The reform of the Romanian mandatory pensions system may have been delayed for over a decade but, for the ING Romania pension fund, it was definitely worth the wait. The pension company did very well out of the competing firms and won a third of the mandatory second pillar pension market.

“We did much better than what we expected or had planned for,” says Radu Vasilescu, director-general of the fund, which runs two pension funds; one for the mandatory second pillar and one for the voluntary third pillar. The sales window for mandatory pensions started in September last year and lasted for four months. With 33.2 per cent of the market participants, which equals about 1.4 million participants, it has by far the largest share of the market.

The long-awaited reform will redirect 2 per cent of the 9.5 per cent social security contributions to the second pillar, where the assets are managed by pension companies. But despite the firm’s initial success, Mr Vasilescu is disappointed about the delay.

He says: “We lost 10 years and that’s definitely a long time. We’ve been very impatient for the reform to happen, since our firm has been very successful in this kind of business in the rest of eastern Europe. Just think of how much money could have been accumulated during this period.”

The first draft of the legislation was put forward as early as 1997, which is about the same time as Poland initiated its reform. However, the Romanian implementation was stalled by the then centre-left government, but the present centre-right government reshaped the legislation and passed it in the beginning of last year.

Under the legislation, some 3.7 million younger members of the labour force had to sign up for a mandatory scheme, while those aged between 35 and 45 had a choice over whether to sign up for a scheme or continue contributing the full amount to the state social security pillar of the pension system. Contributions are set to increase by 0.5 percentage points a year, topping out at 6 per cent a year in 2016. So far, the take-up has been very high and about 75 per cent of those who could choose decided to join the system.

“Sooner or later, I believe the rest will join as well. They can opt to join until they are 45 years old and they have seen that they can’t rely only on the state system,” says Mr Vasilescu.

Pension companies are now set to start investing the first assets for the second pillar, which was collected in May. Investment restrictions prevent funds from having more than 50 per cent exposure to equities, but like most of its peers, ING Romania will allocate about 70 per cent to fixed income and 30 per cent to stocks. Although it will only invest in the domestic market to begin with, it aims to move into international markets over the long term.

“The legislation allows us to invest half of the equities in the Eurozone, but the exchange rate is a problem that could swallow all the income from abroad. But Romania plans to switch to the euro by 2016, so the closer we get to that date, the more assets will be invested in euros,” says Mr Vasilescu.

The firm also has the opportunity to invest in the US market, but Mr Vasilescu believes any foreign investment will be focused on Europe to start with.

“If we invest in foreign currency, the prime market will be the Eurozone. But we will gradually diversify our investments and look at other markets,” he says.

The investment regulations also restrain the fund from investing in any alternative asset classes. But despite restrictions that disallow hedge funds, property and private equity, Mr Vasilescu is the most keen to take on commodities.

“I think commodities are very interesting and would be a good investment considering the increasing commodity prices. However, our restrictions do not create too many constraints for us for the time being, but it probably will in the future and we’re lobbying for them to be changed,” he says.

Relaxing the regulatory framework is the focus of the firm and he believes the Romanian pensions legislation needs to be brought closer to other European countries.

“First, we need to make the system more in accordance with our neighbours and then more like the rest of the EU,” he says.

After the successful take-up of mandatory pensions, the firm is now shifting its efforts towards the voluntary pensions system, which was introduced in 2006.

“We’ve been preoccupied with the second pillar reform over the past year, but will definitely start focusing on voluntary pensions. The mandatory market had about 4 million participants and compulsory contribution, compared to 1.5 million participants in the voluntary system, so it made sense to prioritise the former,” says Mr Vasilescu.

Last year, ING got the first licence to set up a voluntary pension fund, but any assets have so far been limited.

“We only have about €3.5m in assets under management in voluntary pensions, but I expect that figure to significantly increase,” he says.

The firm is also lobbying to change some of the regulation for voluntary pensions.

“For example, only €200 a year of voluntary pension savings is tax deductible, which is far too little and needs to increase to at least €1000 a year. We will try to change that, hopefully during next year, since the parliamentary elections will make any change difficult this year,” he says.

• Location: Bucharest, Romania
• Mandatory fund – Savers: 1.4 million
• Assets: €20m

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