Sofia, 18th September 2009

1. Romanian dilemmas on the road to multifunds Mihai BOBOCEA Secretary General Romanian Pension Funds' Association (APAPR) Sofia, 18th September 2009 CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

2. Who we are • Romanian Pension Funds' Association (APAPR); • 18 members: 13 pension fund companies + 5 custodian banks = 99% of private pensions market; • 5 million participants (2nd + 3rd pillar); • We believe in: professional ethics, transparency, efficiency, protecting the best interests of both our members and pension fund participants; • APAPR is a proud member of both EFRP and FIAP. CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

3. Agenda 1) Background on Romanian private pension system development 2) Overview: CEE pensions and multifunds 3) Our dilemmas on the road to multifunds 4) Destination, an outline 5) Conclusion CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

4. 1. Background: private pensions development • 2nd pillar (mandatory private pensions) • Launched in May 2008 with a 2% contribution; • Contributions go up 0.5 percentage points a year, to reach 6% in 2016; • Freeze at 2% in 2009, but IMF/WB/EC impose going back to initial calendar and recovery of the lost 0.5% in the first year of economic growth (2010 – 2011?); • 4.8 million participants, out of which 4.4mn are active; • Net assets worth EUR 438mn (estimate: EUR 540mn at end of 2009). CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

5. 1. Background: private pensions development 2nd pillar (mandatory private pensions) CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

6. 1. Background: private pensions development • 3nd pillar (voluntary private pensions) • Launched in May 2007, with tax break of EUR200/year; • Tax break went up to EUR400/year at 1st January 2009; • “Corporate” product, occupational-like features (ex: employer can contribute on behalf of employee; no vesting); • 175,000 participants, very slow growth expected; • Net assets worth EUR 38mn (estimate: EUR 50mn at end of 2009). CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

7. 1. Background: private pensions development 3nd pillar (voluntary private pensions) CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

8. 2. Pensions and multifunds in CEE countries 2nd pillar: 10 countries, 30.5mn participants, net assets worth EUR 50.3bn (data for end-2008); 3rd pillar: 11 countries, 7.6mn participants, net assets worth EUR 11.2bn (data for end-2008); Est. 2015: ~50mn participants, EUR 200-250bn net assets; Multifunds: - already adopted in 4/11 states: Estonia&Latvia (2002-2004), Slovakia (2005), Hungary (2009); - debated upon / proposed in: Bulgaria (3rd pillar, 2010?), Czech Republic (3rd pillar v2.0, 2011?), Poland (projects under debate), Romania (2011?). CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

9. 3. Our dilemmas on the road to multifunds • I. Shall we have multifunds implemented? When? • issue has been on the agenda for ~1-2 years now, there is still no consensus (supervisor & market) on the opportunity to adopt this solution. Possibility: 2011 II. How much freedom (investment choice) for participants? • too much => information overload, most participants will walk the easy path (default option); also more expensive • too little => would affect system’s credibility and participants’ trust • fair balance between flexibility (freedom of choice) and potential speculative behavior • must limit the scope for bad (adverse) decisions CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

10. 3. Our dilemmas on the road to multifunds • III. How many funds, what asset allocation limits? • 2-3-5 funds? What limits for asset allocation? • we have to change from current fund risk rating (based only on credit risk = % of assets in “safe” bonds) to market risk based ratings (% of assets in equity) for funds IV. Design of default option, a system on “autopilot” • how to link participants’ age (investment horizon) to corresponding type of fund? • what should be the default fund? Chile approach (default = corresponding fund with extremes blocked) vs. Slovakia & Baltics approach (default = conservative fund) • what options to “block” (ex: the dynamic fund for the older participants)? CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

11. 3. Our dilemmas on the road to multifunds • V. How to transfer participants between fund types? • i.e. how to ensure an efficient, less risky transition? • should transition be automated when a certain age is reached (Hungary) or a smoother, gradual, transition, should be sought (Chile)? VI. Low potential for economies of scale • Romanian 2nd pillar: very low contribution, very low participants’ income, very low fees charged by fund managers, a very concentrated market • => 2 major problems: - diversification risks for smaller funds - cost sustainability issues for all pension fund companies CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

12. 3. Our dilemmas on the road to multifunds • VII. Transition to multifunds = more costs for pension fund companies. Can we take it? • past&current investments made by pension companies to breakeven until year 2021; • new costs only seem acceptable if fund fee structure is reorganized: • higher fees for dynamic (equity-dense) fund • lower fees for conservative (bond-dense) fund • managing expenses (trading, custody, etc.) must be transferred back from pension company to pension fund VIII. How to link multifunds with payout phase? • although it’s very early, payout phase legislation is currently being drafted, we must ensure an efficient transition from multifunds to payout phase. CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

13. 4. Destination, an outline • What should multifunds ensure? • Closer to optimum (risk)–(investment horizon)–(return) correlation for all pension fund participants • Minimize market risk for participants close to payout • Fair trade-off between participants’ and pension fund companies’ costs and benefits from the new system • Bonus: more active implication of participants, more responsibility about investment choices, maybe more financial education & awareness CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

14. 5. Instead of conclusions… • Most important lesson from the current crisis: the end has come for the “one size fits all” approach; • Success / failure of multifunds resides in system design (careful at all details!); • Very risk-adverse legislation & authorities are a barrier to be seriously considered when adopting multifunds in Romania. Photo: diversityjobs.com CEEC Forum – Multifunds in the Pension Systems of the CEE Countries

15. Wish you all… … a qUick recoVery! mihai.bobocea@apapr.ro www.apapr.ro CEEC Forum – Multifunds in the Pension Systems of the CEE Countries