ECONOMY

Romanian pension plans

BUCHAREST – Romania is to launch a far-reaching overhaul of its communist-era pension system in April, hoping it will help develop financial markets and create a solid base of local investors. The success of the reform will depend largely on how quickly issuers meet demand from the country’s new mandatory private pension funds, which are expected to collect more than -2 billion over the next eight years in contributions. For now, local investment opportunities in Romania are limited, with no secondary government debt market, limited primary issuance of treasuries and a small stock exchange with capitalization of -20 billion. This lack of diversity may hurt the profits of the new pension funds, analysts say, but in the long term it should encourage potential issuers, such as government bodies, local authorities and companies, to tap capital markets more widely. «The reform will be genuinely important for the development of capital markets,» said Jonathan Woollett, director of structured finance and securitization at the European Bank for Reconstruction and Development. EBRD, the development bank for Eastern Europe, is indirectly involved in three private pension funds in Romania. «In other countries after the reform, mortgage, municipal and corporate bonds were introduced, (there was) greater development of the local stock exchange, securitization… The money had to go somewhere,» Woollett said. Romania fully liberalized its capital markets in 2006, the year before accession to the European Union. But foreign investors still park their cash mostly in short-term money market instruments and the red-hot real estate market. Potential local issuers are reluctant to tap markets, while rising yields have deterred the Finance Ministry from selling planned amounts of state debt. Retirement needs Romania desperately needs to reform pensions to keep pace with wage rises and economic growth. Elderly Romanians live on around -100 a month on average, caught behind continuously improving living standards. Under the new system, Romanians up to 35 years old will have to funnel a part of their social security contributions to selected private pension funds, in addition to a state pension scheme. Those between 35 and 45 have a choice to participate. Up to 4 million employees are expected to contribute to the new private funds, about 80 percent of the work force. This will make Romania the second-largest private pension market in Eastern Europe after Poland. Some fund managers say Romania is not prepared for the pension overhaul, as the markets are not large or safe enough. The limited options mean much of the cash will be parked in foreign instruments initially, exposing managers to currency risk at a time when the Romanian leu is weak and volatile. Others say demand for local options may inflate stock prices. «It is a matter of size but also of safety,» said Mihai Coca-Cozma, general director of AIG Fond de pensii, one of the 18 private pension funds operating in Romania. «This is why funds… up to 30 percent will invest on the European market because diversity is greater.» Others say the trickle of cash into the system in the early years of the overhaul will be small enough to find sufficient investment instruments. This year, contributions are seen at -300 million, or 0.18 percent of gross domestic product. But issuance and market depth will have to pick up to ensure rising demand later. «I don’t see major risks in the beginning,» said Mircea Oancea, head of the private pension supervisory committee. «Later, if we do not supply investment opportunities, these funds would escape abroad. Then there is exchange and interest rate risk. Without opportunities, we will have weak results.»