CEE Insurance and Pension Funds 2010, Warsaw, 29th January 2010 How we weathered the storm: a Romanian experience in CEE context Mihai BOBOCEA Secretary General Romanian Pension Funds' Association (APAPR)

About us Romanian Pension Funds' Association (APAPR); 16 members: 11 pension fund management companies + 5 custodian banks = 99% of private pensions market; 5 million participants, over EUR 600mn net assets; 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. CEE Insurance and Pension Funds 2010

Agenda 1) CEE pension funds: caught between quick investment recovery & political reform reversals 2) Case study: the Romanian experience 3) Future challenges and conclusions CEE Insurance and Pension Funds 2010

1.1. Strong returns in 2009, after the drop in 2008 CEE Insurance and Pension Funds 2010

1.2. As a consequence: solid boost in net assets CEE average returns: -13,5% in 2008, +12,9% in 2009, -2,4% combined. Funds still have a (short) way ahead to complete recovery. Combined assets grew in 2009 by 30.7%, compared to an average annual growth of 23.4% in ; Pension funds in the 10 CEE countries manage savings for >40 million participants. CEE Insurance and Pension Funds 2010

1.3. But we see a wave of reform reversals in CEE In spite of a relatively quick investment recovery, private pension systems in the CEE were hit by reform reversals & political decisions. This happened regardless of previous or current performance of pension funds; Reform funding was reduced by contribution cuts, investment performance was hindered by political decisions => all this greatly reduced private pension systems’ adequacy and affected the property rights and best interests of millions of pension plan participants; Excuse: to protect private pension plan participants from investment losses. Real motivation: governments want more money available to spend for the state pension system, which was more affected by the crisis than the private pension system. CEE Insurance and Pension Funds 2010

1.4. Examples of reform reversals & political attacks Contribution cuts: ET (6%->2%), LV (10%->2%), LT (5,5%->3%), RO (2,5%- >2%), also discussed in BG (not approved in the end), PL (7,3%->3%) and SK; Opening of 2 nd pillar: SK (twice), HU (for those aged >52), also discussed in RO, HR (by populist or political groups) ; Cutting fees or increased cost for solvency, etc.: PL (fees cut), BG (fees cut), SK (fees cut), CZ (costs raised) ; Introducing new “guarantees” or investment restrictions: SK, HU, also discussed in RO, PL; Delays in previously scheduled reforms: CZ (delay in introducing 2 nd pillar), PL (delay in multifunds), LV and RO (delay in contribution increases). Lessons: 1) Political risk is more dangerous than investment risk; 2) Adequacy has left the Eastern front (countries with strong, adequate reforms affected those reforms and countries without such reforms did not proceed to implement them). CEE Insurance and Pension Funds 2010

2.1. The Romanian funds: unscathed by the crisis … but amid a very low level of assets. Exceptional returns, but limited gains for participants, because of reduced contributions. CEE Insurance and Pension Funds 2010

2.2. Romania: quick adaptation of PFs’ investments PFs’ recipe for increased returns: 1) High interest rate environment (Government bonds and bank deposits); 2) Romania perceived as very high risk => premiums for RON- denominated bonds; 3) Equity: initially low exposure, gradually increased to benefit from market recovery; 4) Low assets favored increased flexibility of investment strategies. CEE Insurance and Pension Funds 2010

2.3. But private pensions are politically hindered Romanian 2 nd pillar confronted with alterations and threats: Contribution freeze & derailment from initial calendar: Contribution rate 2% in 2009 (instead of 2.5%) + lower increase in 2010 (and beyond?); Initial calendar = 0.5pp increase each year, until the contribution rate reaches 6% in 2016; If the measure is prolonged until 2016, this means the Government taps EUR 1.1bn from pension funds. Constant threat of “monthly inflation benchmark”: Measure proposing monthly inflation “guarantee” for pension funds is already 2 years old, but rejected several times by the authorities. + others, affecting pension companies (e.g.: refusing of DAC accounting) => Breakeven horizon for pension companies increased from ~7-8 to ~10-12 years. CEE Insurance and Pension Funds 2010

2.4. Some help came from IMF / WB / EC Romania’s agreements with the international financial institutions strengthened pension reform: Conditionality imposed for state pension system: Reduced indexation (Swiss formula) for public pensions; Limit the scope for discretionary pension increases; Increase minimum retirement age and penalize both early retirement and abusive disability retirement; Eliminate “special” non-contributive public sector (DB) pensions and impose contributions on those social categories; Adopt revised pension legislation to incorporate the changes. Conditionality imposed for continued implementation of 2 nd pillar: Resuming contribution increases, as initially envisaged; Priceless support for reform and a change in mindset. CEE Insurance and Pension Funds 2010

2.5. Prospects for Romanian private pensions Funds’ combined assets to surpass EUR 1bn in 2010; 2 nd pillar coverage to increase due to new state pension legislation, 3 rd pillar coverage remains low and grows slowly, because of still low tax incentive; Contribution rate calendar for 2 nd pillar still uncertain, in spite of resumed increase in 2010 (2.5%); Poor shape of public pension system (which runs at a 20% deficit) limits the scope for accelerated reform, because of the narrow horizon of politicians; Political instability and reform skepticism remain the largest threats to the private pension system. CEE Insurance and Pension Funds 2010

3.1. Future challenges for private pensions in CEE Putting reforms back on track: reverse harmful measures inflicted to private pension systems in 2009; Making pension funds’ investments more efficient: legislation in need of update and liberalization; Reviewing the adequacy issue: is the current funding level for private pension provision enough? Political involvement remains a constant threat towards the development of private pensions, against the background of increased structural deficits in the state pension systems; Lack of (massive) popular support for reform – individuals are yet to be aware of the stringent need for supplementary private pensions. This should be addressed by communication, information, education. Not easy & it takes lots of time and effort. CEE Insurance and Pension Funds 2010

3.2. Conclusions CEE pension funds quickly emerging from crisis, the road to recovery could complete in 2010; Adequacy has left the Eastern front: reform reversals more consistent than the effects of the financial crisis; Political risk much more of a threat than investment risk; Romanian pension funds weathered the storm reasonably well and are set to further consolidate. However, slow growth lies ahead, because of low contribution levels; Still plenty of future challenges left for CEE private pensions: road ahead definitely not easy. CEE Insurance and Pension Funds 2010

Wish you all a better 2010 and a swift end to our recovery process! CEE Insurance and Pension Funds 2010