Did you know that the pension concept comes from the 19th century? That’s when the first state pension system came into being. Few people know that the first initiator of a public pension system is the famous German Chancellor, Otto von Bismarck, the unifier of Germany.
Like today’s pension systems, the system created by Bismarck was conditioned by the principle of contribution. In 1889, in Germany, the first pension legislation was adopted and implemented, and was applicable to all eligible workers. The legislative initiative was called the “Law on Old Age and Disability”.
What is the Romanian pension contribution to Pillar II, and how does it work?
Pillar II is the Romanian mandatory private pension system, which was introduced in Romania back in 2008. In order to better understand how it works, it is important to first understand how the Romanian pension system is currently structured.
In Romania, the private pension system was born quiet recently, in 2007. Until then, there was only one pension system in Romania – the state pension system. Starting with that year, the Romanian pension system has been structured as follows:
- PILLAR I – State pension system (mandatory)
- PILLAR II – Mandatory pension, privately managed
- PILLAR III – Voluntary pension, privately managed
- PILLAR IV – Occupational pension system/employer pension plan (optional), privately managed
Pillar II is the mandatory private pension (to private pension plans), which was introduced in 2008, and was mandatory for all employed persons who were at that time up to 35 years of age. Optionally, people between the ages of 35 and 45 could also contribute, if they wished so.
The pension contribution to Pillar II represents a percentage of the mandatory contribution that all Romanian employees (i.e., employees of Romanian companies) pay to Pillar I (the mandatory state pension system).
Thus, employee contributions are accrued in individual accounts, which in turn are managed by private pension fund administrators. These administrators invest money in order to obtain a profit that will benefit the individual contributors when they reach the retirement age.
Benefits of contributing to the Pillar II system
- The amounts accrued in the individual account are always in your ownership; they may not be used for other purposes or enforced;
- The money you contribute to Pillar II system will be inherited (in specific situations), and will not be lost;
- The money is invested by the pension fund manager to increase its value over time;
- You can have an extra income from the investment profits when you retire;
- You are always guaranteed to receive the net contributions;
- You have access at all times to information about what happens to your private pension money.
What is important to know about the Pillar II of Romanian pension system
- Contributing to Pilar II system is mandatory for anyone who earns a salary and pays the mandatory pension contribution (CAS) to the state;
- You can choose to transfer from one private pension fund to another at any time you wish;
- You can choose one of approximately seven active Romanian private pension funds authorized by the Romanian FSA (Financial Supervisory Authority);
- If you stop working as an employee, the money accumulated in your account is still invested by the fund. When you resume your activity, you will automatically resume the payment of contributions to Pillar II;
- To continue feeding your private pension plan, if you no longer work, you can choose to contribute to the same pension fund under Pillar III – the voluntary pension system;
- Your money is invested wisely and for your benefit.
Now that we have made a brief introduction about the pension contribution to Pillar II, we will further go deeper into the topic.
How does the pension contribution to Pillar II work in Romania?
It is good to know that your privately run pension is safe. Your Romanian employer transfers the mandatory pension contribution (CAS – individual social insurance contribution) of 25% of your gross salary to ANAF on a monthly basis, and ANAF transfers a fixed part of it (currently, this part is set at 3.75% of the monthly pension fund contribution) to your individual private pension account, which you have opened with the privately managed pension fund.
Based on the legal provisions in force, you are guaranteed that, at retirement, you will receive at least the net amounts with which you have contributed over the years. There is a high probability of receiving more, due to the investment gains made by the private pension fund manager. The accumulated amounts are invested, in particular, in government securities, shares, bonds and others, their advantage being that they present a low risk.
The legislation stipulates, in the most explicit way possible, that private pension funds cannot go bankrupt. How is this possible in practice? According to the Romanian legislation governing pension funds, the money invested by taxpayers in these funds is completely separated from other assets owned by the pension fund managers.
This provision is an advantage that the Romanian private pension system has over all other financial market players, such as banks, insurance companies, investment funds, etc. In the case of other financial market players, the money contributed by people is held together with the assets and liabilities of the respective financial institutions. This specific separation required by law operates in the private pension funds system. In addition, the activity of fund managers is regularly and thoroughly supervised by the Romanian Financial Supervisory Authority (in Romanian: ASF).
Any participant in the Pillar II private system of pensions can decide if he wants to transfer to another pension fund, but only after paying the first contribution. Each year, the administrator must inform the participant of the current status of his account.
From your first day of employment you have the possibility to choose your private pension fund where you would like to invest under the Pillar II. What happens when you don’t use this option? You will be assigned a private pension fund ex officio. The important aspect is that, if you are not satisfied with the way your money is managed, you can always transfer it to another pension fund.
Can money be lost?
No, you can’t lose your money. The state guarantees this system, but the only thing that cannot be guaranteed by anyone is a certain percentage of profitability from the investments of the fund. The way they are monitored indicates that the stability and fairness of these funds are at their full potential.
In conclusion, the Romanian Pillar II of the pension system can be seen as a long-term savings account. It is important to note that the money cannot be accessed before retirement, except for an unpleasant event (decease), in which your money is automatically passed on to your heirs.
The pension contribution to Pillar II could help you save your money and can bring you a higher percentage of profit at retirement age. At present, it is built in such a way that it should not present any significant risks to you as contributor.