Private pension funds, growing more relevant

Noiembrie 2011

Asociatia pentru Pensiile Administrate Privat din Romania (APAPR)

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Adresa
Strada Costache Negri, Nr. 1-5
Cladirea Sediul ING Pensii, Etaj 2
050552 Bucuresti, Sector 5

Telefon
+40-21-207.21.72

Fax
+40-21-207.21.70

Website
www.apapr.ro

More than four years after their launch in the troubled waters of an uncertain globaleconomy in 2007, Romanian private pension funds now exceed a membership of 5.5 million contributors, manage assets worth close to EUR 1.5 bn and are facing new and new challenges every day. Their growing up over this period has been anything but uneventful; also, the following years are also expected to be as “interesting” for the industry as the overall economic and political context.

Market data: slow but steady growth

2^nd Pillar mandatory private pension funds were launched in May 2008 and since then have amassed a membership of 5.4 million participants, but this number is significantly misleading, because contribution density averages just below 63%,meaning only six out of every ten participants to the statutory pension funds receive contributions in their accounts each month. The loopholes affecting the contribution collection system, that make up the difference up until 100%, are numerous, startingfrom participants enrolled (and validated) in the initial sign-up campaign of 2007 without being active contributors to the public pension budget and ending at the recent recession-induced unemployment and labour market troubles. Even so, the third quarter of 2011 brought a slight improvement in contribution collection numbers for the 2^nd Pillar, with the new Labour Code, the “single 112 tax form” for employers and a timid pick-up in economic activity adding up to higher average contribution and a somewhat better frequency/density of inflows.

After more than three and a half years since their launch, the 2nd Pillar funds reached net assets under management worth EUR 1.35 bn at the end of August 2011, of which 85% are actually contributions collected from paying participants and the remaining 15% net profits churned by the funds’ asset management activities. Contribution levels are still very low, with the mandatory percentage diverted from the social security budget to private pension funds starting at 2% of members’ gross earnings in 2008, staying frozen at 2% in 2009 by political decision and increasing subsequently to 2.5% in 2010 and 3% in 2011. This means the system is still lagging behind the initial contribution calendar, which foresaw annual increases of 0.5 pp until 6% in 2016. In the three years of being sidetracked from this calendar, the 5.4 million members of pension funds lost net assets in excess of EUR 250 mn just because the Government decided, as an austerity measure, to skip the statutory increase in contribution levels in 2009. This fact and a few others forced the industry to concentrate relatively fast: the number of pension funds in this segment dropped from the starting 18 to the current 9.

3^rd Pillar voluntary private pension funds were however launched even earlier (May 2007) and had an even bumpier start. Four and a half years later, the 13 voluntary pension funds active on the market today reached a membership of only 250,000, and net assets below EUR 100 mn, which is obviously much lower than the unanimous initial expectations and their real potential. The main driver of suchvoluntary contributions in the mature pension markets is always the fiscal incentive, which is still not attractive enough in the Romanian 3^rd Pillar market, and it shows in the numbers above.

Also, the contribution collection problems described for the 2nd Pillar are also valid for voluntary funds:

several companies halted paying contributions they offered their employees as part of the total reward packages, and new sales are currently being represented mostly by the retail segment. All in all, the average value of monthly contributions is practically capped somewhere below the tax break value and the contribution density is perhaps as low as the 60% valid for 2nd Pillar funds.