Romania May Lower Private Pension Contributions

Government considers redirecting private pension funds into state pensions.

Romania’s prime minister said the government was considering reducing contributions to mandatory private pension plans, and redirecting some of the funds into state pensions, according to Reuters.

In 2008, Romania overhauled its pension system, and made it mandatory for working Romanians under the age of 35 to contribute to private pension plans as well as their state pension. The new addition to the pension system is known as Pillar II, or the second pillar.

 “I have asked the finance ministry and the pension system representatives to make an analysis,” said Prime Minister MihaiTudose after a meeting of senior members of the country’s ruling Social Democrat party, according to Reuters. “We … ran the numbers to see what yield does this second pillar have. We were surprised to find the state is a better administrator at this thing. Half the sum will go to the first pillar (the state pension) and half of it to the second pillar.”

Reuters reported that the Romanian finance ministry met with industry officials earlier this month, where they discussed lowering contributions from the current 5.1% to 1% or 2.5%, or even a fixed sum per participant. Other proposals included eliminating a commission for fund managers of 2.5% of all contributions.

“Such cuts to contributions would make the system quasi-irrelevant for participants who will accumulate paltry sums in the long term,” a source told Reuters.

Approximately 6.9 million people contribute to second-pillar private pension funds, which have assets totaling 35.1 billion Romanian leu ($9.1 billion) as of May 19, which was the ninth anniversary of the introduction of mandatory private pensions, according to Romania’s Association for Private Administration Pensions (APAPR).

According to the APAPR, Romanians are wealthier by more than €1.5 billion ($1.8 billion) in the nine years since Pillar II was implemented. From May 20, 2008, to May 19, 2017, all funds of private pensions reported an average annualized return of 9.46%, said APAPR. The APAPR also said that Romanian private pension money contributes to economic growth and job creation in the country, as more than 92% of the Pillar II investments are made in Romania.

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