PRIMM: Mr. Chairman, we suggest to start with a recap: what is left to be done, from the legal point of view, in order to have a fully functional pension system?
Mircea OANCEA: As far as the first stage is concerned, in other words full authorisation of operators, of schemes and private pension funds, both voluntary and mandatory, the system is completely functional from the legal point of view. Operating ground rules have been already drafted for these entities.
On the other hand, the legislation will never be complete. It will always be perfected, based on market developments, on issues raised by operators or by us, as a supervisory commission. Most certainly, practice will have a say in all this.
Some issues regarding the collection of Pillar II contributions still need to be clarified. We are working on the methodology for enlisting in the funds that will be authorised. The draft will be examined by an inter-ministerial committee, made up of representatives of the Ministry of Economy and Finances, of the National House of Pensions (NHP) and of the Commission. At the moment, NHP keeps the records of the entire publicly insured population and it will continue to do so for Pillar II. We have to decide how the enlisting documents are to be recorded, and how these pieces of information are to be processed and transmitted. The same structure will be used to keep the records of the participants in privately administered pension funds.
In the same context, we need to set the basic rule for mandatory enlisting age limit - which should be 35 years old - and for the voluntary enlisting age limit of 45 years old.
We will basically choose one of two possible options: to take into account the exact age that one has at the beginning of the enlisting period or to take into consideration only the year of birth so that anyone who turns 35 in 2007 must enrol in a fund, while all those who turn 45 years old will be able to enlist if they want to.
Another interesting issue is raised by the young people who get employed after the enlisting deadline from 2007. We have to decide if they will have to choose a fund when they get hired or if they will have some time to have a look at the offer and then decide on the operator. I think the second option is better, but, however, this will be set in the future.
PRIMM: One of the basic responsibilities of the Commission is to oversee the financial safety of the market. Where does the legislation stand in this respect? Are there any evaluation indicators for pension funds as well which will be followed-up?
M.O.: Of course we will have solvency and financial stability indicators, but I must underline the fact that private pensions are tackled differently than insurance. Our evaluations are run in a different manner. We clearly separate the fund and the administering company, as these two are distinct legal entities. The fund is assessed based on the investment return correlated to the average market return. If for a year, the fund return goes constantly below this average value by over 4%, the fund loses its operating licence. Consequently, a fund cannot afford returns which are significantly lower than the market average. This will push the administrator to constantly look for a balance to bring him a quite good return, on one hand, so that he can stay on the market, and an acceptable risk profile on the other hand.
As to the evaluation of fund administrators, we are getting closer to insurance procedures. This is the reason why, at European level, they have already started to talk about adopting a system which is similar to Solvency II model used in insurance. The European Insurance and Occupational Pensions Committee has been analysing Solvency II with a view to find a way to adapt this system, especially created for banks and insurers, to private pension systems and forward a directive draft in this respect by the end of 2008. Nevertheless, it is important to say that this will not be an easy process considering that, as far as pensions go, we can’t talk about a harmonised European legislation as it is the case of insurance, capital market or banking. This is first of all due to differences between Western European systems and those from Eastern Europe. Let’s not forget that Directive 41 itself is based on the 2001 reality, when the European Union had only 15 Member States. EU enlargement brought to the attention the situation from Central and Eastern European countries, which had adopted pension systems completely different to those from older Member States. In Western Europe, the system is highly occupational, with defined benefits, where funds are established by the employer with the employees and administered by the employer. In such a context, the financial stability evaluation of these institutions is greatly similar to the insurance industry. The countries of the “new European Union” practise exclusively defined contribution accounts and they make the distinction between funds and administrators. Under these circumstances, there are no guarantees for benefits level, but, still, the pension is always guaranteed. This brings along the need for guarantee funds, which are rarely encountered on Western markets. From the point of view of supervision, this means different objectives and priorities of supervisory bodies. In our case, if something bad happens and the administrator goes bankrupt, the fund is taken over by another administrator. But, however, for this to happen we have to constantly check that there is money in the fund and that the interests of the participants are protected. Obviously, until a set of evaluation rules is adopted at European level, we will have to draw up our own rules for companies and for funds.
We intend to propose a set of solvency and risk indicators for pension companies by the end of the year because we don’t want to deal with bankrupt administrators. We would like to work with administrators that have financial resources available at all times to meet their duties and, if they have chosen to guarantee a certain minimum return to the fund participants, that they are able to cover, from own resources, a potential return deficit. The minimum registered capital level of 4 million does not provide sufficient guarantee. On the contrary, this amount is the minimum needed to start the business.
I want to emphasize that the law doesn’t impose on the administrators to provide a certain return. It is completely up to them if they decide to promise, as part of the pension scheme, a minimum guaranteed return. But, however, to make sure that if they make such a promise, they will be able to keep it, the administrators have to establish certain technical provisions. Therefore, we have already drawn up a Norm regulating pension scheme provisions. This normative act specifies the method of calculation, the rule and revision period of these provisions, which are to be adjusted to the return promised, to the establishment and source of amounts - from the administrator’s own resources, not from the fund assets. The provisions will form a separate account and will be kept in depositary.
PRIMM: A large part of the operators who are already authorised for Pillar III, or who think they will get an authorisation soon, have said that the marketing campaign might start on the 1st of May. Do you think this is realistic as a date? What do you think the structure of the voluntary private pension market will be at that time?
