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* Reform moves bond assets from private to state fund
* Some equity assets to gradually move to state as well
* Changes seen reducing Polish public debt by 8 pct of GDP
* Funds say moves could be unconstitutional
* Warnings that private pension funds could be wiped out
By Dagmara Leszkowicz and Chris Borowski
WARSAW, Sept 4 (Reuters) - Poland said on Wednesday it will transfer to the state many of the assets held by private pension funds, slashing public debt but putting in doubt the future of the multi-billion-euro funds, many of them foreign-owned.
The changes went deeper than many in the market expected and could fuel investor concerns that the government is ditching some business-friendly policies to try to improve its flagging popularity with voters.
The Polish pension funds' organisation said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation.
Announcing the long-awaited overhaul of state-guaranteed pensions, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.
He said that what remained in citizens' pension pots in the private funds will be gradually transferred into the state vehicle over the last 10 years before savers hit retirement age.
The reform is "a decimation of the ...(private pension fund) system to open up fiscal space for an easier life now for the government," said Peter Attard Montalto of Nomura. "The government has an odd definition of private property given it claims this is not nationalisation."
Tusk said people joining the pension system in the future would not be obliged to pay into the private part of the system. Depending on the finer points, this could mean still fewer assets in the private funds.
"The (current) system has turned out to be built in part on rising public debt and turned out to be a very costly system," Tusk told a news conference.
"We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer."
By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend.
Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of gross domestic product (GDP).
This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government's own calculations.
The private funds hold assets worth about one fifth of Polish economic output and are among the biggest investors on the Warsaw bourse. Players in the pension market include international firms such as ING, Aviva, Axa , Generali and Allianz.
Bonds make up roughly half the private funds' portfolios, with the rest company stocks.
Soon after Tusk unveiled his plans, the benchmark index on the Warsaw stock exchange was down 2.6 percent on the day.
"This is worse than many on the markets had feared," a manager at one of the leading pension funds, who asked not to be identified, told Reuters.
"The devil is in the detail and we don't yet know a lot about the mechanism of these changes, what benchmarks will be use to evaluate our performance... (It) looks like pension funds will lose a lot of flexibility in what they can invest."
Polish officials have tried to reassure investors, saying the overhaul avoids the more radical options of taking both bond and equity assets away from the private funds outright.
They say the old system effectively made Polish public debt appear higher than it really is.
Poland has a hybrid pension system at the moment; mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE.
The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.
"This may lead to the private pension systems shutting down," said Rafal Benecki of ING Bank Slaski.
Policy in Poland is still much more prudent than in many of its European peers. However, the reform could erode Poland's reputation under Tusk for steady financial stewardship.
In the past few months, the opinion poll rating of Tusk's Civic Platform party has, for the first time in years, slipped below that of the main opposition, the conservative Law and Justice Party.
Though the next election is not until 2015, some analysts believe electoral concerns are already influencing economic policy and pushing the government to find scope for spending.