Melania Mirea: Pension funds finance the economy and stimulate saving

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This is the transcript of the message delivered by Melania Mirea, Executive Director and Member of Directorate at BCR Pensii, during the Energy Strategy Summit, held on June 4 at the Cantacuzino Palace in Bușteni.

To change the tone or the subject of this extraordinarily interesting event today, I prepared an opinion regarding pension funds in Romania as broad topic, so with your permission in the next minute we will try to debate a little if we need pension funds in Romania and if are they important to the local economy. As you may know, pension funds invest in long-term projects in the local economy, and their actions and investments have a huge impact on the local community.

We claim that pension funds have a crucial dual role: a financing role of the Romanian economy and a social role by stimulating savings, both at employers and employees’ level, long-term savings for retirement. Pension funds become important investors in Romanian companies of national strategic interest, through the 4.5 billion of net assets they own.

This is the amount that pension funds active in Romania have invested in various financial instruments. These 4.5 billion euros represents currently over 3% of gross domestic product of Romania and what is very relevant, especially for today’s discussions, investments rose in significant amounts in Romanian companies, the companies developing the country’s infrastructure.

More specifically, 497 million lei in Romgaz shares, 354 million lei in Petrom shares, 278 million lei in Electrica shares, 261 million lei in Transgaz and 170 million lei in Transelectrica shares. Obviously, this is encouraging on one hand, but on the other hand there is a less encouraging thing for us as a sector. If we were to refer to the trends of the next 10-20 years in demographic, sustainability of the public pension system is not something on which we can bet, on the contrary, we say it is critical.

Today, perhaps you know an active employee supports 1.2 retired employees in Romania, following that in the next period, the next 10 years we say, an employee will support 1.5 retired employees. I would insist on this figure of 1.5, which in itself cannot say much, but in fact have direct negative effects on the future evolution of the Romanian economy. I say this because, with decreasing working population, the potential GDP of Romania will decrease too by reducing state contributions paid by actual employees and future employees while increasing social assistance and medical expenses.

With your permission, to claim even deeper the social impact I bring to your attention some more figures of the future. If today our earnings replacement rate with state pension is approximately 41%, in the future this will replacement rate will be 28%, and this is an optimistic variant.

And there is also something else very important: the state spends about 9.8% of GDP for pensions in Romania, but in the next decades this share is to rise to 13.5% of GDP. Is the public pension system sustainable in these conditions? I leave you to draw the conclusions. It is very important to stimulate long-term savings in Romania.

This issue is not necessarily in connection with the culture that we have in general, so if we were to think about the system’s evolution, we had a very positive development for this period in Romania, a crisis has passed over us. Despite this we have 6.3 million participants in Pillar 2, the mandatory private pension, and nearly 345,000 Romanian in the voluntary pension, Pillar 3.

Maybe this is not a big number, especially on the optional pension, but I was to think about the yields we have offered in this period, they really are interesting. To bring to your attention just a figure, on Pillar 2, we provided a yield of 11.1% annualized over this period, and for Pillar 3 the yield offered was 8.2% annualized over the whole period since 2007, when he started to reform the public pension system.

If at first I did mention that the share the pension funds have is 3% of GDP, in the next five years the trends show that pension funds will account for almost 10% of Romania’s GDP, ie 96 billion lei. This is perhaps relevant for today’s audience and for multiple other audiences, from the perspective that we believe that what we have claimed today is somewhat the answer to the issue of whether we need pension funds in Romania now and in the coming years.

Thank you very much.

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