EUROPEAN PAPERS ON THE NEW WELFARE

The Pension System in Romania

The balance of the pension fund has the following trend, as a percentage of GDP:
molodovan-tab4.gif
Source: Projections made by the Romanian Association of the Private Pensions Providers.

Some remarks about the figures in the above table:
• the expenditure figures does not include the benefits paid to the farmers;
• the expenditure figures does not include the amounts due to the so called ‘re-correlation’ process, which means that the pension of all retired persons before 2000 have been recalculated according to the new rules for pension retirement. These figures are difficult to estimate, so the balance of the PAYG system is over optimistic.

4. Pension reform

The reform of the pension system has a long history in Romania. Almost 10 years of discussions have passed without any concrete results.
The initial project started in 1996, when a steering committee was established, including the representatives of all main institutions: National Bank, Ministry of Finance, Ministry of Labour, and National Commission of the Capital Market. The mission of the steering committee, having the support of the World Bank and using international consultancy, was to reform the public pillar and to introduce a three-pillar system based on the World Bank model:
1. a reformed PAYG system;
2. a mandatory second pillar, defined contribution, funded and privately managed, for a large part of employees;
3. an optional pillar, including a saving product for pension.
The PAYG system was reformed through the Law No. 19 approved by the Parliament in 2000.
The work of the steering committee has been concluded through a draft for the second pillar, issued by the Government as an emergency ordinance in November 2000, just before the election day. The coalition which was ruling the country in the period 1996-2000 lost the elections and the new winning party, social-democrat oriented, revoked the emergency ordinance in January 2001. The main reason was that such an important law must be discussed in the Parliament and not issued as an emergency ordinance.
New legislation for the second and third pillar was approved by the Parliament in the autumn of 2004. But in the spring of 2004 the main insurance companies carrying on life insurance business in Romania, together with main asset managers, have established the Romanian Association of the Private Pensions Providers (www.apapr.ro). The main aim of the association is to be a partner of discussions for the Government in drafting the legislation for private pensions. Unfortunately the Government in force in 2004 was not taking into consideration the comments of the association. The result was that the members of the association have rejected the legislation and no member has made an application to be a private pension provider.
In November 2004 there were new elections, and the social-democrat party which was ruling the country lost the elections. The new coalition, liberal and social-democrat, suspended the legislation for the third pillar and proposed to re-discuss the whole legislation for the private pension system. A new draft for the third pillar was proposed by the National House for Pensions, after discussions with the members of the association. Unfortunately this draft was not accepted by the association’s members, due to the following reasons:
• the existing life insurance products (endowments or unit-linked) do not qualify for a pension product in the third pillar;
• there is only one product, individual account with defined contribution, which is included in this pillar;
• the guarantee a provider must offer at the end of the administration of the accounts: capital payments indexed with inflation plus 1%.
Regarding the second pillar, the discussions have to start, but the main problems to be discussed are:
• the balance of the public pillar;
• the contributions diverted to the second pillar, out of the contributions paid to the public pillar;
• the participants to this pillar;
• the level of up-front commission;
• the guarantees required.
In the summer of 2005 a new commission for the supervision of the private pension system was established through an emergency ordinance, but no person was nominated as the head of this commission.
It is difficult to say when Romania will have private pension legislation, accepted both by the Parliament but also by the market providers.
The Romanian Association of the Private Pensions Providers has made some estimation regarding the deficit of the public pillar after introducing the second pillar, using the following assumptions:
• the base year is 2003;
• the payments regarding pension farmers have also been included;
• the second pillar starts in 2008;
• the second pillar is mandatory for those under 35 years in 2008;
• contributions diverted to the second pillar are 2% in 2008, increasing by 0.5% each year, but capped to 6%;
• the payments of the pension system do not include the re-correlation amounts already paid in 2004 and 2005, which are difficult to estimate.
The calculations show that starting the second pillar in 2008 will produce a deficit of approx. 1.5% of GDP in the following years.
molodovan-tab5.gif

Based on these data, a political decision remains: taking into consideration the priorities of Romania in the following years (rebuilding the infrastructure damaged in 2005 by severe floods, national health expenditure, and the likely EU accession of Romania in 2007), what are the resources to fund these deficits?


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