We tend not to think about retirement. Time passes quickly, especially when we have so much “entertainment” such as movies or social media, work, everyday life.

Life expectancy in Romania, according to Eurostat, is 72.8 years, while the retirement age is 63 for women and 65 for men.

It is not known whether the retirement age will be changed. This is actually not difficult to predict given the situation with Tier I pensions and the fact that many will retire in a few years and this problem will be more difficult to solve.

What is pension level I?

Tier I is a pension paid by the government when you retire, based on how long you worked and how much you contributed. Because the employer pays, you may not have known, but 21.25% of your gross salary goes to this level (and the remaining 25% to the other – we describe this in detail below).

Your money is not kept in an account for you, but is used to pay pensions to those who are already retired.

And since there are more pensioners than working people, and many Romanians have left the country, the system has a big deficit, and you don’t know how much you will get in retirement. Tier I is guaranteed by the Constitution but can be changed at any time by law.

In case of death, the money is not transferred to the heirs.

There is, however, a survivor’s pension, which is granted under certain conditions, but not in the sense that all the money contributed to it is returned.

Consider that the pension is small and you will still need additional amounts.

Level II – as a mandatory savings account

Tier II is a pension managed by private pension funds that invest your money in various financial assets.

3.75% of your gross salary goes to this level. The advantage is that your money accumulates over a long period of time and is yours alone.

Second-tier pension funds invest your money in various financial instruments that can earn you more money, such as stocks, bonds or bank deposits.

When you retire, you won’t get less than you contributed. If you do not catch the crisis, that is, problems in the markets, then you will have a much larger amount.

Unlike the state pension, Tier II is guaranteed by law and cannot be changed without your consent. In case of death, your money goes to your heirs.

How much do we contribute to Tier II and what value will it reach

Official figures show that almost 8 million Romanians pay contributions to second-level pensions.

At the end of 2022, privately managed pension funds had almost 96 billion lei, about 8% more than at the end of 2021.

The amount would be higher if it were not for the exemptions introduced in 2018, i.e. construction workers who do not pay, and more recently also agricultural and food industry workers on request.

Pension Tier II has averaged 8% per year since its launch. If the trend continues, it will reach 210 billion lei in 20 years. Of course, it depends on many things.

*Prediction made by Bing AI, which is based on ChatGPT. Level II’s average annual return has been 8% since its launch in 2008. ChatGPT has assumed that Pension Tier II returns and growth will remain constant for 20 years, which is an optimistic and uncertain assumption. He applied the compound interest formula to estimate the cost of Level II pensions in 2042, using an initial value of 96.46 billion lei in 2021 and an annual rate of 8%.

Level III – your pension, your money

Tier III is a pension that you choose to make into a private fund of your choice. You can contribute as much as you want.

If you are employed, you can also do this through the company you work for.

If you have an employer who understands and has a good accountant to explain it to them, there is a mechanism to help them from a tax perspective.

Last year, the law was amended, according to which deductions are limited to 33% of the gross salary, but up to 400 euros per year (Decree 16/2022).

For example, with a salary of 4,000 lei, 33% will mean 1,320 lei.

Thus, EUR 400/year is included in this ceiling of 33%. The employer can spread the amount over several months.

Employers can enforce regulations to retain their workforce. Let’s not forget that this €400 is tax-free, so it’s a salary advantage that’s worth it from a tax perspective.

Your money is invested in various financial assets and grows according to the fund’s performance.

One of the additional pension administrators is BT Pensii, a Banca Transilvania Group company. 40,000 people chose “My pension“.

As with Pillar II, this money stays with your loved ones in the event of your death.

More Romanians are looking at level III pensions. How it will look in 20 years

The assets of the voluntary pension fund at the end of December 2022 amounted to 3.62 billion lei, registering an increase of more than 6% compared to the same period of the previous year.

The value of total assets compared to September 2022 increased by 8.52%.*

The number of participants enrolled in the voluntary pension system as of December 31, 2022 was 627,000, which is 11% more than at the end of last year.

Unlike level II, the third had higher growth rates, especially in conditions where it is not mandatory. Let’s not forget that when you’re still at the beginning, it’s normal for each new client to increase assets significantly.

If we looked at the average growth rates for the last 10 years of the assets of the entire optional pension system and made an estimate, we would come to the conclusion that they would reach 137.8 billion lei in 20 years. However, we must be realistic. Let’s not forget that as it increases, the growth rate is lower. This is normal.

In 2022, it was 6%. If we assume that this percentage will be maintained (it depends on the market and customers), then in 20 years it will reach 11.54 billion lei.

But, as I said, it is much more difficult to predict how many customers and what amounts will come. This is much more difficult to calculate than in the case of Tier II (too many variables and the market is still in its infancy). In addition, Romanians have become more informed about pensions and are more confident that they will receive something privately than from the state, given the shortfall in the first pension level.

In terms of variables, if we look at BT Pensii** as an administrator, for example, we will see that compared to 31 December 2022 until now, the non-compulsory pension fund Pensia Mea has increased its membership by several thousand to over 40,000, after as at the end of 2022 there were 36,660. This is in a few months. So there is a lot of demand for level III.

*Information from the website www.asfromania.ro was used

**BT Pensii Non-Compulsory Pension Fund Management Company, www.btpensii.ro

Article supported by Banca Transilvania