CFA vice president: Romanian private pension funds unlikely to beat risk-free rate

The Romanian privately managed pension funds will end this year with an average annual yield of 5%-6%, according to estimates by the vice president of CFA Romania, Adrian Codîrlaşu, Economica.net reported. This is going to be less than inflation, he said. In fact, it's going to be worse: the 5%-6% yield is less than the risk-free rate in Romania.

This can hardly be understood in the context of the high yields paid by the Government bonds issued in December but also during the first quarter of 2023 and April, of above 7%. The portfolio of bonds was already marked to market last year when the contributors to the pension funds lost roughly one-fifth of their wealth as a result.

Furthermore, households pay no income tax on the profit generated by investments in such instruments (Fidelis, Tezaur) – which makes Pillar III (typically less profitable compared to Pillar II) an even less competitive option compared to other investment alternatives. Pillar II is mandatory.

The refinancing rate in Romania is expected to remain at 7% during the whole year, while the annual inflation will probably drop from 15% to 8%-9% at the end of the year. This means banks can place their excess money in overnight deposits with the central bank (BNR) at the deposit facility rate of 6% – exactly the same, if not more, as the yield generated by the private pension funds managers.

"If we take into account a sharp decrease of inflation that could reach 8%-9% at the end of the year, a 6% yield is still below inflation, so real negative," Codîrlaşu said.

The Constitutional Court has recently cleared a bill cutting the fees charged by pension fund managers and linking their revenues to the real yields.

(Photo source: Chernetskaya | Dreamstime.com)