By Clare Nuttall in Bucharest
It must have been every civil servant’s worst nightmare; publishing a document on a ministry website that gave unwelcome insights into the Romanian government’s intentions towards the country’s pensions system, created a furore among fund managers and the wider investment community, and sent the local stock exchange plummeting.
Specifically, the document included a proposal to suspend contributions to the second pillar of the Romanian pension system, where at present mandatory contributions are made into pension funds, in the second half of this year. Since it was published on May 20, and immediately widely reported in the Romanian media, officials have pointed out that it is merely a proposal and doesn’t represent government policy. Yet following other changes already indicating a lack of government support for the second pillar, that was enough to send investors reeling.
Romania’s current pensions system dates back to 2008, when the country introduced a multi-pillar pension system. The second pillar, where mandatory contributions from workers and employers are gathered in privately managed pension funds, stands alongside the state pension system (the first pillar), and the voluntary third pillar. When the new system was adopted there were plans to gradually increase the share of gross salaries directed into second pillar funds to 6%, in the hope of averting a pensions time bomb caused by the country’s ageing population.
For more than a year, however, rumours have been swirling that the government planned to do away with the second pillar. Romania’s then prime minister Mihai Tudose commented in September 2017 that there were plans to make contributions to pension funds voluntary from this year; two months later the government used an emergency decree to cut the contribution rate from 5.1% to 3.75% of gross wages effective from 2018.
The most likely reason for that change — and the government’s latest plans — is to reduce the fiscal deficit, which international financial institutions warn will soar above the 3% of GDP threshold set by the European Commission (EC) this year. Commenting on the decision to cut the contribution rate in its March country report on Romania, the EC noted that while the move would reduce the fiscal deficit in the short term, “that fiscal gain would dissipate in the long term as the social contributions diverted from the second pillar would be accompanied by an obligation to pay old age pensions in the future. In addition, this reversal will result in less diversified retirement income.” A temporary diversion of funds (that many suspect will become permanent) from the second to the first pillar looks like a parallel effort to replenish government coffers and rein in the deficit.
The most immediate impact has been on the local capital market. A couple of months ago I wrote a column for OZB about the recent strong performance of the Bucharest Stock Exchange, which is not only attracting a growing number of new listings (including the recent IPO of Purcari Winery from neighbouring Moldova) but also saw its main index soar at the beginning of this year. By April the BVB’s blue chip BET index was outperforming all its peers across the EU.
But that all changed when the plans for the pensions system were revealed. Local pension funds are important investors on the BVB; according to the private pensions association (APAPR) pension funds currently hold around 20% of the freely traded shares on the exchange with a value of around €1.9bn. Fears (even before the document surfaced) of a government assault on the second pillar caused an abrupt slide in the BET in mid May.
And there are more important long-term consequences. With Romania’s population ageing, and many working age Romanians leaving the country to live in other EU member states, pensions sustainability is already a concern — as in many other East European countries. UN data indicates that the country’s population will seen a further dramatic decline by the middle of the century, while the old-age dependency ratio is expected to rise in line with that in other EU members. This makes keeping a sustainable second pillar pension system to complement the state pensions highly important for Romanians’ futures.
Clare Nuttall is a Bucharest-based journalist specialising in Eastern Europe. Currently news editor at bne IntelliNews, she has been with the magazine since 2008, initially in Kazakhstan and more recently in Romania. Clare has also written for the Financial Times and the Economist Intelligence Unit.