Anca Paduraru in Bucharest -
Romanians have a month left to choose one of the private pension funds into which part of their pension contributions will be channelled from January 1. Even so, opinion polls show few people know anything at all about the new private pension system that is being foisted on them and noisily debated by politicians, pundits and trade unions alike.
Romania's pay-as-you-go pension system, like most others in Europe, is stretched to breaking point, so the government is reforming this one-pillar scheme by replacing it with a three-pillar system, comprising a state-run pension fund, private funds that will invest part of employees' mandatory pension contributions, and privately held voluntary funds that will provide supplementary pensions.
It is the second pillar that is currently causing the greatest controversy, drawing criticism not only from the scheme's opponents but also from the firms themselves who have applied to join the second pillar of the system and act as administrators of the mandatory private pension funds.
The biggest question for these administrators is whether a country that has such a deep distrust of financial products following the ruinous pyramid schemes prevalent following the end of communism actually offers that much room for growth.
"We are here because we cannot afford not to be in this market," says Adrian Allott, CEO designate for Aviva Romania, which was one of the first life insurers to apply for a license to become a private pension administrator.
The other administrators are ING Bank, Allianz Tiriac, Banca Comerciala Romana and the UK's Aviva. And in May, a joint venture between Banca Transilvania and the Dutch insurer Aegon said it too plans to enter the market.
Allott stresses his firm is not expecting to make a lot of money out of the mandatory pension fund business, but rather it's positioning itself to provide other financial products and services. "If we are not here, it will be difficult to run a financial business of any description, and the size and scale of the opportunity to focus on says we cannot afford not to be in this market," he says.
Another problem with the scheme inevitably centres on the regulatory framework within which these pension administrators will operate. And Allott's list of criticisms of the regulatory regime is almost as long as that of the trade unions, both of whom agree on two key points.
One is that Romania is using a blueprint that will create a system similar to the one in Poland. That country is just one year away from paying the first pensions out of the private pension funds, but hasn't yet any legislation in place to decide how that distribution will take place.
Romania too has developed only the World Bank-sponsored legislation for collecting the funds, but not one for distributing them.
"We do not know what will happen afterwards; all we provide at the end will be a lump amount of money to go to a pension provider under a law that is not yet adopted," says Allott.
In this legislative void, all the relevant parties in the process are taking a huge leap of faith, leaving it up to the politicians to decide on what will make some people a fortune and others not.
Petru Dandea, vice president of the trade union Cartel Alfa, says the lack of transparency stemming from the missing legislation means that people who pay into one of these private funds will have no clear information about how their investment is performing. "The government is deliberately mocking the citizens who are contributing to these funds," says Dandea.
The other point on which Allott and Dandea are in agreement is that the pension administrators should not be funding the very body, the Committee for the Supervision of the Private Pensions System (CSSPP), that will supervise their activities.
Dandea describes it as "a conflict of interest legislated by the Parliament," while Allott says, "there should be no direct link between the amounts of money the regulator receives and the industry."
"Possibly the best way to separate the two would be for the parliament to come in between and approve or allocate the budget to the CSSPP," Allott says.
The CSSPP argues there is a law regulating the financing it receives, which obliges it to present an annual audit to the parliament.
Not good enough, argues a group representing all of Romania's major trade unions.
In a critique of the pension system issued to the media on June 15, trade unions urged the parliament to tighten its control over the CSSPP; legislate the floor of profitability below which funds would be forbidden to continue operating; state clearly the method of how the rate of return is calculated; make no distinction between men and women in that regard; and make public how the costs will be covered in moving from a public pension system to this new three-pillar system.
This last point is worrying those like Dandea who feel that although the individual contribution cap to private pension funds has been set at a relatively low initial 2% of gross salary, this will rise to 6% over a period of eight years, leaving just another 3.5% of gross salary going into the state pension fund. Ultimately, the reform will make a dent in the public pension funds of around 1% of GDP, say analysts.
"Who is going to cover that deficit? Do today's pensioners know about this and have they agreed to this move? Do women know that they will pay for most of the transition to a system that will fail them?" Dandea asks.
Dandea is referring to the problem whereby traditional early retirement for Romanian women will mean smaller overall pensions for them, given the combined effect of contributing fewer years to their pension funds while living longer than men. Dandea says women seem largely unaware of this problem, just as the population as a whole is largely ignorant of these reforms to the pension system.
In an opinion poll carried out in May by IMAS polling institute and paid for by the Center for Equal Partnership, 77% of people polled said the new private pensions system was something good, but 85% admitted they had no or very little information about how this new system actually worked and how it would affect their livelihoods.
Even so, the legislation leaves them little choice: all people under 35 will eventually have 6% of their salary directed to a private fund whether they choose an administrator or not. The freedom to opt out of the system only applies to those aged between 35 and 45.
The legislation leaves little room for manoeuvre for the fund administrators too.
"The bottom line is that Romanian administrators are asked to operate more efficiently than anyone in the world," says Allott.
In his list of grievances about the system, Allot says profit margins will be very low; the cost of the depository bank will be born by the administrator, not the fund like in other countries; and fees are very tightly controlled, as private pension funds can charge only 2.5% of the monthly contribution and 0.6% per annum on the total assets.
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