M.O.: The date is realistic but I don’t think that many companies will already operate on the market at that time. I think that the first contributions will be made in the second half of 2007, while the real “boom” will take place in 2008. This depends also on how informed human resources managers are and how willing they are to promote this type of benefit. No matter what, I don’t think that in 2007 we will witness a spectacular increase in voluntary pensions. But, once these benefits will be embedded in 2008 company budgets, the market will develop.
In addition, by the end of the year, we will have at least six administrators on the market. Two are already authorised and four are about to be authorised. The first investment company that will bring something new than insurance companies is being authorised as well. Such a player will colour up the market and I think it will be only beneficial.
PRIMM: We would like to go back and try to clarify where the Private Pensions System Supervisory Commission stands with regard to an issue that still causes strong debates: voluntary private pensions vs. capitalised life insurance. Besides the fact that in Romania the above-mentioned insurance products are not included in Pillar III, what differences between the two types of financial products make the Commission think that the confusion between them could be a potential risk for clients?
M.O.: Considering the structure of these products, the two products are meant to cover different needs. The private pension is a clear product of accumulation, whereas the insurance covers mainly a risk and the accumulation element comes second. This leads to major differences related to costs. In the case of insurance, the costs are higher because funds allocation is made mostly in the first contract period mostly to cover the risk. On the other hand, pension fund contributions are invested from day one. Unfortunately, clients who don’t know this difference have unrealistic expectations for both products to lead to the same result. Or, at equally invested amounts, the return cannot be the same. These products were promoted as pensions when there was no legislation in place, but they cannot be called “pensions” anymore because this might mislead the clients. This decision was made so that voluntary pensions are not influenced and so that the population doesn’t get confused by the two.
Moreover, there are great differences from the points of view of legislation, taxes, supervision, and organisation. Risk management and collection systems vary as well... briefly, there are considerable differences, even if, at a first glance, the products seem similar.
PRIMM: Let’s stay in the same topic of Pillar III. Have European companies shown any interest in selling voluntary private pensions in Romania? What are the operating terms for them?
M.O.: Only AIG Poland showed an interest in selling voluntary pensions and this happened because the Romanian operator of the group, AIG Life, said they wanted to work only on Pillar II.
Anyway, I don’t think that the foreign administrators will not pour in. In addition, Pillar III provides a type of deductibility that cannot be applied to foreign operators unless they are authorised in Romania.
As far as Pillar 2 is concerned, it has nothing to do with supplementary occupational pensions, therefore it is not subject to the Directive on free movement of financial services. Actually, Pillar II pensions originate from social insurance. In this respect, we interpret the law in compliance with the National Bank of Romania.
It is true that the idea of occupational pensions has come to Romania too, as some administrators want to set up funds for certain professional groups. But, the law allows other individuals to enlist in these funds as well. Pressures were made to change the law as to allow closed funds, but however, this didn’t happen because we would have created a pillar for occupational pensions, more restrictive that the existing one. I think that the system adopted in Romania has some advantages because the employee can choose. At the same time, it makes the participant and the Supervisory Commission responsible.
PRIMM: Numerous voices say that the private pension system is overregulated because “Romanians have already got burnt”. Do you think that, when the market has matured enough, more “liberal” regulations should be adopted?
M.O.: This is possible, but not for authorisations. I think that the limits set for investment policies are quite permissive. For example, 50% of the share portfolio is more than permissive, especially that we are talking about pensions, and 70% in government securities is enough.
As far as I know, Ireland has much more restrictive rules, and if we keep in mind that the Romanian market is just at the beginning, we can say that the rules are adapted to the Romanian reality.
Let’s remember that in ‘96-2000, Romania had some problems concerning the asset calculation for investment funds. This is one of the reasons why fixed asset investments, for example, are not allowed because, although they seem extremely profitable at one moment, they are pretty unstable and may involve a lot of subjectivity when running the evaluation. However, it will be allowed to run transactions with mortgage bonds, which will be listed at stock exchange, similar to municipal bonds or government securities. Actually, the entire philosophy on which this system is based is to reflect the daily stock exchange value for transacted fixed assets in the net assets value.
For this reason we are considering to impose a certain type of investment even on listed markets. Let’s not forget that RASDAQ shares are also listed shares. Still, this alternative system generates a very low volume of transactions, with minimum liquidity. Most of these bonds are transacted to a very small extent, which from our point of view cannot provide the liquidity needed for pension investment funds. Shortly, we can’t ignore the fact that the Romanian capital market is just at the beginning and that it is very unstable.
PRIMM: You have recently stated that the Private Pensions System Supervisory Commission will support any legal changes which could increase the volume of contributions (removing the 15% threshold for Pillar III, shortening the period over which Pillar II contribution percentage will increase). Is there a timeslot forecast for debating such measures?
M.O.: It is hard to predict when these changes could be made. The Commission can promote these changes but, it is the Government that has to make the final decision.
I personally think that this 15% limit sets a handicap for someone who enters the system later because they will find it hard to compensate for the short period of contributing by increasing the value of contributions. Still, as always, there are pros and cons. For example, the 15% threshold can be used to make pressures for declaring the real income.
In addition, an increase of the Pillar II contribution could lead to a better efficiency of the system and I will support such a measure.
Nevertheless, everything depends on the budget, on how budgetary efforts required by such a measure will match the effects of the planned decrease of social insurance. Even if people are generally optimistic about economic development, we don’t really know what might happen tomorrow. Consequently, although I think that these measures would benefit the development of the private pension system and I will support them, I cannot predict when they will be implemented.
