A year after the start of the mandatory private pensions system (2nd pillar) and very close to the first official announcement of the returns reached by voluntary pension funds (3rd pillar), the Romanian private pensions market is still in the middle of a consolidation process. About required changes, perspectives, future plans, in an interview with...
Mircea OANCEA Chairman, CSSPP - The Private Pensions System Supervisory Commission
PRIMM: We celebrate one year since the launch of mandatory private pensions in Romania. What do you think of the results so far?
Mircea OANCEA: I think that the real celebration will happen a year after the transfer of the first contributions, on 20 May 2008, because only then will we be able to say that the mandatory private pensions market is actually working as planned. Of course, the preparatory months of structuring the market were a real challenge to all the entities involved. I think we can state that, on the whole, it was a success. We are quite satisfied with the collection figures, although many accounts are still empty. Compared to our more pessimistic first expectations, we have around 3.7 million contributors with money in their account, which is over 80% of the people enrolled in mandatory pension funds. The start is also promising in terms of the transferred contributions volume, which has also topped early forecasts and at the end of 2008 the contributions will probably hit more than 240 million euros.
The funds have started their fund-managing work, as normal, with a lot of caution, investing mainly in fixed-income instruments, which are most recommended given the current stock exchange volatility. Actually, we don't expect more sophisticated investment policies this year because the assets haven't yet reached the critical volume needed to diversify investments. Briefly, I think this is a moment of balance and caution.
PRIMM: What could you say about the development of the voluntary pensions market and what are your forecasts for the near future?
M.O.: The 3rd pillar remains the basic component of the private pensions system because it provides the perfect environment for making major improvements. In our opinion, the optional pension market development strategy should include three main elements: deductibility, well-being, knowledge. I am talking first of all about raising deductibility because we know from experience that, if properly applied, tax incentives are a real growth driver. In fact, the big picture shows us very clearly that the average contribution in Romania is not higher than the deductibility threshold which proves that only a significant augmentation of tax incentives could fuel a faster market growth. If there were total deductibility (from both income tax and social taxes), as it is currently contemplated, the employers could get more motivated to use optional pensions as benefits for their employees, which will make the voluntary pensions market grow. On the medium and long run, higher incomes, a higher level of information and more trust are the other 'must-have' elements for the strategy I was telling you about.
As to perspectives, I stay rather optimistic, but only if deductibility is increased and especially if it is total. I also think that the considerable efforts that pension administrators have put in to inform big employers will bring positive effects and in 2009 a higher number of big companies will include voluntary private pension contributions in their budgets, on behalf of their employees. Under these circumstances, the number of voluntary pensions contributors might double and it is not out of place to estimate 450,000 - 500,000 fund participants by the end of next year.
PRIMM: The "moment of truth" is getting closer as in 2009 the first official results regarding the returns of pension funds will be made public. In this respect, what could you tell us about the main goals of the PPSSC for the next period?
M.O.: We always keep that in mind. In the end, in order to reach its goal, this market needs to be not only safe, but also efficient and bring a fair return-on-investment to contributors. For this reason, our efforts go mainly to correct and improve the legal framework allowing administrators to do their business in a setting that favours investment performance, without ignoring prudence criteria.
First of all, we will amend some provisions of the net asset calculation rule, whose wording is not clear enough and may lead to misinterpretation and wrongful evaluation. At the same time, by amending this rule we will give private pension funds more chances to start diversifying their portfolio. Basically, it all comes down to including in the list of financial instruments approved as investments for private pension funds other instruments than those currently explicitly stipulated in the law: synthetic instruments, mortgage bonds, risk capital funds, etc. We can't rule out such instruments even if some of them are considered "delicate" because at some point their use could bring substantial revenues to pension funds. It is just a matter of time, related to the maturing process of the Romanian financial market and probably to overcoming this financial crisis, before they will be available or will become appealing again to investors, and we have to get ready for it. We have to assess their risk potential and decide the weight they could be given in the overall portfolio.
For 2009, the Commission has other ambitious plans too, such as trying to promote a bill that will bring new corrections and amendments to both fundamental laws governing private pensions and that will introduce a series of modern concepts, like liberalisation of the private funds market. The bill is currently being drafted, but the most significant amendments have already taken shape. First of all, the introduction of a multi-fund system giving pension companies the possibility (on the 2nd pillar) or setting the obligation (on the 3rd pillar) to manage at least two, three pension funds respectively, with different investment risk profile, so that contributors can change their options over the contribution paying period according to their risk appetite and the contribution period they have left to go. At the same time, for the pension companies whose funds reach a return-on-investment below the market average, we will set the obligation to cover the deficit from their own resources. The approved average return will be worked out on classes of investment risk. Finally, we plan to relax or even remove (for the 3rd pillar) the quantitative thresholds in asset classes set for investments made by pension funds.
We are also working on a bill on the Guarantee Fund, the last missing piece in the set of guarantees targeting system safety. This will play a major role during the payout phase and it will be directly linked to the liabilities taken by the payout funds. Let's not forget that pension sizing will be mainly based on lifespan forecasts, which could become inaccurate at some point. In such a case, deficits or liquid assets shortages might come up which will be most probably covered by a short-term loan from the guarantee fund. We think that this is the role that the Guarantee Fund will play. But, for now, the fund needs to become functional and accrue money so that it can play this role when the payout phase begins, in probably 15 years or so.
We are also planning to continue lobbying for tax deductibility augmentation for voluntary pensions, but also for speeding up the increase of contributions transferred to mandatory pension funds. The development of the Commission as an institution and staff upgrading are also on our list of priorities.
PRIMM: What do you think about the relationship with the market players so far? Could the restructuring of APAPR (Romania's Pension Funds' Association) contribute to a better dialogue between CSSPP and the pension fund management companies?
M.O.: The Association set up a number of committees on specific fields that meet up with the Commission experts to discuss technical matters. At management level, we meet monthly to talk about current business and to share opinions. I think we can call it a normal relationship of cooperation between two partners that may have different stands, but they share a major goal in the end: to build up a sound private pensions market.