Central & Eastern Europe: Tax breaks boost Romania’s pensions

In late November 2022, the Romanian parliament voted to introduce a more favourable tax regime for private pension payouts. 

This means that from 1 January 2024, tax will be payable only on capital returns, not principal. So pension income will be taxed on the gross amount paid out, less net contributions. 

“This is probably the most important of any recent developments, because it means the second pillar will be largely not taxable,” says Radu Craciun, president of the management board of BCR Pensii and president of Private Pensions Association, Romania. “It should also encourage people in the third pillar to up their contributions above the tax-deductible limit of €400 per year, because they no longer run the risk of double taxation on those savings.” 

There are also plans to increase the second-pillar contribution from 3.75% of gross wages to 4.75%, as from 2024 – another important development, says Craciun. 

However, other changes to the second pillar which he considers necessary are unlikely to be made, at least at present, in his opinion.

“First, we need an update of the investment norm regulating our portfolios,” he says. “We also need more digitalisation – that is, the ability to connect the database of our eight million participants with the official register of personal data, because people get married, change addresses and so forth.”

Craciun says that all this information is already in the state registry, so there should be a way for pension funds to import it automatically. 

“Otherwise, we cannot update our database – and we know we don’t send information accurately,” he warns.

He would also like to see the introduction of a pension payment law: at present, payments can only be allocated over a maximum of five years – a short-term horizon for pensions, he points out.

According to Craciun, one continuing headache is that since its existence, the second pillar – now boasting €18bn in assets under management – has been under consistent political pressure. 

“As with some other countries, the system not only has friends but also has what I would call some ‘un-friends’,” he says. “And of course this year has been the first in 14 years when we have seen negative investment performances.” 

A mere single year of losses by pension funds was enough for the ‘un-friends’ to become active, questioning the usefulness of the system, he observes: “This is the type of challenge we have to deal with. Of course, we get many questions from our participants who see their assets declining and asking why, what is going on, and so forth. But on top of all that, we face this political pressure that we just have to handle somehow.”

Most Romanian pension fund assets are in local investments. 

“We definitely prefer local treasury securities, because they are very ‘juicy’,” Craciun says. “At the moment, for medium and long term, you get a yield of about 8%, which is not bad at all. And, of course, you don’t run the foreign exchange risk. But for equities, the local market becomes increasingly small for us; we are growing more rapidly than local stock market listings so we are forced to look into foreign markets as well. Our fund is doing that, and so are others.” 

What Craciun says he misses is a real debate about ways in which pension funds could invest more in the local economy, supporting Romania’s development: “The stock market is generally too small to be able to do that, so we will need to invest more in private equity, for instance, or co-finance infrastructure projects for which we need vehicles to invest in.” 

He adds that pension funds can be considered to have two roles, by default – a social role and an economic one: “I feel that in Romania somehow there is an excessive focus on the social part, and much less focus on the economic part. In my opinion this is a pity, because we live in times when capital is becoming more and more scarce, and domestic capital will become increasingly important.”