ROMANIA - This year should be the most significant yet in Romania's drive to reform its pension system with two new laws set to reach the statute book.
Romanian economic conditions are ripe for pensions reform, Elena Dumitru, minister of work, social solidarity and family told a conference in Bucharest, Private Pensions in Romania, organised by FIN Media. The last four years of economic growth, lower inflation, and a greater number of professionals have created favourable conditions, she said.
Pension reform will also be good for the economy. Violeta Ciurel, general director of ING Nederlanden in Romania, told the conference: “Passing to mandatory or quasi mandatory funding will be beneficial for macro and micro economic reasons.”
The law on occupational pensions is due to be passed in the first half of the year, with a second law on universal private pension funds set to gain parliamentary approval by the end of the year. Both should come into effect in 2005 or 2006.
Romania faces one of the worst dependency ratios in the world: from a level of 2.5 in 1990 the ratio plummeted to 0.75 in 2003. The consequences were evident in a rise of the mandatory state contribution rate from 14% in 1990 to 36.5% in 2002.
Currently all interested parties, from the social partners to potential product providers, are involved in ongoing discussions about the final form of forthcoming second pillar privately managed mandatory funds.
But Dragos Neacsu, president of Raiffeisen Capital and Investment in Bucharest, said: “Banks or insurance companies sometimes have contrary proposals. We have to have a unified response from the market as a whole.”
The proposals stipulate that anyone under the age of 35 entering the labour force for the first time will be obliged to join the new funds; those over 35 will be excluded. Contributions of 2% of gross salary in the first year of operation will rise annually by 0.6% up to a limit of 8%.
After the first three years of operation pension funds must have a minimum of 50,000 participants or their authorisation will be withdrawn. Investment limits are also stipulated: a limit of 70% of the portfolio on Romanian bonds and equities, and 20% on foreign investments. Caps on individual investments in one issuer are under discussion.
Also to be decided are minimum ratings for investments. “Norms will be issued by the new regulatory entity about the minimum rating. They will nominate the markets that are eligible and the types of securities and their ratings,” added Neacsu.
A major problem in Romania is the limited development of the nation’s capital markets. Pension funds will be short of investment opportunities unless the markets develop beyond the few listed companies and bonds now available.
Sergiu Oprescu, president of the Bucharest Stock Exchange, talked of a triangle of development where capital markets, pension funds and privatisations will go hand in hand. “Now there is nothing for pension funds to invest in,” he said.
“We need to offer a larger range of instruments. Risk in the capital market is generated by systemic and issuer risk. There are only a few corporations which could absorb investments by pension funds.”
But that could be about to change. Neacsu added: “The capital markets could offer the returns expected so pension funds reach the capitalisation they need. We have to address this challenge. By the end of this year we hope to have new alternatives for diversification of financial instruments.”
Romania has already made some progress in reforming its capital markets. Last year it was granted the status of working market economy by the US government, opening up the country to more foreign investment.
Stere Farmache, chief exec
The Pension Protection Fund (PPF) is consulting on proposals to charge a "risk reflective" levy for commercial defined benefit (DB) consolidation vehicles.
The funding gap across FTSE 350 schemes could be slashed by as much as £275bn if schemes look beyond traditional ways of creating value. Victoria Ticha examines how
There will be "many flavours" of defined benefit (DB) consolidators but consolidation will only be the right answer for a minority of schemes, Alan Rubenstein says.
Work and Pensions Committee (WPC) chairman Frank Field has questioned the regulator on what lessons it can learn from the experience of the Kodak Pension Plan No.2 (KPP2).