Proposal of full tax break for voluntary pensions waits for Parliament's decision
Romanian MPs have been discussing a law modifying the Fiscal Code during the last few weeks, but the debates were postponed because of domestic political matters. Among the hot issues of the proposed new fiscal regulations was one regarding the extension of tax deductions for contributions made to voluntary private pension funds (3rd Pillar), but this particular amendment is still under scrutiny by the deciding Commissions in the Chamber of Deputies, the lower chamber of the Parliament. The Romanian pensions industry has been supporting this amendment for quite some time now, and the proposal is also favored by the CSSPP, the private pensions' system watchdog.
The amendment foresaw the extension of the tax break for contributions directed to voluntary pension funds, as currently the legislation is incomplete and these contributions are only exempt from personal income tax and some (but not all) social taxes. The tax deductions ceiling is of EUR 400 EUR or EUR 800 per year, depending on who contributes: the individual or the employer alone or they both contribute, in which case the tax breaks add to make the retirement savings product more attractive. For the moment, the existing tax break for saving with a voluntary pension fund makes it rather difficult for both employees and businesses to make significant contributions to the system and use the product as a Western-like occupational pension scheme.
When voluntary pension funds were first launched in Romania in early 2007, the tax deduction was even less attractive: the ceiling was of only EUR 200 (or EUR 400 in case of mixed contribution) and it was only applicable to the personal income tax, but not to any social tax. In time, the industry and the market regulator CSSPP managed to convince the authorities to support the increase in tax advantages for saving with voluntary pension funds. This rather unattractive initial tax regime led to low pick-up rates of the product: until now, less than 230,000 of Romanians started saving with a voluntary pension fund, and approximately two thirds of this figure comes from corporate contributions, i.e. companies offering voluntary pension contributions to their employees as part of the benefits and rewards package.
The total number of voluntary plan members, representing about 3% of the working population, is still lower than the initial estimates for the first year of the system being operational (2007), when officials expected 250,000 to join the system in the first few months. Now, the amendment proposing a full tax break for voluntary pension contributions still has a chance to pass in the lower chamber of the Parliament and boost participation in the medium term.
There are currently 13 voluntary pension funds operating in Romania, managing net assets worth about EUR88mn on behalf of 230,000 participants. The biggest funds are managed by ING Life Insurance, BCR Pensions and Allianz-Tiriac Private Pensions.
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