I wrote earlier this year (here) about the commitments that Romania has made through the PNRR regarding Tier II pensions and the possibility of a comprehensive reform. After increasing the contribution from 3.75% to 4.75% from January 1, 2024, determined by the extraordinary government decree No. 23/2022, the Ministry of Labor has finally published a draft of the extraordinary decree, which should make important changes to the current legislation. Unfortunately, the point is completely missed and the proposed changes are a step back.

The main change, which has also been mentioned in the media, is the abolition of the fee applied to paid contributions, a fee that currently cannot exceed more than 0.5% of the paid contribution. This measure in the government is argued by the fact that the current mechanism for determining the commission “leads to an unjustified reduction of the private pension to be received at the end of the contribution period“. Thus, in case of adoption of the order in its current form, the management fee will be no more than 0.07%/month of the total net assets of the fund (if the fund’s return exceeds the inflation rate by more than 4%).

The measure, theoretically beneficial to taxpayers, raises serious questions. Given that this would not be necessary in a competitive market, are there any concerns about anti-competitive practices among fund managers? If the authorities do have such concerns, why are the possible fines that could be imposed by the ASF and the Competition Council insufficient? On the other hand, if the measure is necessary because the market is not competitive by its very structure (therefore without the need for anti-competitive agreements), why not try to introduce some measures to increase competition in the market? As we suggested in an article at the beginning of the year, lowering the barriers to entry, facilitating the transfer of members and increasing transparency will be solutions that should be considered to increase competition between administrators. In addition, in the context of rampant inflation and increased volatility in global financial markets, has there been an analysis of the impact on the stability of Level II? Fees will be limited to no more than 0.02% per month of total net assets if returns are below inflation, which could put pressure on administrators’ stability in the near term.

In addition, under more favorable macroeconomic conditions, the measure may lead to a decrease in productivity. More precisely, in the absence of measures to facilitate the transition of members, the administrators have no clear interest in obtaining a profit significantly higher than 4% of the inflation rate, given that their “reward” is limited to 0.07%/month.

Another important change that is less discussed in the media is the elimination of the ability of pension funds to invest in private equity funds (ie, venture capital funds and private equity funds). After some changes in the legislation in 2019, pension funds have the opportunity to direct up to 10% of assets to such investments, which indirectly stimulates investments in startups. Unlike the liquidation of the commission, neither the draft order nor the explanatory note to it contains any explanation for this proposal.

This measure is clearly against the PNRR and has absolutely no justification. One of the objectives of the PNRR is precisely the diversification of funds by changing the existing investment restrictions. However, instead of giving administrators more flexibility by changing existing restrictions, the new draft simply eliminates the asset class. In addition, as we have shown in another article (here), Romania has also committed through the PNRR to allocate 400 million euros for investments in startups through the European Investment Fund. The idea behind the subsidy is to maximize their potential by attracting private investment, in addition to investment from the Romanian state, to the newly created funds. Pension funds would obviously be among the main target investors. Last but not least, given that (i) pension funds worldwide are among the main investors of these investment funds and (ii) no specific risk has been identified in Romania regarding the impact of allocations on such investments, this measure appears purely discretionary

Finally, it is necessary to note the flagrant unconstitutionality of the resolution. The changes are so urgent that the draft is undisturbed in the debate procedure (sic) for 10 days! The article is published on Contributors.ro