February 2, 2004

Violeta CiurelGeneral Manager

ING Nederlanden Asigurari de Viata

Going Multipillar in the Romanian Pension System

2

Worldwide pension crisis• Demographic trends and economic developments increase spending on

public pension systems

• An aging population increases dependency ratios• rapid decline in birthrates• increase in life expectancy• past social/economic factors having effect on demographic structure (e.g. baby

boom)

• Poor economic performance has adverse effect on pension contributions– High social security contributions combined with high levels of unemployment

harm labor markets and international competitiveness which further reduces economic performance

• Early retirement schemes cause actual retirement age to be lower than official

3

European pension reform• EU aim to harmonize pension benefits • Increase in retirement age and reduce replacement ratios• Reduce early retirement schemes• Tendency towards defined contribution systems• Germany introduces corporate and income tax incentives for

additional savings• Introduction of funded private pension funds in Central and Eastern

Europe

4

The “middle ageing” of Europe

0

1000

2000

3000

4000

5000

6000

7000

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85

2000 2020Thousands

Source: Eurostat 2002/nVision company

6

Working hours are decreasing Change 1995 – 2001: all workers

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%D

enm

ark

Sw

eden

Fin

lan

d

Gre

ece

Bel

giu

m

Sp

ain

Ital

y

Au

stri

a

UK

Ger

man

y

Lu

xem

bou

rg

Net

her

lan

ds

Fra

nce

Por

tuga

l

Irel

and

EU

15

Source: Labour Force Survey/nVisionBase: All workers in the EU

7

Major changes in the dependency Ratios in CE Countries

0% 20% 40% 60% 80% 100% 120%

Croatia

Armenia

Macedonia

Czech Republic

Yugoslavia

Slovakia

Slovenia

Romania

Poland

Hungary

Ukraine

Bulgaria

Latvia

Albania

Pensioners / Contributors

Pre-1992

Most Recent Year

8

Objectives of Pension Systems and ReformsDifferent approaches:• Primary goals: To provide adequate, affordable, sustainable and

robust old-age income– Adequate refers to both the absolute and relative level (i.e. poverty

alleviation and income replacement)– Affordable refers to the financing capacity of individuals and the society– Sustainable refers to the financial soundness of the scheme, now and in

the future– Robust refers to the capacity to withstand major shocks, including those

coming from economic, demographic and political risks

• Secondary goals: To create developmental effects by – minimizing negative impacts (e.g. labor market)– supporting the economic development by increasing the savings and

mobilizing the financial resources and development of the financial market

9

Multipillar Pension Systems in the year 1985

10

Multipillar Pension Systems in the Year 2000

11

Multipillar Pension Systems in the Year 2010

12

Pension situation in Romania

Facts after 1990:• Rapid demographic changes: increase the life expectancy, decline

natural growth rate, increase ageing population• higher unemployment (economic reasons and early retirement

based on number of labor years)• decreasing the number of contributors within the active population:

in 1996 only 55% of this category were contributing to the pension system

• increase on the number of liberal professions and persons in agriculture (no pension contribution)

• black labor market• restructuring of the big state-owned and inefficient companies

13

Pension situation in Romania• decreasing the number of employees from 8 million in 1996 to 4.6

million in 2003 (shrinking the calculation base)• increasing the number of retired persons who benefit from state

pensions: 6.1 mill (of which 4.5 mill state pensions, 1.5 agriculture)• dependency ratio changed: from 2.5 in 1990 to 0.75 in 2003

(employees/retired)

14

Pension situation in Romania

Consequences:• financial constraints at state budget• impossibility of the state budget to cover the inflation rate by social

protection measures• increasing the contribution of the employees from 14% in 1990 to

36.5% in 2002• negative impact on the companies profitability and national

economy restructuring efforts• big discrepancies within the pension system by higher social

protection measures for the lowest pensions - pension calculation formula changed

15

Going Multipillar...

• A multi-pillar pension system and reform approach makes sense as it produces diversification of different kind of risks – economic and demographic – retirement income is exposed to

• Mandatory or quasi-mandatory funding part of the future retirement income makes sense for macroeconomic and microeconomic reasons, as well as for reasons of political economy

