Since its inception, the compulsory private pension system, level 2, has been constantly under media and political pressure, despite very good investment returns compared to the risk profile of the funds, writes Radu Krachun in his personal blog

This situation led me to believe that as soon as the evolution of the financial markets leads to the negative performance of private pension funds, the context thus created will be the perfect moment to relaunch with greater “arguments” to denigrate the system.

And in a context where sensationalism sells better than truth, I feel obliged to talk about some of the falsehoods and manipulations that have been promoted lately, without mentioning their sources.

Second level pensions exist only in Romania and Venezuela

The association with a country with a dictatorial regime and an economy “on the rocks” like Venezuela can only show the inadequacy of this system. But, intentionally or not, the advertising information is incorrect and reminds us of banks from Radio Yerevan. The Latin American country that has such a system is not Venezuela, but Chile, and it is not the only one, there are other countries that have such a system. In addition, Chile was the first country to introduce the 2nd level of private pension provision. However, massive tax evasion in the labor market and bad political decisions subsequently succeeded in torpedoing this, forcing people to take to the streets. I explained in more detail in the article “The first private pension system (level 2) in the world is collapsing. why?” As for uniqueness, we can mention countries like Bulgaria or Croatia, which also have an existing multi-level system in Romania. However, in the developed countries of Western Europe, private pension systems have existed for decades. Which brings me to the next lie.

The obligation to contribute to the second level is abnormal

This idea is combined with the statement that private pensions in developed countries are optional. Just a little. The hundreds of billions of euros in private pension funds in developed countries cannot be the result of voluntary contributions by people who have spent decades looking after their retirement rather than their immediate needs. The truth is that not only here, but also in the West, the financial needs for retirement are underestimated, so people do not save enough for the long term. This is exactly what the obligation (called “auto-enrollment” in the West) tries to avoid. In Romania, the situation is even more dramatic, as studies conducted by the banking system or private pension systems have shown that more than 50% of Romanians claim to have no retirement savings. For this reason, liabilities are more of an asset to the system than a problem.

Members of private pension funds paid an average of 2 million lei for each administrator employee

This is an “analysis” that wants to imply that the income from commission administrators is excessive and goes to the very high salaries of those who work in the system. However, you won’t see a collection of luxury cars in front of buildings, and here’s why. Approximately 60% of the fees collected by the administrator are used to pay statutory obligations such as: pension guarantee reserves, ASF taxes, guarantee fund, annual information letters, fund transactions, etc. Approximately 40% remains for investments and covering operating costs, including salary payments. In this context, it is worth remembering the fact that, considering that private pension funds in Romania are among the smallest in Europe, and the commissions charged are among the lowest. Since comparison with other European countries does not help this purpose, the comparison with the number of employees was considered more influential, even if it was incorrect.

The fraud discovered in one of the administrators concerned the participants’ money

The fraud discovered in one of the private pension administrators fell into the hands of “friends” of the system, who had the opportunity to manipulatively link the decrease in the value of the funds’ assets (as a result of the evolution of the financial markets) with the defrauded money. Thus, the idea given was that the stolen money would be the participants’ money. The truth is that funds of administrators and funds are managed separately. For this reason, there have been years when, for example, funds have had positive returns and managers have suffered losses. The fund management procedure is also certified by depository banks that keep separate records of fund assets. With such a division, the fraud almost never touched the funds of the participants (despite what was circulating), only the management company and its shareholder were affected.

Achieving high returns with low risks is possible, but managers are incompetent

As part of the process of financial counter-enlightenment, which we see on many channels with a wide audience, the idea that the evolution of pension funds should be linearly increasing and, of course, always above the rate of inflation, is supported. It’s impossible, and as I’ve said on other occasions, the key word I would put at the heart of any financial education strategy would be the volatility (that is, swings) of the financial markets. The only asset class that will deliver the kind of linear growth that many observers dream of is bank deposits. But, as many of you already know, bank deposits have not beaten inflation for a long time. Pension funds have managed to beat inflation in 11 of their 15 years of existence by investing in assets that do not have a linear evolution, but fluctuate over time: government securities, corporate bonds, stocks, commodities, etc. Such assets do not have constant growth, but alternate periods of growth with periods of decline depending on economic cycles, geopolitical events or decisions made by governments. This is a phenomenon we have seen over time in periods where policy decisions have questioned the existence of Tier 2, at the start of the pandemic in 2020 or, more recently, in 2023. Fluctuation (volatility) is the price we pay to be able to beat inflation in the long run. The hypothesis of linear growth above the inflation rate is a utopia.

In 2022, you transferred money to level 2 for 9 months for nothing

The statement is based on the fact that the value of the assets of the pension fund after 9 months is the same as at the end of 2021. But have you really transferred money for nothing? Each monthly contribution is converted into fund units, i.e. a kind of “units”, which allow you to proportionally participate in the growth of the fund’s capital. In unfavorable economic conditions this year, the value of the fund’s units has decreased, which explains the stagnation of the asset value. But the good news is that over the course of 9 months, you’ve been getting cheaper and cheaper units of the fund every month thanks to your contributions. Accumulating fund units is important for when the markets recover, when the value of each fund unit starts to rise, therefore benefiting from the exposure of all the fund units you have purchased. I will stop there, although the list of untruths that need to be corrected is far from exhausted. But do not underestimate the imagination of those who do not know or have bad intentions, as well as their media exposure.

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