Media battle and market crash force pension policy rethink in Romania
Romania’s coalition government will publish new proposals for the country’s private pensions system at the end of June or early July, the country’s finance minister said last week.
Eugen Teodorovici said that discussions would take place over the next few weeks, to include private pension administrators and other stakeholders.
He also said state pensions would increase as planned by 10% from July.
The commitment comes after a media skirmish between business groups attacking rumoured plans to weaken Romania’s mandatory second-pillar pension system, and a government with a track record of fiscal U-turns and confusing policy statements.
Opening shots were fired two weeks ago when 15 influential business organisations – including the Romanian Pension Funds Association (APAPR), the Foreign Investors Council (FIC), and trade unions – presented the government with a letter arguing for the preservation of the second pillar.
The letter attacked the government’s “short-term thinking”, saying any changes would have negative economic and social effects.
Romania’s second pillar was introduced in 2008, the legislation enshrining a gradual increase in contributions to 6% of gross salary by 2016.
Not only has this level never been attained – contributions eventually rose to just 5.1% – but in 2017, the new centre-left (PSD) government lowered contributions to 3.75%.
The open letter said that the second pillar had not only supplemented a state pension system increasingly under strain, but had also been a crucial player in developing local financial markets.
It said: “The pension funds invest more than 90% of their assets locally, thus helping public debt financing, economic growth and job creation. At the Bucharest Stock Exchange, the pension funds hold approximately €1.9bn, amounting to 15% of the market’s liquidity.”
It continued: “About 40 Romanian companies benefit from additional funding through the involvement of the second pillar, and market institutions, including the rise of corporate governance, have grown robust throughout this time.”
On 20 May, the government website published proposals to suspend contributions to the second pillar from the second half of this year, diverting payments instead to the state pension fund in order to reduce budget deficits.
The next day, the Bucharest Stock Exchange’s blue-chip BET index plummeted.
Although the government later said the press release had been published “in error”, and that no second-pillar contributions would be suspended, Romania’s president Klaus Iohannis weighed into the controversy, calling for more clarity from the government and warning it not to touch second-pillar savings, as citizens were losing trust in the pension system.
Meanwhile, European lobby group PensionsEurope came out in support of the Romanian pensions industry.
“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,” it said. It also called on the government to safeguard the schemes’ design and legislative framework.
The lobby group pointed out that Romania’s demographic challenges were worse than for most other EU countries, having experienced a population decrease of 3.5m people over the past 30 years. A further 4.7m decrease was projected by 2070. This would lead to a dependency ratio of 56.9% in 2060, according to Eurostat – more than double the 2015 figure.
PensionsEurope said: “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. Private pension saving should be encouraged to compensate for potential lower state pension benefits.”
According to the OECD, Romanian pension funds – along with those in Poland and Croatia – were among the top performers of the EU’s newest member states during 2016.
PSD leader Liviu Dragnea told Reuters last week that the government would continue to cut taxes while raising state pensions until 2020, in order to improve living standards.
Membership of the second pillar pension system could also become voluntary, he added.