Mandatory pensions (2nd pillar) - brief system design and explanations
Romania’s mandatory private pensions system (2nd pillar) is based on World Bank’s multi-pillar model. It is a fully funded system, based on personal accounts and on the defined contribution (DC) philosophy. The system has been put into place in 2007, when it became mandatory for all employees aged under 35 and voluntary for employees aged 35-45. The system is not occupational.
Participation is only open to employees paying social security contributions (CAS). Contribution collection is centralized - CNPAS (The National House of Pensions) collects and directs the contributions towards the pension funds. Employers don’t get involved in this system - they have to pay social security contributions just like before the implementation of the system and they have to fill in and send (to CNPAS) nominal declarations regarding the paid contributions.
Mandatory pension funds are managed by pension management companies (administrators). Each pension company must only manage one fund, not more. The pension fund is unitized and functions similar to an investment fund. To enter and function within this market, any pension company must get several licenses from CSSPP (Romania’s pensions market regulatory and supervisory body).
A participant to such a fund contributes during his active life and will get a pension after 65. The starting level of contribution is 2% of the participant’s total gross revenues and it goes up 0.5 percentage points a year, to reach 6% of total gross revenues in 2016. The contribution level is thus fixed, and the participant cannot save more in this system. Pension companies are not allowed to make simulations or estimate the future pension’s level. Payout phase legislation is due to be adopted in 2009.
Continuous opting-in to this system started on 18th of January 2008, immediately after the initial big-bang marketing campaign (17th of September 2007 - 17th of January 2008). Participants can switch funds (transfer) at any time, but they have to pay an up to 5% penalty fee of their net assets if they transfer within the first 2 years after joining a fund.
The pension companies can only charge 2 fees: the upfront entry fee (of up to 2,5% of paid contributions, deducted from the contributions before they are converted into fund units) and the asset management fee (of up to 0,6% per year of 0,05% per month, out of the fund’s net assets). The fund also pays for the annual auditing fee, and the rest of the fund’s expenses (custody, depositary, transaction/trading expenses) must be supported by the pension company (the administrator).
Pension funds’ investments are also strictly regulated: the law imposes percentage ceilings for different asset classes. Mandatory pension funds can invest: - up to 20% of their assets in bank accounts and money market instruments; - up to 70% in state securities (T-bills and T-bonds) issued by Romania, a EU state or a European Economic Area (EEA) state; - up to 30% in municipal bonds issued by Romania, a EU state or a EEA state; - up to 50% in listed shares on stock markets in Romania, EU or a EEA state; - up to 15% in state securities issued by other states; - up to 10% in municipal bonds issued by other states; - up to 5% in listed foreign private bonds; - up to 5% in mutual (investment) funds in Romania or other countries.
There are no explicit restrictions regarding investments made abroad - in theory, mandatory pension funds can invest all their assets abroad. Pension funds can have one of the possible 3 risk profiles: low / medium / high risk. The investment rules are the same as in the voluntary system.