Pension Plan Published in Error Rips Through Romanian Market

(Bloomberg) -- A Romanian draft law published “in error” touched off confusion and alarmed investors as the government and ruling party officials try to manage the fallout.

A government website published a proposal late Sunday to suspend payments to the nation’s mandatory private pension pillar this year and direct the funds to the state pension fund to plug holes in the country’s budget. The proposal, which would effectively channel taxpayers’ private retirement savings into government coffers, riled bond investors and sent the main BET stock index lower.

The draft law’s publication was “a material error,” and the proposal was meant to address concerns about the sustainability of public finances, Ion Ghizdeanu, the head of a government panel of economists that drew it up, told Digi24 TV on Monday. At the same time, ruling Social Democratic Party chief Liviu Dragnea said the government might freeze payments to the private scheme as it assesses whether it should make the pillar optional rather than mandatory.

“When this review is done and after we hold talks with the pension-fund administrators, we’ll make a decision maybe this summer or autumn,” Dragnea said Monday. “This topic must be closed this year.”

‘Ping-Pong’

The furor over the pension plan adds to criticism of the government, which has gone back and forth on economic policy throughout 2017. After proceeding with a tax overhaul last year that drew warnings from the president that it will widen the fiscal deficit, business associations and pension funds are saying that suspending private pension payments will deplete the long-term savings of more than 7 million citizens.

Romanian President Klaus Iohannis urged the ruling coalition to make clearer statements about their proposal and avoid “touching second-pillar payments” as citizens are losing their trust in the entire pension system.

“There’s this ping-pong of statements -- about a suspension, then nationalization, then a dismantling -- it’s very worrying,” Iohannis said on Monday. “This is taking everything to the point of no return for this toxic, amateurish government. They need to clearly state their intentions about the second pillar.”

Slowing Growth

Last week, data showed that Romania’s economic expansion slowed to 4 percent in the first quarter from a year earlier, a dramatic deceleration from the 6.7 percent in the last three months of 2017. Following the draft law’s publication, the Finance Ministry failed to raise 600 million lei ($153 million) in an auction of local bonds, and the Bucharest stock exchange plunged as much as 2 percent, the most since February.

Romania shifted to a three-pillar pension system in 2008, with the state pay-as-you-go scheme, the mandatory private pillar and an optional private system. The private funds paid into the second pillar have grown to about 35 billion lei in the 10 years since its inception, the association of private pension funds said.

“Any attempt to reform the system will inevitably take its toll on the local stock market and significantly impact its liquidity, especially if the solution local authorities adopt cuts the flows to the second pillar,” said Dan Rusu, head of capital-markets research at Banca Transilvania. “Investors are growing weary, and it’ll be hard for the local stocks to hold on to the otherwise substantial gains they delivered this year.”

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