(story written at the end of July 2008 for The INSURER publication)
Ten years have passed from the first discussions about introducing private pensions in Romania. The long wait was put to an end last year, when proper legislation and the first private pension funds emerged - first, the voluntary pension system (3rd pillar) was launched in June 2007, then the initial adhesion campaign for mandatory pensions (2nd pillar) was started in September 2007. It successfully ended in January 2008, and the mandatory pension funds started collecting contributions in May. Following the story...
After ten full years of waiting, Romania launched its private pension reform in 2007, choosing the World Bank multi-pillar model also adopted in other Central and Eastern European countries. The reform started with the launch of the voluntary system (3rd pillar) in June 2007 and continued throughout last year with the mandatory pensions (2nd pillar) - system which became operational in May this year, when it collected its first contributions.
Being the last in line (among the CEE countries) to adopt the private pensions reform, Romania managed to avoid all major mistakes in putting the system into place - thus becoming "a success story of the East" in this matter. So here's a brief analysis of the implementation of the system, the story being focused on mandatory pensions.
- Autumn 2005: CSSPP, Romania's pensions supervisory body, is formed - May 2006: Voluntary pensions law is adopted - December 2006: Mandatory pensions law is adopted - January 2007: First voluntary pension companies and funds begin the licensing process - April 2007: First mandatory pension companies and funds begin the licensing process - June 2007: Voluntary pension funds begin collecting contributions - September 2007: The 4-month initial adhesion campaign for mandatory pensions starts - January 2008: The initial adhesion campaign ends, over 3,800,000 participants joined. Continuous adhesion procedures started immediately - March 2008: The lottery takes place to redistribute 333,000 among the 18 funds - April-May 2008: Four funds withdraw from the mandatory pensions market - May 2008: Collection in the mandatory pensions system begins.
Romania's private pensions system is fully-funded, based on personal accounts and on the defined contribution (DC) philosophy. Although at some point the possibility of applying occupational pension schemes was discussed, the outcome has nothing to do with any occupational features. The 2nd pillar became mandatory for all employees aged under 35 and voluntary for all employees aged 35-45. The 3rd pillar became voluntary for all individuals earning income - from employees to the self-employed, those with independent activities of liberal professions.
Collection is centralized in the 2nd pillar and it's managed by CNPAS (The National House of Pensions) and decentralized in the 3rd pillar, where employers have to direct the contributions to the funds. In all the other cases (self-employed, etc.), the voluntary pensions participant can direct his own contributions.
Pension funds are managed by new entities - specialized pension companies (2nd pillar only), while 3rd pillar legislation also allows life insurance and asset management companies to manage voluntary pension funds.
In the mandatory system, the level of contribution starts at 2% of the gross monthly income (to go up by 0.5 pp per year, reaching 6% in 2016), while in the voluntary system the contribution level is flexible and must be of up to 15% of the monthly gross income. Payout phase legislation is due to be adopted in 2009.
Mandatory pensions: market history and structure
No less than 18 funds aligned at the start of the race: the 4-month, big-bang sales campaign for mandatory pensions that took place September 17th 2007 - January 17th 2008. Initial estimates showed a market potential of 2.5 million participants to opt into the system, with the most optimistic estimates to stop at 2.8 million participants.
But the 2.5 million participants figure was reached after only two and a half months, because of the massive adhesions by employees in the voluntary age cohort (35-45). Over 3,800,000 participants were validated at the end of the campaign, and other 333,000 joined after the lottery that redistributed participants under 35 that didn't choose a pension fund. So a total of 4,150,000 participants entered the system, all in all, surpassing even the most optimistic expectations. The reason was that over 90% of participants in the voluntary aged cohort opted in - which shows the system earned the populations trust.
On the other side, a participation of 4,150,000 means that only 42% of the total active population got into the mandatory pensions system, this being the lowest coverage of the 2nd pillar schemes in all the ten CEE countries that adopted the system. Among those, the average coverage of the 2nd pillar schemes in the active population is 65%, according to research by PRIMM Insurance & Pensions Magazine. In Latvia, the coverage is 84% (double than the Romanian level), in Poland it's 78% and in Hungary it's 65%.
The battle for clients during the initial campaign was fierce: over 261,000 marketing agents were authorized as sales force for both pension companies (tied agents) and pension brokers (external sales force). The brokers had about 33% of this total sales force and managed to bring 22% out of the total participants (almost one million participants). To compare, last year's intermediation ratio (brokers' contribution to the market) on the Romanian insurance market was 29% of total gross written premiums.
ING (Romania's life insurance market leader) got the cream of this pie, with 1,380,000 participants (33.2% market share) at the end of the campaign, followed by ALLIANZ-TIRIAC (Romania's general insurance market leader), with 1,066,000 participants (25.6%) and GENERALI (390,000, 9.4%). The ranking is completed by AVIVA (Commercial Union), INTERAMERICAN (Eureko), AIG, BT AEGON, BCR (Erste), BRD (Societe Generale), OMNIASIG (Vienna Insurance Group), BANCPOST (EFG Eurobank), OTP, PRIMA PENSIE (Prva Group) and KD.
The market was and is very concentrated: a third of the funds (the biggest 6) amassed 88.3% of the total number of participants and the top10 funds (out of the total 18 funds) have 98.3% of the total participants. That means the mandatory pensions market is the most concentrated financial market in Romania.