• A radical reform of a PAYG pillar is needed under any scenario

16

Current situation on Romanian pension system

• presently, one system - state one, compulsory - PAYG - new law -

Law 19/2000 enforced in April 1st 2001

• draft law on Facultative Occupational Pension Schemes - approved

by the Government (Oct.9) and to be approved by the Parliament -

draft law on the universal pension funds to be drafted by the

Ministry of Labor and

• still life insurance companies offer pension type of products - not

regulated as the 3rd pillar

17

Existing - 1st pillar principles• Unique public pension system, state guaranteed, PAYG• National Pension House - autonomous institution for management of

public system• increasing the categories of contributors for increasing the funding• New Labor Code - impact on the pension budget• increasing the retirement age: until 2014 - men from 62 to 65, women

from 57 to 60• reducing the contribution for the fund from 11.6% to 9.5%• new calculation formula - ceiling for the maximum pension level• possibility of early retirement• inflation adjustment of the pension level• changes in definition and approach of the permanent/total disability -

more severe

18

How they currently define How they currently define

retirementretirementMainly negative connotations:

• Poverty

• Depression

• Humility

• Dependence

• Sadness

• Loneliness

• Spare time

• Silence / less stress

Mainly negative connotations:

• Poverty

• Depression

• Humility

• Dependence

• Sadness

• Loneliness

• Spare time

• Silence / less stress

Two main expectations

• Dynamic – have time and resources to

develop activities they haven’t done yet:

Traveling – as the main aspiration

(also seen as sign of aspirational

Western types)

Allocate time for hobbies (fishing,

fixing cars etc.)

Peaceful / static / relaxing

Take care of grandchildren

Move to / return to nature /

countryside

Two main expectations

• Dynamic – have time and resources to

develop activities they haven’t done yet:

Traveling – as the main aspiration

(also seen as sign of aspirational

Western types)

Allocate time for hobbies (fishing,

fixing cars etc.)

Peaceful / static / relaxing

Take care of grandchildren

Move to / return to nature /

countryside

Dominant Dominant

patternpattern

CURRENTLY

How they expect retirement to beHow they expect retirement to be

EXPECTED

Many respondents stated they would feel attracted to

buy a supplementary pension so as to get closer to the expected portrayal of

the retirement time

Red = positives

Blue = negatives

Consumers’ Portrayal of Retirement Time

Source: Qualitative Research Study developed for ING by Synovate, in May 2003

19

Objectives of Pension System Reform in Romania

• providing adequate, affordable, sound, sustainable and decent old-age income no matter the economic, political risks

• structurally support the economic growth• brings the EU admission closer• avoiding the negative social effects created by the very low

levels of pensions• creating possibility of economic development by

– minimizing negative impacts (e.g. labor market)– investments on the local capital market– supporting the development of the financial market

20

World-wide ING pension models • Occupational pensions Benelux• Defined contribution US• Life greenfields

• Taiwan, Korea, China, India• Poland, Hungary, Czech and Slovak Republic, Romania, Chile

• Pension funds• Mexico, Peru, Chile, Poland, Hungary, Czech Republic, Australia, Russia,

Bulgaria, Slovak Republic • Corporate banking is gateway to pensions (WSM)• Investment expertise Asset Management

Pensions are prime example of how ING can combine insurance, banking and asset management skills

21

ING Pension “best practices”Region Name of the operation “best practice”/ Lessons learned

Latin-America

AFP Integra (Peru)

USA

Europe

Asia/Pacific

AFP Santa Maria (Chile)

ING Commercial America Afore (mexico)

Cost efficiency, Market based strategy,Innovative culture, efficient campaign,agent productivity, in-house payroll

deduction system

Commercial and investment strategyTechnology

Entry strategy (short time-to-market)

ING Aetna Financial Services

Using different distribution channels to gain maximum marketpenetration (Direct sales, TPA,indep brokers, Top broker

dealer firms). Market research and market literature Cultural diversity marketing

ING Pension fund Czech Rep.

Great success in short notice, efficient and wellstructured campaign, fast expansion of sales force at

launch, limitation of number of non-contributive membersING Pension Fund Poland

ING Pension Services (NL)Short time-to-market in a mature market

Flexibility of the product

Broker distribution

ING Austraila

Product development, Management, brand/product advertising,lobbying/influencing capability. Emloyer Data Transfer Service,

Commission structure, Administration systems, distributionexpertise, Investment management capability

22

ING competitive edgeCombination of competencies:

• Advice

• Local capital market development• Emerging markets banking

• ING Brand • ‘ING, the pension provider’• Stability, trust and innovation• Important to speed up global branding

• Asset management capabilities

• Multi-product / multi-distribution

23

Needs and expectations for future developments of pensions in Romania• Customers’ financial protection and emotional security

• wider access to pension reform• proper replacement ratios

• New Fiscal code • to provide fiscal sustainability • to create short-term fiscal balance, long-term financial viability and incentives to pay

contributions

• Transparency, supervision, control, security, efficiency• clear regulations • customer protection• responsibilities for product providers, sales persons, purchasers• consistent approach across all product types and distribution channels

• Country level infrastructure, operational systems

24

Thank you for your attention !