Sofia, 18th September 2009 CEEC Forum – Multifunds in the Pension Systems of the CEE Countries Romanian dilemmas on the road to multifunds Mihai BOBOCEA

Sofia, 18th September 2009

CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

Romanian dilemmas on the road to multifunds

Mihai BOBOCEA

Secretary General

Romanian Pension Funds' Association (APAPR)

Who we are

• Romanian Pension Funds' Association (APAPR);

• 18 members: 13 pension fund companies + 5 custodian banks = 99% of private pensions market;

• 5 million participants (2nd + 3rd pillar);

• We believe in: professional ethics, transparency, efficiency, protecting the best interests of both our members and pension fund participants;

• APAPR is a proud member of both EFRP and FIAP.


Agenda

1) Background on Romanian private pension system development

2) Overview: CEE pensions and multifunds

3) Our dilemmas on the road to multifunds

4) Destination, an outline

5) Conclusion


1. Background: private pensions development

2nd pillar (mandatory private pensions)

• Launched in May 2008 with a 2% contribution;

• Contributions go up 0.5 percentage points a year, to reach 6% in 2016;

• Freeze at 2% in 2009, but IMF/WB/EC impose going back to initial calendar and recovery of the lost 0.5% in the first year of economic growth (2010 – 2011?);

• 4.8 million participants, out of which 4.4mn are active;

• Net assets worth EUR 438mn (estimate: EUR 540mn at end of 2009).



2nd pillar (mandatory private pensions)



3nd pillar (voluntary private pensions)

• Launched in May 2007, with tax break of EUR200/year;

• Tax break went up to EUR400/year at 1st January 2009;

• “Corporate” product, occupational-like features (ex: employer can contribute on behalf of employee; no vesting);

• 175,000 participants, very slow growth expected;

• Net assets worth EUR 38mn (estimate: EUR 50mn at end of 2009).



3nd pillar (voluntary private pensions)


2. Pensions and multifunds in CEE countries

2nd pillar: 10 countries, 30.5mn participants, net assets worth EUR 50.3bn (data for end-2008);

3rd pillar: 11 countries, 7.6mn participants, net assets worth EUR 11.2bn (data for end-2008);

Est. 2015: ~50mn participants, EUR 200-250bn net assets;

Multifunds:- already adopted in 4/11 states: Estonia&Latvia (2002-2004), Slovakia (2005), Hungary (2009);- debated upon / proposed in: Bulgaria (3rd pillar, 2010?), Czech Republic (3rd pillar v2.0, 2011?), Poland (projects under debate), Romania (2011?).


3. Our dilemmas on the road to multifunds

I. Shall we have multifunds implemented? When?• issue has been on the agenda for ~1-2 years now, there

is still no consensus (supervisor & market) on the opportunity to adopt this solution. Possibility: 2011

II. How much freedom (investment choice) for participants?

• too much => information overload, most participants will walk the easy path (default option); also more expensive

• too little => would affect system’s credibility and participants’ trust

• fair balance between flexibility (freedom of choice) and potential speculative behavior

• must limit the scope for bad (adverse) decisions



III. How many funds, what asset allocation limits?• 2-3-5 funds? What limits for asset allocation?• we have to change from current fund risk rating (based only

on credit risk = % of assets in “safe” bonds) to market risk based ratings (% of assets in equity) for funds

IV. Design of default option, a system on “autopilot”• how to link participants’ age (investment horizon) to

corresponding type of fund?• what should be the default fund? Chile approach (default =

corresponding fund with extremes blocked) vs. Slovakia & Baltics approach (default = conservative fund)

• what options to “block” (ex: the dynamic fund for the older participants)?



V. How to transfer participants between fund types?• i.e. how to ensure an efficient, less risky transition?• should transition be automated when a certain age is

reached (Hungary) or a smoother, gradual, transition, should be sought (Chile)?

VI. Low potential for economies of scale• Romanian 2nd pillar: very low contribution, very low

participants’ income, very low fees charged by fund managers, a very concentrated market

• => 2 major problems:- diversification risks for smaller funds- cost sustainability issues for all pension fund companies



VII. Transition to multifunds = more costs for pension fund companies. Can we take it?

• past&current investments made by pension companies to breakeven until year 2021;

• new costs only seem acceptable if fund fee structure is reorganized:

- higher fees for dynamic (equity-dense) fund- lower fees for conservative (bond-dense) fund- managing expenses (trading, custody, etc.) must be

transferred back from pension company to pension fund

VIII. How to link multifunds with payout phase?• although it’s very early, payout phase legislation is currently

being drafted, we must ensure an efficient transition from multifunds to payout phase.


4. Destination, an outline

What should multifunds ensure?

• Closer to optimum (risk)–(investment horizon)–(return) correlation for all pension fund participants

•Minimize market risk for participants close to payout

• Fair trade-off between participants’ and pension fund companies’ costs and benefits from the new system

• Bonus: more active implication of participants, more responsibility about investment choices, maybe more financial education & awareness


5. Instead of conclusions…

•Most important lesson from the current crisis: the end has come for the “one size fits all” approach;• Success / failure of

multifunds resides in system design (careful at all details!);• Very risk-adverse

legislation & authorities are a barrier to be seriously considered when adopting multifunds in Romania.


Photo: diversityjobs.com

Wish you all…

… a qUick recoVery!

[email protected]


Documents

Sofia, 18th September 2009 CEEC Forum – Multifunds in the Pension Systems of the CEE Countries Romanian dilemmas on the road to multifunds Mihai BOBOCEA