ROMANIA - The IMF has made a list of reforms it wants to see in the mandatory Romanian second pillar, including higher fees, but some of the demands are unnecessary, according to experts at the pension fund association, APAPR.

"Current fees are well below those in other EU new members states with DC systems. Only pension fund management companies with large scale will be profitable," the IMF argued.

At present, pension fund members pay a 2.5% upfront fee, a 0.6% asset management fee per annum and an annual audit fee.

All other costs, especially those related to investment funds, are to be covered by the pension fund managing company.

"It is a situation actually nowhere else to be found, and it basically refers to trading costs, particularly on equities)," explained Mihai Bobocea, secretary-general of the APAPR.

"When a CIO decides to raise equity exposure, they buy shares for the fund but pay for the trading fee with pension fund management company money - it is an abnormality that creates many problems and that is why the IMF wants it eliminated", added Bobocea.

This regulatory peculiarity was introduced with the 2006 review of the 2004 pension law and states that "all costs directly related to managing the fund are supported not by the pension funds, but by the pension fund management company".

"They thought this would reduce operating costs for pension funds and increase benefits for participants", noted Bobocea.

However, other demands by the IMF are not making as much sense to the APAPR secretary-general.

The IMF warned "the governance structure of pension fund management companies should ensure that their directors act in the best interests of contributors when transacting with other related entities", in part because the 14 pension companies are owned, in the main, by banking or insurance groups.

But Bobocea noted that by law pension fund management companies are not allowed to invest pension fund assets in the products of their owners.

"According to the two laws governing private pensions in Romania (411/2004 and 204/2006) and subsequent Norms by the CSSPP (the second pillar supervisory authority), both auto-investment and trading with affiliates is strictly forbidden. So the situation that the report is referring to cannot occur as pension fund management companies never trade with related entities," the APAPR secretary general pointed out.

Another demand made by the IMF is "pension funds should use identical asset prices, based on agreed methodologies and data".

However, Bobocea pointed out that the assessment by the IMF was made in 2008 but subsequently "revised valuation rules were adopted and the issue was solved".

"Prior to that, some funds were valuating their fixed income by mark-to-market, some by accrued interest," he said.

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