Global ageing: do privately managed pension funds represent a long term alternative for the Romanian pension system? Empirical research.

• Author: Cristea, Mirela
• Position: Report

Introduction

At a worldwide level, demographic studies show that the ageing of the population has become a major problem affecting the viability and sustainability of the pension schemes, influencing, at the same time, the efficiency of public policies in the social and economic fields. The direct effects of the population ageing process consist in a value decrease of contributions to the social insurances assigned to the payment of public pensions, as a result of the reduction of the number of contributors and the increase of the expenses with the public pensions and, also, as a result of the increase in the number of beneficiaries (Cristea et al., 2014).

Due to an increasing life expectancy and a decreasing birth rate at the European Union level, the governments of the Member States seek to implement a wide range of strategies on the line of the increasing pensioners' share who need to remain on the labour market in order to extend their active life. Romania, as a Member State of the European Union, enrols in the increasing life expectancy trend manifested worldwide, due to its decreasing birth rate. Furthermore, people born after the year of 1967 (when the communist regime's ban on abortions led to a demographic shock), fail to currently sustain the public pensions of the existing pensioners. In twenty years time, when this current generation will have retired, it is expected that the pension would reach 25% of the average salary. In March 2015, according to the statistics provided by the Ministry of Labour, Family, Social Protection and Elderly, the average pension represented 48% of the average gross salary, an average pension of 886 Ron, and an average net salary of 1829 Ron.

As a response to the decrease of the pension schemes solvency, in terms of demographic changes, a series of pension reforms has been adopted in most of the countries during the last 25 years. These measures included the increase of the contributions rates, restructuring or reducing pensions, the increase of the standard retirement age, the equalization of the retirement age for men and women, and the introduction of private pension components within the structure of the pension schemes. Still, the question arises as to which of these measures are really efficient, considering that each economic and social policy needs to be adapted to the specific of every country, based on the premises that "each country has its own story" (Walter and Iglesias, 2010).

At the moment, a prevailing solution to the problem of public pensions is to supplement them with mandatory private pensions, however, this solution has become unsustainable in some countries (such as Poland and Hungary), where this component has been nationalised. The contributions to the mandatory private pension component, pillar II, in most of the countries that have implemented the multi-pillar pensions system recommended by the World Bank in 1994, consisted in allocations from the social contributions assigned to the public pension (pillar I). Therefore, the governments of the countries which have waived the mandatory private-pensions component targeted the handy solution to the current budget deficit reduction for public pensions. Another question that arises is whether the waiver, or the reduction of contributions to the pillar II of pension, is beneficial as a long-term solution for the component of public pensions.

Hence, the present study aims at analysing to what extent the economic and social policies in Romania counteract the difficulties of public pensions--an issue also raised at a worldwide level--which have become even more acute for the conditions of our country. We analyse the alternative of private pension funds, pillar II, to see whether it is efficient and sustainable in the short and long term, through the obtained returns, related to their dimensions, considering that the birth rate in Romania has been decreasing, having a negative impact on the active population in the future term.

Theoretical fundaments

With regards these problems, numerous studies and analyses on private pension investment performance, guarantee schemes and their regulators to support their longterm viability have been recently developed.

The result of the decrease in the number of children and, at the same time, the increase in the number of older people has a direct influence on the equity and solidarity between generations and within generations. At a global level, the number of older people is increasing by 2.6% per year, at a faster rate than the annual increase of the entire population, which is increasing by 1.2% per year. Such a rapid increase needs economic and social adjustments in most countries, especially in the pension schemes segment. The introduction of private pension components in the structure of pension schemes has come to complement the public pension system, as the "PAYG, pay-asyou-go" type has become increasingly ineffective as well.

A study carried out by the United Nations in 2009 shows that the percentage of people aged over 60 increased from 8% in 1950, to 11 % in 2009 and is expected to reach 22% by the year 2050 (Figure 1). As long as old age mortality and birth rates are declining, the proportion of older people will continue to grow.

Overall, the increase in pension expenditure so far is primarily attributed to the changes of the dependency ratio in different countries (the ratio of young and/or elderly people of working age).

Kinsella and Wan, in a study carried out in 2009 on the development of the dependency ratio of older people worldwide, show that the highest development of the dependency ratio of older people is registered in the countries of Western Europe, in some East-European countries and in North America (Figure 2).

As a result of these factors, the population structure has changed (Kinsella and Phillips, 2005, p. 4). Moreover, during the following years, even more significant mutations will lead to a pyramid-shaped structure, in which young people, representing the basis, will be more numerous than the upper segments, as the percentage of people over 65 is growing steadily.

Therefore, even if the ageing population was only considered a problem of rich countries, the effects of the ageing population on public pension expenditure will also be intensely experienced in Eastern Europe throughout the following years.

In 2010 (Aegon Global Pensions) in OECD countries, there were on average 25 retirees per 100 workers or, in other words, four workers to every pensioner. In the European Union, the dependency ratio averages 26%, meaning that there are on average 4 workers to every pensioner. In Germany and Italy there are only 3 workers for every retiree, and in Ireland, Slovenia and Cyprus the dependency ratio is the lowest, i.e. 16.67%, 16.95% and 18% respectively. In Romania, the dependency ratio is 21.33%. Since 2010, the ageing population process has been expected to accelerate; doubling the dependency ratio in 2050, to 50%, thus there will be 2 workers for each retiree.

Thus, according to this study, the average dependency ratio in the European Union is expected to reach 31% by 2020, hence there will be 3 workers for every retiree. Finland will face the highest dependency ratio, i.e. 37%, followed by Italy and Germany with 35%, Sweden 31%, France 34% and Greece 33%. The lowest dependency ratio will be in Cyprus, with only 22%. Romania will register a level of 25.67%.

In 2050, the average dependency ratio in the European Union is expected to rise to 50%, with only 2 workers to one pensioner. Slovenia will register the highest ratio, i.e. 59.4%, followed by Italy with 59.24%, Spain, 58.69%, Slovakia, 55.46% and Romania with 54%. Since January 2015, Romania has entered the 26th consecutive year of population decline, and by the year 2050 the number of Romanians is expected to drop to 17.1 million. The demographic problem has thus become one of national security. An alternative to the public pension can be represented by the introduction of private pension components in the structure of pension schemes. However, the main issue of that component is the sustainability in the long term.

For the first time in 2003, Dariusz Stanko assessed the performance of pension funds in Poland, who had introduced the public-private pension system since 1999. One of the main conclusion of this study highlighted that the pension fund managers produce additional value through the management of the assets and some characteristics of the investment behaviour for pension funds were mentioned, such as the successful diversification of investment and positive intervention skills (Stahko, 2003). We know, however, that mandatory private pensions did not have the expected success in Poland, because the state budget could not support the targeting of part of the social contributions to the mandatory private pensions anymore, but also due to the weak performances they obtained, and of the high management fees.

Since 2013, the Polish government has taken over all the treasury bills of mandatory private pension funds' portfolios, so that their investments have remained only in the segment of shares, with pension fund assets being reduced by half. The participants in mandatory private pension funds were compensated after the transfer with a pension indexation of which they would benefit from the state. In the future, they will be able to choose whether they want to contribute to the private pension funds or prefer to contribute only to the state pension. Since the effectiveness of mandatory private pension, pillar II, is decreasing, it is expected that all Poles would elect the state pension. Another paper of reference on the performance of pension funds, authored by Pablo Antolin and developed within the OECD studies, puts forward an analysis of the aggregate investment performance of pension funds in a country, on risk-adjusted basis, using the Sharpe ratio and the...