Voluntary pensions (3rd pillar) - brief system design and explanations
Romania’s voluntary private pensions system (3rd 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 voluntary for all persons earning any type of income. The system is not occupational.
Participation is open to everybody earning income - from employees to the self-employed, those with independent activities of liberal professions. Contribution collection is made by the employers, which have to direct the contributions of participants (only in the case of employees) towards the voluntary pension funds. In all the other cases (self-employed, etc.), the participant can direct his own contributions.
Voluntary pension funds are managed by pension management companies (administrators), life insurance companies of asset management companies. However, there is only one type of product - 3rd pillar voluntary pension fund - regardless of the nature of the pension management entity. Each pension / life insurance / asset management company can manage as many funds as they wish. The pension fund is unitized and functions similar to an investment fund. To enter and function within this market, any pension / life insurance / asset management 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 60. The contribution is limited to 15% of the participant’s total gross revenues. The contribution level is flexible - it can be decided upon, changed, and even interrupted and resumed. 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.
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 fund’s operating expenses are supported by the fund itself, not by the pension company, like in the mandatory system.
Pension funds’ investments are also strictly regulated: the law imposes percentage ceilings for different asset classes. Voluntary 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, voluntary 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 mandatory system.