Pillar III pension funds inhibited by restrictive deductibility and double taxation in Romania

The weighted rate of return for all medium-risk voluntary funds (Pillar III) was only 4% compared to 5.5% for the mandatory funds (Pillar II), calculated by the financial supervision authority ASF at the end of June. The differential in favour of Pillar II was constant at 1.5pp over the past seven months and 3.9pp in the three months before that.

The more intuitive annual increase of the value of the fund unit shows a similar pattern and wider discrepancy: 8.9%-10.9% y/y for Pillar II funds versus 11.2%-13.6% y/y for Pillar II.

Pillar III funds are severely constrained by limited deductibility and double taxation for the employees who pay from their own pocket their contributions.

Despite being managed by the same fund managers, the voluntary privately managed pension funds (Pillar III) constantly perform weaker than the mandatory Pillar II funds – which are more in the spotlight, perhaps because of their higher capitalisation.

The main difference between the two categories of pension funds is their size (volume of assets under management): while Pillar II funds have total assets of RON 110 billion (EUR 22 billion), Pillar II funds are much smaller, with total assets of RON 4.1 billion (EUR 820 million). The asset allocation is quite similar as the managers have to observe the same restrictions for Pillar II and Pillar III.

The individual contributions for Pillar III funds are constrained by the EUR 400 annual deductibility that keeps these funds alive but prevents their development. Indeed, the average contribution to Pillar III funds is around RON 166 per month, in line with the EUR 400 annual deductibility but totally insufficient for a relevant pension at retirement.

While the contribution to Pillar II grows by default in line with the average wage, the EUR 400 annual cap for Pillar III funds has never been increased since the system was designed more than a decade ago. The net wage was some EUR 350 per month at that time (in 2008), growing to EUR 846 in May 2023. Therefore bringing the deductibility limit to EUR 1,000 per year would be justified.

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