Romania has not been well served by its rulers. Under the Ottomans the core of what is now Romania was governed by Constantinople-based carpetbaggers who bought the office and used their term to recoup the outlay and wring whatever else they could from the hapless population. A pre-World War II king followed this tradition, pausing only long enough at the end of a less than salutary reign to loot the treasury and load it onto the train carrying him and his mistress into exile. The post-war communist leadership imposed by the invading Red Army presided over a bleak and ruthless industrialisation and collectivisation process that was enforced by the feared Securitate secret police. And the confusion and euphoria that followed the overthrow and execution of the last communist dictator, Nicolae Ceausescu, spawned a hard-line leftist regime led by a former Ceausescu crony who bussed in miners to physically intimidate opposition and paid little more than lip service to structural reform.
So while this year sees neighbouring Hungary celebrate the 10th anniversary of the implementation of its multi-pillar pension system, Romania is only now following suit. Recent weeks have seen the president sign legislation to introduce a third, voluntary pillar and its implementation is expected over the coming six months.
However, there are growing concerns that political developments may delay attempts to introduce a second pillar.
Pension reform began in 1992 with the publication of a so-called White Book, but the first meaningful attempt at reform came with the defeat of the post-Ceausescu leftists first in the November 1996 presidential election and then in a general election the following month after which a plethora of centre and rightist parties formed a coalition.
“We came in on a major wave of sympathy and hope, especially among young people,” says Dragos Neacsu, managing partner at consultancy Dragon Finance and at that time a member of the reformist team. “Unfortunately the honeymoon was short lived. Initially, we had a lot of genuine sympathisers among the world’s largest institutional investors. It was just after the successful Polish and Hungarian reforms of the mid-1990s, so central Europe was seen as a new bonanza and Romania seemed to be the next Poland. I was running the national depositary for securities and in my first three months in office I was visited by 17 of the Financial Times-ranked top 20 global custodians. Based on that I was already dreaming that we were the next Wall Street. It took six months for a reality check, for me to see that plans I had been discussing with these guys for the development of our market were going to have to be postponed for quite some time.”
During its four years in office the centre-right administration dissolved into squabbling factions and was led by five prime ministers.
“The main reason for these huge missed opportunities was the government's lack of professionalism, I would even call it dilettantism,” says Neacsu. “It is not enough to be sincere and not have previous communist or secret police affiliations. You have to be a professional as well. This was a lesson we learned the hard way.”

A working group on private pensions took two and a half years to produce a report and the government subsequently drafted a package of legislation intended to restructure the first pillar and introduce a mandatory second pillar, a voluntary third pillar and a fourth pillar funded by the proceeds privatisation to compensate existing pensioners for their very low pensions.
“Unfortunately, it took another year and a half before the proposals were discussed in parliament and a final form was accepted,” recalls Neacsu. “But by then the government was very weak so it was not possible to get the package through.”
In the face of a public opinion polls predicting a crushing defeat for the governing parties which in turn triggered defections to the opposition, the then technocrat premier, former and current central bank governor Mugur Isarescu, employed a parliamentary stratagem to introduce the second pillar law by a decree-like government ordinance rather than a parliamentary vote. This would keep the measure alive over the following 18 months during which time it could be debated and approved by the succeeding administration. But in the event the incoming leftists, rebranded as the Social Democrat Party (PSD), cancelled it.
Nevertheless, growing macroeconomic pressures, which saw pension expenditure average 7.2% of GDP between 1995 and 2003, triggered a parametric reform of the public first pillar in 2000. Among other things, it forsees raising the retirement age to 65 from 60 for men and to 62 from 55 for women by 2014. And it bought time as the deterioration of Romania’s dependency ratio of around 1.4 workers per pensioner is exacerbated by emigration and a substantial black economy that places thousands of workers outside the tax and social security system.
Ironically, the PSD government that began its term by killing off one attempted pension reform attempted to introduce another in its closing months.
