Contribution to Pillar II of pensions18 October 2023
Currently, an employee contributes monthly to social insurance (CAS) with a percentage of 25% of his gross salary, consisting of 21.25% Social contributions and 3.75% Contribution to the privately managed pension fund Pillar II.
Starting in 2008, the system of privately administered pensions or mandatory private pension was introduced – Pillar II, represented by mandatory contributions for people aged up to 35 years and optional contributions for people aged between 35-45 years. As I mentioned before, currently the contribution rate to the privately managed pension fund Pillar II is 3.75%, and in 2024 the rate will increase to 4.75%.
According to Law no. 296 of October 26, 2023 regarding some fiscal-budgetary measures to ensure the financial sustainability of Romania in the long term, employees in the IT, construction, agriculture, and food sectors can opt to contribute to the privately administered pension fund Pillar II.
Basically, employees in the previously mentioned sectors will be able to choose to contribute only 21.25% to the public pension system. The share of 21.25% represents the difference between 25% (CAS) and 3.75% (contribution to the privately managed pension fund Pillar II).
This measure may generate negative effects for employees who will no longer contribute to Pillar II pensions. Despite the fact that the net salary will increase by a small percentage, the value of pensions is expected to see significant decreases for employees who choose not to benefit from the additional pension through Pillar II.
According to the Association for Privately Administered Pensions in Romania (APAPR), since the establishment of Pillar II of mandatory private pensions and until now, the number of participants exceeds 8 million. The number of employees in the aforementioned fields is over 1 million.
Mathematically speaking, Romanians transferred approximately EUR 17 billion in the period 2008-2023 (15 years) to the private pension fund, the total net gain generated by pension funds for the benefit of the population (from which commissions were deducted) was 5 billion of EUR. The decrease in the number of contributors to Pillar II of pensions will generate losses both for employees and, at the same time, will negatively influence the development of local financial markets since over 90% of the assets of Pillar II pension funds are invested in Romania. The assets of Pillar II pension funds represent an important contribution to public debt financing, economic sustainability and job creation.
An important aspect to mention is that the yield of Pillar II was at a higher level than the yield of deposits in LEI, respectively EUR, turning private pensions into the most efficient and accessible form of long-term savings despite crisis situations, financial market fluctuations , but also unforeseen events.
Therefore, a large part of the employees who will no longer contribute to the privately managed pension fund Pillar II will enjoy an insignificantly higher salary, but in the long term – more precisely at retirement age – they will bear the consequences marked by smaller pensions.
Junior Transfer Pricing Consultant