* Govt may lower contributions to 5 pct, from 7.3 pct now
* Poland keen to prevent its debt from breaching 55 pct/GDP
* Move comes after Hungarian pension shift criticised
* Investors express worry over fiscal "slight of hand"
By Gabriela Baczynska
WARSAW, Dec 1 (Reuters) - Poland may be the latest eastern
member of the EU to fiddle with a successful pension reform in a
bid to ease short-term debt problems that risks raising future
debt levels and driving local markets lower.
A government source told Reuters there are plans to replace
some of the cash contributions to private pension funds with
non-tradeable bonds as Prime Minister Donald Tusk's cabinet
seeks ways to reduce the deficit ahead of a 2011 election.
The moves, like more aggressive steps being taken in
Hungary, are part of efforts by the eastern Europeans to deal
with temporary additional costs created by much-praised 1990s
reforms of their pension systems.
The European Union has declined to give Hungary, Poland and
others further leeway on how their deficits and debt are
assessed in light of the reform costs, which will eventually
drop off government spending.
"There is a consensus within the government to lower cash
transfers to OFEs (private pension funds)," the Warsaw source
said under condition of anonymity.
"We should have the key decisions over the course of the
next 10 days and we will be ironing out the details."
The source said one of the options included lowering cash
transfers to OFEs to 5 percent from the current 7.3 percent.
"But it is possible that the 2.3 percent difference will be
compensated in OFE-dedicated bonds. For the timespan of the most
difficult year, or two, we may also change the proportion and
have more in bonds and less in cash," the source added.
"We are still discussing whether the bonds would be tradable
or not, but for now we seem to lean to the non-tradable option."
Budapest's new government has gone as far as to propose a
nearly complete turn around which brings private fund assets
back into the state system, prompting outrage from the industry
and concerns that in the long run it will lead to sharply higher
debt.
The Polish proposals do not go as far that, but still run
the risk of upsetting markets already unnerved by the euro
zone's debt troubles and Warsaw's failure to show willing on
budget cutbacks of its own.
"The EU's Maastricht (budget) criteria have been abused by
virtually everybody, and look at the kind of mess that we've
gotten into," said Nigel Rendell, a strategist at RBC.
"The market is so sceptical of fiscal tricks that the Poles
could end up shooting themselves in the foot."
SCRAMBLE
Tusk's centre-right government is scrambling to prevent
public debt from breaching a ceiling of 55 percent of annual
output, which would trigger spending cuts and hit a
region-leading growth path that has been helped by public
spending.
The senior government source said Warsaw should seek savings
in other areas -- for example by cutting special military
pensions and streamlining public fund management -- but not all
cabinet members agreed more decisive steps were urgent.
Officials have said Finance Minister Jacek Rostowski and the
economic council advising Tusk originally sought an even lower
level of cash transfers, possibly only slightly above 2 percent.
Poles pay 12 percent of salaries into an inefficient state
pension system and an obligatory 7.3 percent more to private
funds, the main players on the Warsaw stock and bond markets
with portfolios worth about 200 billion zlotys ($64.98 billion).
Warsaw hopes to get the EU's approval to deduct the bonds
meant to replace the cash from its overall debt calculation and
hopes to have a solution agreed before the middle of December,
but Brussels' approval is far from clear.
On Tuesday, a diplomatic source said the Commission could
persist with disciplinary action over Hungary's budget if it saw
its pension move insufficient to cut the deficit sustainably.
Warsaw has repeatedly criticised Hungary's decision, saying
predictability of pension systems was crucial to the stability
and credibility of countries on the markets.
The state-supported system contributes around 26 billion
zlotys annually to pension funds and reducing the amount of cash
funds would cut what funds have to invest in both equities and
potentially ordinary government bonds.
"Polish bonds are loosening, and this is already part of the
markets expressing concern over these proposals," Marek
Wichelmi, spokesman for a lobby group that encompasses 12 of
Poland's 14 private pension funds.
(Writing by Michael Winfrey; Editing by Patrick Graham)