“The 2004 law, the occupational pension law, was a mistake,” says Crinu Andanut, director of Allianz Tiriac’s pensions division. “There was no social dialogue, no contact between the authorities and the main actors in this market. It was just a law issued for political reasons because elections were coming and was not a practical approach. So the market players were not interested because it was limited and restrictive.”
Neacsu agrees. “It was not market friendly. The PSD were doing it like it was another box to be ticked in the EU accession pact. And they didn’t try to capitalise on it in the 2004 election, showing it as a measure to gain a confidence vote from the electorate, the young voters especially.”
The 2004 general election saw the emergence of another centre-right government, which has again tackled the pensions issue. But again after a delay.
“I had hoped that this reform would be included in the legislative process for 2005,” says Neacsu. “It is better to do major structural reforms in the first year of a new government to give them time to deliver some benefits before the next election. But it was impeded by outside factors – the government pushed through a package of 17 pieces of legislation for the restitution of or the payment of compensation for property expropriated during the communist years and then there were floods that for three of four months took over the public agenda. Since then the government’s efforts have been focused on resolving the last of the ‘red flags’ to EU ensure accession on 1 January 2007.”
The passage of the third pillar legislation before that establishing a second pillar has dismayed some players. “This is a law with which we can work,” says Bram Boon, executive general director of ING in Romania. “The only problem from an industry point of view is we don’t expect too big a market for the third pillar.”
“Currently, employers pay 30-32% of an employee’s salary depending on the type of work as a pensions contribution, including a 9.5% deduction as an employee’s contribution,” says Mihai Seitan, president of the National Pensions House, secretary of state at the ministry of labour, social solidarity and family and a veteran of efforts to reform the system. “The law provides that two percentage points of the employee’s contribution goes to the second pillar pension fund, increasing by 0.5% of a salary yearly to take the contribution to 6%.”
“The contributor will not feel anything because the contributions will be taken from the existing contributions,” explains Andanut. But the problem is that the social security budget will, and this is one reason for the delay in the legislation.
“The reason we are somewhat unconventionally starting with the optional not the mandatory private funds, is because we are expecting to have a budgetary deficit and are still looking for the solution to cover this,” says Gratiela Lordache, vice-president of the parliamentary budget, finance and banking commission. “I don’t think this will remain a deficit for long. I think that the second pillar will be a success because it will serve as an incentive to attract a lot of money out of the black economy to benefit from the pensions and the result will be that we have even more money coming to the public pension system.”
“The non-involvement of the finance ministry, unlike in other countries, was one of the reasons for the delay of the implementation of private pensions was,” concedes Seitan. “But now the new draft law on the second pillar has been signed by everybody involved, including the finance ministry.”

H e is optimistic that the process will now move forward rapidly. “We have to be realistic and but I expect it will be passed by parliament in the autumn and when it is finalised we will have a schedule for its implementation, including the finalisation of secondary legislation for the second pillar.”
Others disagree. “I think that the introduction of the second pillar in 2007 is much too optimistic,” says Boon. “The big problem is the collection system. This is a bottleneck. It is extremely difficult to get that in place. There is hardly anybody working on this issue and if it is not in place it can cause a real disaster both for the customers and the industry.”
And Neacsu sees another problem. “At this stage it’s hard to say that pension reform will still be at the governing coalition’s priority legislative list,” he says. “Early elections have been on the president’s agenda for some time. And now a compromise is expected to emerge between the four governing parties to call capitalise on the European Commission’s expected signal later this year that 1 January 2007 is the Romania’s EU accession date by calling an early election next spring. I’m trying to see whether there is genuine political support for the second pillar or whether real politics might ask whether as we did not do it last year, what would be the benefit of pushing ahead with it now instead of other things that might bring more votes in the months before early elections.”
And there is still no political consensus on the reform. “I was speaking with former PDS finance minister Mihai Tanasescu and I understood him to be very aware of the necessity of putting this system put in place,” says Lordache. But he recently said that with the first and third pillars in place he could see no need for a second pillar. And as president of Lordache’s budget committee, he has considerable influence.