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Pillar III: Thinking of fiscal incentives

Romania's voluntary private pensions market (3rd pillar) has not matched expectations so far, despite the optimistic estimates at its start in June 2007. Until one month ago, only 121,000 participants started to save in the optional private pension system, and the accumulated assets barely exceeded 15 million Euros. For comparison, the estimates made when the market was launched indicated 250,000 participants and assets worth 30-40 million Euros for the end of 2007, but these forecasts seem remote so far, even for the end of 2008. But there is still room for hope on the market: the fiscal incentives for contributions in the voluntary pensions system could be increased from January 1st, and the voluntary pension plans could thus become more attractive.

Thinking of fiscal incentives

The number of customers and the amounts accumulated in the voluntary pension system did not match expectations, which surely stand for the empty part of the bottle. On the fiscal incentives side, the Government finally decided to increase the tax deductibility for contribution in the 3rd pillar from EUR 200 per year (both for the employee and for the employer) to EUR 400 per year, namely from a total of EUR 400 (in the case of mixed contributions) to a total of EUR 800. Also, contributions to voluntary pension funds will be fully deductible (they will not be taxed with social contributions nor income tax - 16%), in comparison with the current situation, when contributions are only exempt from the income tax, but are still due for social taxes.

The full half of the bottle...

In other words, full deductibility compared to partial (current) deductibility for 3rd pillar contributions means expenses about 30% lower for those who choose this savings option, either individual participants or employers offering voluntary pensions as part of the benefits package, states Ion GIURESCU, Vice-president of CSSPP, Romania's private pensions supervisory authority. Together with the doubling of the deductibility, the tax incentive becomes even more obvious. The deductibility increase might lead to higher contributions transferred in the system, as current analysis show that the average contribution to voluntary pension funds was about EUR 195 per year so far, namely slowed down by the deductibility limit.

Other good news are that, despite the slow start and the still low fiscal deductibility, the voluntary private pensions companies still show a growing interest for this market. The first four optional pension funds emerged on the market in June 2007, managed by four pension companies, and now the number of operational funds reached 9, with 7 managing companies. In addition, another three funds were pending authorization at the end of September, and CSSPP is expecting at least two-three other funds to request licensing in the following months.

The market has strong potential: approximately 5 million participants could save through such voluntary pension schemes within the next 10 years, thinks Mihai SEITAN, former president of the National House for Pensions and Other Social Security Rights (CNPAS) and the main designer of the Romanian private pension system (both voluntary and mandatory). And the pension companies that already entered last year on the mandatory funds market (2nd pillar) know this and, if they don't have voluntary pensions already in their offer, they prepare plans to enter on this savings segment as well.

The market estimates for the end of the year are not spectacular - 200,000 participants at the most, and net assets up to 25 million Euros - but they indicate a constant and sustained growth of this saving alternative. At the moment, employers contribute for approximately two thirds third of the 121,000 participants - a sign that companies get more and more interested in using voluntary pensions as an instrument to motivate and retain their staff.

Who is in the lead

ING Life Insurance, BCR Life Insurance and ALLIANZ-TIRIAC Private Pensions are the three leaders on the voluntary private pensions market, leading the "hostilities" at different moments in the past one year and a half. Even today, the differences are quite small, as the market is still shaping up, undergoing a slow evolution, and just a few significant corporate contracts (whereby companies contribute to the optional pension for the benefit of their own employees) can change the hierarchies of the funds and managing companies at any moment.

At this time, ING leads with its two funds in terms of number of participants, as well as net assets, while BCR has the largest voluntary pension fund from the assets perspective and ALLIANZ-TIRIAC (managing two funds as well) is close in both areas - participants and assets -, after leading the market race most of last year. In terms of number of participants, ING now has a 40% market share, ALLIANZ-TIRIAC has 30% and BCR has 23%. In terms of assets, ING has a market share of 35%, BCR 30% and ALLIANZ-TIRIAC 27%.

So far, the little money from the voluntary pensions system was invested more and more prudently, as the funds relied on state securities, bank deposits and corporate bonds, constantly lowering their exposure on shares to protect themselves from stock exchange fall downs caused by the global financial crunch.

Two voluntary pension funds are now preparing to launch under the administration of INTERAMERICAN Pensions (EUREKO Activ and EUREKO Confort), as well as the second fund of AVIVA (Pension Max). The three funds are now going through the licensing process, but other players from the market also prepare their "weapons": GENERALI Pensions, BRD Pensions and AIG Pensions - three Top 10 players on the mandatory pensions market.

What does the future look like?

Besides the project for increasing tax incentives, the voluntary private pensions system shall be supplemented and changed in the near future by certain fundamental normative acts. Firstly, we are talking about the Guarantee Fund and the law on the payout phase, two laws that will include provisions applicable both to optional and mandatory private pensions systems. In addition, 2009 might bring a substantial liberalization of the legislative framework for the voluntary pension funds, mainly in the investment area.

CSSPP plans to enhance the attractiveness of the 3rd pillar through a higher investment tolerance than for the mandatory private pensions (2nd pillar), which will bring more attractive returns for the voluntary system in the long run, for participants willing to undertake a higher investment risk.
If the CSSPP plans become a reality next year, the percentage limits imposed to investments on various asset classes shall be relaxed or even eliminated, the funds will get green light to invest in much more numerous financial instruments - from private equity funds to synthetic instruments, real estate assets and mortgage bonds -, and CSSPP might even start the necessary legislative actions to allow the funds to outsource their asset management activity, a relatively common practice on the 3rd pillar in the countries in the Central and Eastern Europe region.

It remains to be seen to what extent these targets will become a reality and how will they boost the increase of savings on the voluntary pensions segment. For now, the funds' offering diversifies, and the battle for customers that involves more and more pension companies is an additional argument to speed up the market.


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