The COVID Crisis and the 2nd Pillar of the Romanian Pension System
Far from the public attention, the value of the assets held in the seven private funds that manage the pension money in Pillar II for seven and a half million future pensioners decreased dramatically in the second part of February and continued to decline during March, with the minimum being reached on the 18th of March 2020.
The funds were constituted with mandatory levies on salaries and are supposed to be managed privately to be multiplied by the time the beneficiaries retire. These were seriously affected: the returns announced at the end of the previous year were eroded massively through the effects of the crisis generated by the pandemic, which resulted in massive decreases on the international stock exchanges.
In addition to monitoring the issues with the state-subsidized technical unemployment, the happy option of switching to teleworking (or going to Germany for seasonal work), we should also keep an eye on the level of future pensions. Instead, we have an endless and useless discussion regarding the application of a law to increase the current pensions, which already looks like budgetary seppuku in the context of the officially announced economic downturn.
Technically, in the individual account of each future-pensioner participant, a number of fund units are collected. The accumulated amount for the Pillar II pension is obtained by multiplying this number of units by their current value, the so-called unitary net asset value or UNAV. All of the seven private funds operating in Pillar II have so far recorded losses compared to the end of the previous year, even though they made efforts to recover at the end of March and the beginning of April. Moreover, their activity is critical to public finances, since most investments are made in government securities.
As a matter of fact, so far there has been no analysis and no explicit concern from the state to provide financial facilities for the Pillar II administrators. Beyond the political calculations of the current electoral cycle, decision-makers should be concerned not only with paying current pensions, but also future pensions. That is, by supporting the much larger number of voters than those for whose good graces the politicians are fighting over, while engaged in present calculations with their usual myopic tenacity. We speak of the entire population of seven and a half million voters that, in fact, ensure the payment of current pensions but who have seen the amounts accumulated in the personal account for their Pillar II pension diminished.
That said, we recall that, bizarrely and unsanctioned still by the great lawyers of the country, a quota of 0.5% of the gross mandatory levies from salaries are being shifted to Pillar I from the sums being sent to the Pillar II administrators. This is on top of the fact that the initial plan of increasing the contributions to Pillar II is not respected anymore. This means that, on a smaller scale, precisely when you read these lines, future pensions are being reduced in order to supply present pension payments, while flagrantly violating the principle of contributiveness, because, for this money, contributors do not accumulate personal score in Pillar I, as they would have in Pillar II.
After more than a million work contracts were put on stand-by or simply cancelled due to the crisis, those currently part in the workforce end up “both beaten and with their money taken”, as the folk saying goes. Thus, beyond the need for measures to help manage assets in Pillar II in this particular contorted economic situation, a fundamental question is outlined: beyond the interests of the moment and the media noise, targeting conveniently chosen populist areas, what is so important in the approximatively five million pensions currently shared/socialized as compared to the seven and a half million pensions that are (to be) accumulated individually for the future?