Pension reform has been on Romania’s agenda for a decade, but only in the past year did it cease to be just a subject of lawmakers’ debate and become reality. As with any other country in the former communist bloc, the main thrust of change has been to put more emphasis on private management retirement savings that would complement the state’s annual pension budget.

The first law establishing the framework of reform was passed only in 2000, at the tail end of the first rightist government of the country, and it envisioned a switch to the three-pillar system widely used across the world. In addition to the first pillar, the compulsory pay-as-you-go pensions paid by the government, two more privately-managed frameworks would be set up – mandatory retirement contributions and personal savings.

Reform stalled over the next four years, during the government of left-wing prime minister Adrian Nastase, which passed the law on mandatory pensions managed by private funds (second pillar) with only one month to go before parliamentary elections. The process picked up steam once a new centre-right coalition took over, which set up a pensions regulator (CSSPP) in 2005 and passed a law on retirement savings (third pillar) the following year.

The third pillar became functional at the start of 2007, although it has failed to thrill potential customers so far. The combined assets of the seven funds operating on the segment at the end of February 2008 stood at a mere 5.7 million euro.

The really enticing pie, however, is the second pillar. More than four million Romanians had to pick between 18 funds competing for the right to manage mandatory pension contributions between September 17 2007 and January 17 2008. All employed Romanians aged under 35 have to choose a private pension fund, while those aged 35 to 45 can do so if they want to. More than one third of the 3.82 million people who picked a fund, 34 per cent, came from among people aged 35 to 45. Another 330 000, who did not pick a fund, would be assigned a fund at random.

Within five years of the start of operations, pension funds on this segment are expected to amass two billion euro in assets, according to CSSPP forecasts. Given the larger-than-expected number of subscriptions, even without taking into account rising average wages in the country, pension funds will reach the regulator’s forecast well before the end of the third year of operations. At the start, the pension funds will receive two per cent of before-tax wages, out of the total 9.5 per cent that have to be paid as mandatory retirement contributions. The share will grow progressively to six per cent over the next eight years.

The types of investment instruments are also strictly regulated by law, with funds allowed to invest a bigger chunk of their money in fixed-income instruments (bonds) than stocks, while the share that can be invested in a single company or group of companies is also capped. A special fund guaranteeing retirement investments will be set up, the law establishing it expected to be put up for public debate by the summer.

The launch of subscription campaign in September last year caused a massive scramble for customers, most funds setting targets that have later proved to be overly optimistic. Only one of the four funds that set their sight on reaching a 30 per cent market share managed to do so – ING, while Allianz came close. The two funds tower over their competition, with almost three in five Romanians opting for one or the other, while the top six, which also includes Generali, Aviva, Interamerican and AIG, combine for a total market share of 88.2 per cent.

Ambitious targets have already taken their first casualty, with the manager of OTP’s pension arm resigning three months into the subscription campaign, when it became clear that the company will not meet its 10 per cent market share target. The Romanian arm of the Hungarian bank wrapped the campaign with a 0.5 per cent market share.
Over the next several months, a wave of mergers and acquisitions is expected to sweep the market, which will leave less than a dozen pension funds still operational, local analysts have said.