August 25, 2017 / 11:46 AM / 2 years ago

Romanian government may cut private pension contributions

BUCHAREST (Reuters) - Romania was analyzing whether to cut contributions to mandatory private pension schemes from next year and redirect some of the funds into state coffers, the prime minister said on Friday.

FILE PHOTO: Romania's Prime Minister Mihai Tudose attends the swearing-in ceremony at the Cotroceni Palace after winning a vote of confidence in parliament, Bucharest, Romania June 29, 2017. Inquam Photos/Octav Ganea/via REUTERS

Romania overhauled its communist-era pension system in 2008, making it compulsory for working Romanians under 35 to contribute to a “second pillar” of private pension schemes as well as their state pension.

However, some analysts are concerned that the government may view these contributions as a way to help it deal with a deficit which threatens to burst above levels allowed in EU rules.

“I have asked the finance ministry and the pension system representatives to make an analysis,” Prime Minister Mihai Tudose said after a meeting of senior members of the ruling Social Democrats in a Black Sea resort.

“We... ran the numbers to see what yield does this second pillar have. We were surprised to find the state is a better administrator at this thing.”

“Half the sum will go to the first pillar (the state pension) and half of it to the second pillar.”

Just under 7 million people are contributing to second- pillar private pension funds, whose assets totaled 36.06 billion lei ($9.28 billion) at the end of June, or the equivalent of more than 4 percent of gross domestic product.

The funds are among the biggest investors in Romania’s relatively small financial markets and data from the private pension association showed their net average yield stood at 7.38 percent on the year in June, sharply above market interest rates.

The finance ministry met with industry officials earlier this month and a source with knowledge of the talks told Reuters the scenarios included cutting contributions from the current 5.1 percent to 1 or 2.5 percent or even a fixed sum per participant. Other proposals included eliminating a commission for fund managers of 2.5 percent of all contributions.

“Such cuts to contributions would make the system quasi-irrelevant for participants who will accumulate paltry sums in the long term,” the source said.

The finance ministry has so far not commented.

The current Romanian proposals would not go as far as Hungary and Poland who fully nationalized their private pension systems, upsetting investors and weighing on local markets for years.

Earlier this year, the Bucharest Stock Exchange and leu currency took a beating after Finance Minister Ionut Misa said the cabinet planned to scrap the second pillar altogether.

The prime retracted Misa’s statement hours later, adding nothing will happen to private pension funds while the Social Democrats were in power.

On Friday, the leu currency was down 0.4 percent to the euro.

Reporting by Luiza Ilie

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