said the new system would give a better deal for pensioners, and allow the state to reduce its debt.
“The (current) system has turned out to be built in part on rising public debt and a very costly system,” he told a news conference.
Finance Minister Jacek Rostowski said the proposed overhaul would cut the public deficit by 8 percent of gross domestic product.
Players in the Polish pension market include major international firms such as ING, Aviva, Axa , Generali and Allianz.
Poland has a hybrid pension system. Workers and the state are required to pay contributions into both the state vehicle, known as ZUS, and into the private funds.
Tusk said that, in other changes, contributions to the private funds would in future be voluntary. He said citizens’ pension pots will be gradually transferred into ZUS over the last 10 years before they hit retirement age. (Writing by Christian Lowe; Editing by Ruth Pitchford)