PensionsEurope calls for safeguarding Romanian private pension system

PensionsEurope, a Brussels-based pension fund association, calls the Romanian government to safeguard the role of private pensions and to not take further measures aimed at deteriorating the role of private funded pensions.

“A pension system that includes also funded parts is better able to achieve its various objectives and is more resilient to the multiple risks to old-age financial security. The decision taken 10 years ago in Romania of setting-up a three-pillar pension system has proved to be a success story, as shown by the very good financial results reached by the Romanian pension funds, and by the significant development of local financial markets. The Romanian government should consider raising the contribution rate to private pensions, instead of decreasing it”, said Janwillem Bouma, Chair of PensionsEurope.

Romania is facing large demographic challenges, which are much bigger than for most other EU countries. Its population has decreased by approximately 3.5 million citizens over the last 30 years and is projected to decrease by other 4.7 million by 2070. The demographic decline is reflected by a severe worsening of the demographic dependency rate (elderly / active population ratio), which is projected to rise from 26.3 percent in 2016 to 56.7 percent in 2060. This means that there will be less than two working age people for every retiree. The fact that fewer active people will have to support an increasing number of retirees puts an extreme strain on the public finances of the country and requires measures aimed at ensuring the long-term financial sustainability of the Romanian pension system, estimates the Association.

PensionsEurope is convinced that the most important measure to achieve long-term adequate and sustainable pensions is to encourage and facilitate private funded pensions. Romania has developed with very good results its funded pensions system, the so-called 2nd pillar pensions. In November 2017 the Romanian government decided to cut the contributions to 2nd pillar pensions to 3.75% instead of raising them to 6% from the 5.1% of 2017 as foreseen by legal provisions. We have heard alarming reports that in the upcoming months further actions could be taken by the government to overhaul the design of private pensions – says PensionsEurope’s press release.

According to OECD data, the private-funded pensions in Romania were among the top performing pension funds in the new EU Member States in 2016, as Agerpres reports. The European Commission too has underlined that "the financial situation and functioning of Romanian private pension funds has not been a matter of concern.

European Commission has analyzed the situation of the Romanian pension system in its Country Report, criticizing the reduction of the contributions directed to the 2nd pillar, which it claims to have been "triggered by short-term fiscal concerns rather than their financial performance" and that the "reform of the second pillar pensions could weaken pension sustainability and the performance of the local capital market".

The 2nd pillar of pensions has caught everyone’s attention after the legislative program for May-December 2018, published on the website of the Ministry for Relations with Parliament on April 28th, mentioned the existence of a bill under which the contributions would be suspended between 1 July and 31 December 2018. Moreover, the document proposes a fixed employee contribution of 84 lei in the first year, which is to be increased annually to 125 lei in year 5, deducted from the income tax. At the same time, the employer could pay that contribution, which in its case is to be deducted from the corporate tax according to the size of the company (50, 25, 10 employees). Since the beginning of this year, social contributions have been transferred to the employee.

Finance Minister Eugen Teorodovici said on Tuesday that any pension system scenarios supported by people who have no idea about government activities have negative effects on the borrowing costs the Ministry of Finance has to pay in the market and it should be analyzed, Teodorovici said, if such unjustified claims should be subject to the law.

On the other hand, several important business organizations have called for maintaining the current legislation and architecture of the 2nd pillar of pensions, without further amendments, in a document titled "Call for the Safeguarding the Architecture of the Private Pension System in Romania".

Source:RRA,PensionsEurope press release.Translated by Miruna Matei