A launch into troubled waters
Romania's fledgling pension funds have managed to stay in positive territory, even though their creation coincided with the financial crash, notes Mihai Bobocea
Romania's second pillar pension funds were launched just as a major financial downturn got under way. They began their sign-up campaigns in September 2007 and they began collecting contributions in May 2008.
Nevertheless, the mandatory private pensions industry managed to post a net weighted average return of 5.1% after its first six full months in operation. And at the end of November it was worth some RON703m (€183m).
This year, the private pensions supervisory authority (CSSPP) proposes to overhaul the system by allowing pension fund management companies to introduce a multi-funds model.
The sector had a long gestation period. Officials first drafted legislation to put private pensions in place 10 years ago, but successive governments failed to implement the proposal. However, at the end of 2006, legislation governing mandatory pensions was passed. It established a fully funded, mandatory DC multi-pillar private pensions system based on personal accounts with a central collection arrangement.
It follows the World Bank model that has been adopted throughout the region with additional elements inspired by the Polish and Hungarian versions, but with many local customary provisions - such as a net guarantee of contributions for the payout phase and relatively liberal investment regulations.
Contributions to the mandatory funds were set at 2% of gross salaries for 2008, rising at 0.5 points a year to reach 6% in 2016.
The authorisation process for the funds began in early 2007 so they could be ready for the September launch of the system's sign-up campaign. The campaign ended in January 2008 and the final allocation of members who had not stated a preference for which fund they wanted to join took place in March.
In the event, the participation exceeded market expectations. Some 4.15m participants signed up out of a total workforce of 5.3m.
Market concentration was high from the very beginning. The largest three funds gained 68% of all customers - ING with 33.2% of total participants, Allianz-Tiriac with 25.6% and Generali with 9.4% - and the seven largest got 92% of all customers.
Market consolidation followed. There were 18 funds at the beginning of the process but the four smallest attracted less than 6,000 participants between them and so requested the withdrawal of their licences before the first round of contribution collection.
The funds' portfolios have not been heavily affected by the financial crisis. Their managers have invested prudently. The regulations stipulate a 50% ceiling on equity investments, although most funds proposed up to 20-25% in their prospectuses. However, managers only bought shares during their funds' first two months of operation and then stopped putting money into the falling stock exchange. The Bucharest stock exchange fell by 67% in the first 11 months of 2008, one of the sharpest declines in the region.
Equity exposure at the end of May 2008, just days after the first money was paid into the system, was only 9.5% and since then it has steadily decreased. By the end of November the funds' equity allocation was below 2%.
Instead, the funds have invested in state securities and bank deposits. Accumulated investments in state securities (T-bonds, T-bills) and bank deposits constantly stayed at around 80-85% of the funds' aggregate portfolios.
This accounts for half of the positive returns achieved by the funds. Given the inflationary, money market and state budget conditions, yields offered by state bonds and RON-denominated bank accounts at 12-15% per year were high enough to attract the second pillar pension funds to invest.
The other factor behind the positive returns was the regulatory secondary legislation issued by the CSSPP. In May it issued a six-months derogation that allowed mandatory pension funds to exceed the 20% ceiling on allocations to bank deposits permitted by law and in October it issued a one-year derogation allowing funds to exceed the 70% ceiling on investments in state bonds. The derogations also allow funds to bypass the investment strategy outlined in their prospectuses.
The measures had an immediate impact, with funds taking cover in the yield-rich state securities and bank term deposits. With annual inflation in 2008 hovering around 7-9%, the banks paid up to 15% interest on RON-denominated deposits. At the same time, a state budget heavily burdened by election-friendly measures in the run up to November's general election, saw the finance ministry offer annual yields in excess of 14% on T-bills with maturities from six months to five years.
The relaxation of the rules on state bonds means that Romania's pension funds have a safe haven for at least a year, although it is debatable whether yields on state bonds will remain at such levels. So where to now? At the end of 2008, after eight months of contributions, the mandatory funds had accumulated net assets of around €230m. This figure is projected to reach the €1bn level in the first quarter of 2010 and surpass €25-30bn in 2020.
And as 2008 closed, consolidation on the sector continued with the announcement of a planned takeover by Banca Comerciala Romana, part of Austria's Erste Bank and the parent of BCR Pensii, of Omniasig Pensii, a joint venture between the Vienna Insurance Group and TBIH Financial Services Group and the manager of the Omniforte mandatory pension fund. If the deal is approved by the CSSPP, the intention is to merge the two pension funds. Omniasig is Romania's 10th largest mandatory pension fund, with some 1.2% of the market. BCR Pensii has a market share of 3.2% by net assets under management.
Further consolidation is forseen, with legislation reaquiring mandatory pension funds to have at least 50,000 participants three years after launch. The expectation is that there will be nine market players at the end of that time. Negotiations have already started and the small funds managed by KD, with a market share of 0.15% and 8,000 participants, Prima Pensie (0.26% and 20,000), OTP (0.44% and 22,000) and Bancpost (0.55% and 25,000) are expected to be absorbed by their larger competitors.
The CSSPP's multi-fund plan would see the sector's players offering life-styling options with differing levels of investment risk - the proposal is going to be filed at the middle of this year.
Voluntary funds not doing so well
The impact of the financial crisis hit Romania's fragile voluntary pension funds, its third pillar, more severely than the mandatory second pillar. Launched in June 2007, the voluntary pension funds posted mostly negative results for 2008 because of their higher allocation to equities and the smaller volume of their assets.
At the end of November 2008 the nine voluntary funds had a total of 145,000 participants and net assets of RON76m (€20m).
In an attempt to boost the system, the tax-exempt ceiling for third pillar contributions was doubled on 1 January to €400 a year, both for individuals and employers - €800 in the case of mixed contributions.
As a result, the private pensions supervisory authority (CSSPP) estimates the third pillar market could expand to 12 or more funds, with 300,000 participants and net assets under management of more than €100m by the end of this year.
However, CSSPP chairman Mircea Oancea sees the doubling of the tax-free ceiling as far from adequate. The CSSPP had proposed a ceiling of €1,000 per year (€2,000 if both an employee and employer contribute), but the finance ministry reduced the figure, citing budgetary constraints.
Mihai Bobocea is senior editor at Bucharest-based PRIMM Insurance & Pensions