What is happening with the Romanian private pensions' Second Pillar?

The future of the mandatory Second Pillar pensions is among the most disputed subjects, in the last period. After the rumors saying they'll be nationalized, the last discussions show that the participants' contribution will be reduced possibly to 1% from the current 5.1%, which will have a significant impact over the future pensions.

How did it get here? The Prime Minister, Mihai TUDOSE, has stated, on Friday, that, according to the Ministry of Finance's calculations, the efficiency of the First Pillar pensions (n.r. state pensions) is much higher than Second Pillar's one, this being the reason for which the contribution for the Second Pillar is reducing, while the contribution for the First Pillar is rising.

"It was found that First Pillar's efficiency, with a benchmark on Romania's average wage, is much higher than the Second Pillar's one. Therefore, I asked the Ministry of Finance, together with pensions system's representatives, for an analyze, to see if the amounts shed into the First Pillar shouldn't be a little bit higher than the ones shed into the Second Pillar, especially now, in these years, when the economic growth is very big and the efficiency of Romanian's pensions money is much higher on the First Pillar. The discussions are advanced and the supreme interest of those that are paying for those contributions for pensions will be taken into account", stated the Prime Minister, quoted by TVR.

He also specified that the money from the Second Pillar won't be taken. "What is already there remains there, but, if it'll be better for Romanians, we will give more money for the First Pillar", explained Mihai TUDOSE.

Previously, last week, sources within the market have confirmed for XPRIMM Publications the existence of discussions regarding the decrease of Second Pillar's contributions, among the scenaries discussed for modifying the contributions being also the alternative of decreasing these contributions to 1%, besides the version of reducing them to 2,5%.

The contribution for the Second Pillar's privately managed pensions was freezed, in 2017, at 5,1%, the level established in 2016. The forecast for 2018 was showing the growth of the contributions to 6%, which means already a delay of two years from the the Law 411/2004 provisions.

On Monday, the President of the Financial Council, Ionut DUMITRU, explained on RFI Romania the differences between the three pension pillars and also how are going to be impacted those who are contributing for the state administrated fund, if the contribution will be reduced.

"I think that everyone should be aware that Romania's public pensions system has a major imbalance. Today, the state is borrowing 1/3 of the money paid for pensions, as the collected contributions are insufficient. It's this imbalance that, in 2007-2008, lead to a pensions reform, one meant to reduce, on the long term, this imbalance and to give a chance to a bigger pension to the future retirees, by introducing the Second Pillar (mandatory) and the Third Pillar (optional)", stated Ionut DUMITRU.

He explained that the money from the Second and the Third Pillar is private money. "It's every citizen's money, those are individual accounts in which some amounts pile up, that are multiplied through an investment policy and placing that money by the private administrators."

"We must be aware that, if the contributions for the Second Pillar will be reduced, this will have serious consequences on the long term, meaning that the additional pension received by the Second Pillar's contributor will clearly be reduced because the contributions are reducing. Moving those contributions to the First Pillar (the state one) means that basically it will be a political decision on how much the future pension will be", stated Ionut DUMITRU.

The pensions administrators want to discuss with the Prime Minister

APAPR (Romania's Association for Privately Managed Pensions) announced that it took note on the statements made on Friday regarding both the First and the Second Pillar pensions. "In the desire to represent and protect the interests of all parties involved in Romania's private pensions system, we publicly ask the Prime Minister, as soon as possible, for a meeting, to discuss, together, the results of the analyze made by the State Authorities and also the impact that the future decisions could have for the 7 million participants", communicated APAPR.

Also, in the spirit of transparency and dialogue, the Association wants the analyze to be public.

AAF: Second Pillar's pensions have contributed significantly on capital market's development

Following last week's discussions on the Second Pillar, AAF (Romania's Administrators Funds Association) has reaffirmed its support for Romania's current private pensions system.

"AAF manifests its support over the necessity to further promote the development of Romania's current private pensions system, the dialogue between Governmental factors and the administrators of pensions' funds being crucial in identifying the best decisions in the interest of private administrated pensions system's contributors and the success of Romania's reform on pensions system, started based on correctly assessed premises", communicated The Association in a Press release.

AAF highlighted that the mandatory private pension funds (the Second Pillar) have contributed significantly on local capital market's development and have sustained the Romanian economy, with the potential of producing the same positive effects in the future, along with the increase of the assets under management volume. "Any step back on pensions system's reform can only have negative effects over its expected success, with a real potential to endanger its future sustainability and to produce related unwanted effects, also over the development of Romania's capital market", say Associations' representatives.

"As an Association of Investment Funds' Administrators in Romania, whose members manage total assets worth over RON 41 billion, belonging to more than 400.000 investors, assets invested with majority in the Romanian economy, we consider that the economic and fiscal policy measures with a major impact on economy must be a part of a program that will take into account the long-term development of the economy, to be adopted in a predictable way and with the prior consultation of the main players in the market", they added.

The pensions will be affected


XPRIMM Publications' sources have shown that, in the current conditions, in which the contributions' timetable has already been delayed a few years from the stipulations of the 411/2004 Law, following that the 6% level provided for contributions by the legislative framework to be reached in 2018, the pensions received by contributors after 30 years of constant contributions will already be reduced by approximately 14% compared to the situation in which the law would have been respected. If, as one of the scenerios discussed states, the contributions will be reduced to 1% from now on, the same participants will lose approximately 68% from the pension that should be delivered by the system in compliance with the law.

PFP (The Association of the Participants in the Investment and Pension Funds) has highlighted that the reduction for Second Pillar pensions' contributions is as harmful as the nationalization or the abolition of those funds.

"The Association of the Participants in the Investment and Pension Funds has been surprised by the latest news on the Second Pillar pensions' funds and is deeply disappointed about Governmental actors' intentions in this direction. More specifically, PFP refers to the informations appeared on August 23, 2017, regarding the intention to cap at 2,5% the social security contribution of employees for the Second Pillar pension funds", PFP's Press release said.

In 2008, at the start of the mandatory private pensions system (the Second Pillar), the chart provided an increase in contributions of 0.5 percentage points each year, from 2% of gross employee in 2008 to 6% in 2016. Due to increasing budgetary pressions, the authorities have decided several times to postpone the annual increase.

According to ASF's data, the Second Pillar pensions system is a solid one, generating positive effects with benefits for participants. In June 2017, the nominal rate of return on privately administrated pension funds was 4.91%. Yet, since the system's inception, the average annual rate of return stayed close to the 10% value, thus providing not only for the best return among all the saving instruments offered by the Romanian financial market, but also for one of highest return rates in the European private pensions environment.

The total value of net assets registered on June 30, 2017 by privately administrated pension funds (the Second Pillar) was RON 36.06 billion, the annual growth rate being 30.76%.

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