After the initial campaign, only 7,914 clients opted into the system during January-June, (new labor market entrants and voluntary age cohort eligible employees not having opted before) showing that no big changes could occur on the market this way. Each year, about 80,000 new participants are expected to join the system. Also, four funds already withdrew from the market at their request, after only managing to attract 5,000 participants (cumulated for the four funds).
The next step was the start of contribution collection, on the 20th of May. First contributions were collected smoothly, no problems having occurred - the IT system worked perfectly. The start of collection also brought the first changes in the market rankings and it also cleared the waters as regards to the "quality" of the amassed portfolios. Up until then, "quantity" was the word of order for the funds.
The first three collection rounds that took place since then (during May-July) brought even more light to the market. The fund managed by ING, the market leader, increased its lead over its rivals and reached a market share of 38.6% by contributions received in those three months, against a market share of 33.2% by the number of participants. Also, AIG (6th by participants) climbed to 4th position by contributions received and gained market share from 6.3% to 7.3%. The other winner was BCR (8th by participants), who climbed to 7th position by contributions and from 3.0% to 3.2% in terms of market share.
During the first three collection rounds, four funds constantly had an average contribution per participant higher than the market average (which was about 8.1 EUR): ING, AIG, BCR and BRD. Two conclusions come out from this: the best paid participants on the market were quickly amassed by those pension funds that were supported by banks in their financial group (BCR - the banking system's leader in Romania, BRD - bank no. 2 and ING - also a top10 player) or had a large life insurance portfolio to target in the beginning (ING - the life insurance leader and AIG - the life insurance company no.2 on the Romanian market).
All in all, the 14 funds left on the market received contributions worth EUR 79.5 millions during these first three months of operation, with a monthly average of 26.5 EUR mn. The markets' concentration degree further increased after the start of the collection process: the top5 funds jumped from a cumulated market share of 81.8% by participants to 83.9% by contributions received. The first transfers between pension funds will take place in August 2008.
Funds' financial investments
The mandatory pension funds started investing with a very prudent stance. The investment strategy was also relieved by a 6-months derogation regarding the 20% ceiling for investments in banking deposits and money market instruments, derogation adopted by the CSSPP days before the start of the collection process.
So, at the and of May, only 10 days after receiving the first money from their participants, the funds had the following investment structure: 45.2% in bank accounts, 42.1% in state bonds (T-bills and T-bonds), 9.5% in listed shares, 2.9% in corporate bonds and 0,3% in mutual funds. Also, 1.7% of total assets were already invested abroad, within the first few days after the start of collection.
At the end of June, the investment structure of the funds became even more prudent: 43.1% in bank accounts, 43.8% in state bonds, 6.1% in listed shares, 6.7% in corporate bonds and 0.33% in mutual funds. The Romanian stock exchange has been massively hit by the financial crisis, the market index having lost 35% since the beginning of 2008 and 40% year-on-year (data valid on the 25th of July), so the funds practically started operating in the red and thus avoided exposure on stocks and mutual funds.
Market prospects and development
The market is expected to further concentrate and consolidate, including through mergers and acquisitions. Some 2-3 mergers are expected to take place this year, marking the exit from the market for the smallest funds. In 3 year's time, the legislation forces all funds with less than 50,000 participants to end their activity and be taken over. The total number of funds to still operate on the market in 3-5 years is estimated at 9, compared to the present 14 funds and the 18 funds that started the pensions race.
The mandatory pension funds will collect about 226 mn EUR. in contributions this year, but the level of collection will rise exponentially within the next years, to surpass 1.4 bn. EUR in 2010, 6.6 bn. EUR in 2014, 11.3 bn. EUR in 2016 and 24.2 bn. EUR in 2020. The funds' assets under management could thus exceed 30 bn. EUR in 2020.
Also, the mandatory pension funds' assets are estimated to surpass the volume of gross written premiums on the Romanian insurance market in the year 2015, according to some research by PRIMM Insurance & Pensions Magazine.
Voluntary pensions in brief
There are currently 8 authorized voluntary pension funds (3rd pillar) on the Romanian market: two by ING, two by ALLIANZ-TIRIAC and one each by AVIVA, BCR, OTP and RAIFFEISEN Asset Management. Participation has developed slowly to these funds: only 55,000 participants entered the system until the end of 2007, number that doubled to 110,000 at the end of June. The assets under management by these funds reached EUR 12 mn. in mid-July (against EUR 4 mn. in 2007).
Enrollment was mainly done by tied agents, the brokers' contribution being of less than 5% of total number of participants. There are currently 11,000 agents authorized to sell voluntary pensions. The fund's investments are also conservative: at the end of June, the asset allocation of the voluntary pensions market was: 69% state and municipal bonds, 16% bank accounts, 9% listed shares and 6% corporate bonds.
Also, 4 more voluntary pension funds are in the licensing pipeline and wait to enter the market until the end of this year. The official (CSSPP) estimation for the end of this year is a total of 200,000-250,000 participants and net assets of EUR 25 mn. In the next years, additional sustained growth is expected, including in the number of operational voluntary pension funds.
For any information you might need about Romania's private pensions system and market, please visit www.privatepensions.ro.