Romania's fiscal austerity has sheltered its nascent pension fund industry but the outlook is still unclear, writes Thomas Escritt

Romania was one of the hardest hit by the credit crunch in 2008. It was forced in early 2009 to the IMF for a €20bn bail-out, but it has been diligent in sticking to the orthodox prescriptions advanced by the multilateral lenders.

So as both Hungary and Poland looked to their funded pension systems as a source of emergency cash when faced with budgetary constraints, Romania followed a more painful course, imposing 25% pay cuts on public workers and adopting a strict fiscal policy.
Romania's four-year-old funded pension system has survived intact, moves against accumulated pension pots elsewhere in the region have left their mark.

"I don't think we'll ever again be able to talk about the pension system being safe," says Mihai Bobocea, secretary general of the Romanian Pension Funds' Association (APAPR). "With ongoing budgetary constraints, you have a situation of a sword always being over your head."

While moves against Romania's private pensions were mooted, the government's determination to stick with its IMF programme brought with it the obligation to avoid excessively unorthodox economic policies, meaning that any such suggestions were swiftly vetoed.

Indeed, there were signs of a commitment to strengthening the funded system, at a time when it would have been expedient to give the population extra disposable income. One was the fact that the government chose to implement a long-planned tiered increase in the level of contributions to pension funds this year. From next year, the contribution will increase to 3.5%, from 3%. "By contrast, it was in 2009 that the level of the state pension was last increased," says Bobocea.

It is clear that the political commitment primarily comes from external pressure. "It was really because of the IMF and the World Bank arrangements. To some extent, the government was going ahead with something already approved because of inertia," Bobocea continues.

Romania completed its 20-month standby IMF loan agreement last year. The programme was then replaced with a ‘precautionary' standby loan agreement which runs until March 2013. Precautionary agreements, which are designed to give bond traders the confidence to buy Romanian government bonds, are not typically drawn down. They do imply a degree of conditionality, however, meaning Romania's pension system is likely to continue developing along World Bank lines for the next 18 months at least.

The past year has also seen progress around establishing a guarantee fund to compensate savers in the event of a bankrupt pension fund being unable to meet its obligations. The establishment of the fund has been repeatedly delayed: the initial legislation should have been passed some three years ago. And while the fund will be capitalised with contributions from pension funds, the exact details will only become clear when the relevant secondary legislation is approved next year. It is likely that the management of the fund will be contracted out to external fund managers by the board, which will be staffed by finance ministry representatives of the, the financial regulator and the pension fund industry association.

The other major change in 2011 significantly broadened the range of public servants who are obliged to make contributions to the social security and funded pension pillars. Until recently, some 200,000 public workers, including members of uniformed services, the secret services and MPs, were entitled to a full state pension without making any contribution. Faced with difficult budgetary circumstances, the government plans to put an end to this anomaly, and these categories of public servants will make contributions based on their salaries from the end of next year. "It's an improvement in accounting terms," says Bobocea, "but also beneficial for fund companies, who will see larger inflows as a result."