This interview was realized by Giada Vercelli and first published on July 1st 2015 on Euromoney Conferences website.

Romania can be an attractive market for asset managers. Assets held by Romania’s private pension funds will grow by 30% this year to 25 billion lei ($6.45 billion) as more workers join the scheme and the mandatory level of contributions rises. The country has the second biggest population in Eastern Europe after Poland: 6.3 million Romanians contributed 19.1 billion lei to private pension funds last year. Romania’s pension reform came later than other Eastern European countries, when Romania adopted the World Bank’s multi-pillar model. In the 1990s there were several attempts to reform the pension system, but a law was first approved in 2000, focusing on reforms in the public system. Introduction of a voluntary pension pillar and a mandatory second pillar followed. In Romania, the voluntary pillar differs from those of other CEE countries, as it does not feature private pensions.

Lucian Anghel, Chief Executive Officer of BCR Pensii and Non-Executive Chairman of the Bursa de Valori Bucuresti – Bucharest Stock Exchange.

Seven private pension funds held 12% of Romania’s treasuries, helping extend their maturities and own shares worth EUR730 million on the Bucharest Stock Exchange. Given its size, should Romania manage to sustain its growth rates, and can we expect to see it become one of the key growth markets in Eastern Europe for your business?

Romania represents a model for the private pension system within CEE. The growth of this system was supported even during the tough fiscal consolidation process that has taken place over the last five years. The mandatory second pillar contribution was increased to 5% for 2015 and will reach 6% in the next two years. The system started with a 2% contribution. Due to a double digit average annual return (for the last six years it was around 11% p.a.), the assets under management grew at a very high rate. In the last five years the average growth rate was almost 50% for the assets under management of the second pillar. According to the Private Pension Funds Association (APAPR) at the end of 2018 the total assets under management will almost double reaching around EUR10 billion.

The pension reform that was passed in 2000 created an integrated system which included the self-employed, the unemployed, and many previously excluded categories, such as farmers and policemen. What are the consequences of these changes in the institutional framework? According to the convergence programme Romania submitted to the European Union, public pension expenditure is expected to increase only marginally, from 6.7% of GDP in 2004 to 7% in 2050. How do you expect demographic changes to affect the pension funds business in Romania?

Accelerated demographic change causes a significant pressure on the state pension system. Now there are 1.2 pensioners for every contributor, but according to EU current projections the ratio is estimated to reach 1.5 pensioners for every contributor by 2060. Therefore we all need to put aside more money for long-term savings in order to decrease dependency on the state pension. As long as financial literacy increases, Romanians will invest more in long term saving products like voluntary pensions, life insurance, asset management and shares listed on BSE.

Are you concerned by the effects of a combination of low interest rates and increased life expectancy? Depressed bond yields are now denting returns from pension funds’ fixed income-dominated investment portfolios. At the same time, historically low interest rates are being used to calculate the size of their liabilities and their capital requirements. What is the impact of protracted low interest rates on pension funds? How can they affect the assets and liabilities of the funds?

In Romania, we have a Defined Contribution pension system for both mandatory and voluntary private pension funds, which means that fund liabilities are mainly related to the guarantees such as the one for net contributions for each participant. We are comfortable exceeding the absolute guarantee at this stage given the double digit return from inception and the fact that we are in the accumulation phase (the system being started in 2007).

However, pension funds, as long term investors, are negatively affected by the low interest environment in their objectives to achieve long term capital appreciation, with a relative lower risk profile. We face a permanent struggle to identify assets with adequate risk-return profiles to add to the portfolio. We were still able to identify good value investments in the equity or fixed income space, especially in the local market and in European equity, but the number of opportunities are shrinking quickly. It will be critical to select the best yielding assets over a longer period of time and to benefit more from high dividend stocks.

In Europe the requirements for determining assets, liabilities and funding levels for accounting purposes are quite standardised. How is Romania responding to the standards?

The local market is following European regulation and best practices as far as determining assets, liabilities and funding levels in the financial services sector.

What are the tools pension funds have to address the risk of persistently low interest rates?

We believe that asset class diversification can play a role in diminishing the effect of a low interest environment. We benefited from a local capital market with stocks in the energy and utility sectors providing more than a 6% dividend yield. The main capital market index BET-TR (including dividends) generated around a 50% increase in the last two and a half years. At the moment, the dividend yield of the main listed companies in Romania on the Bucharest Stock Exchange is twice or three times bigger than the yield offered by state or corporate bonds.

Can the search for yield lead to a bigger problem of financial stability?

Theoretically yes. However, in the short and medium term I do not think we have this problem, and I believe that proper mechanisms are in place at industry level to mitigate this risk as conservative investment limits are in place.

Where do you see the greatest investment opportunities? Are you looking at infrastructure and environmental projects, due to the higher allocation of EU funds to the region?

I believe that frontier and emerging markets provide good opportunities in the equity space as the dividend is much higher than fixed income yield, but you need to dig deeper into the universe of companies. For the moment, there are only a limited number of investment instruments available for investment. State of the art corporate governance of the listed companies might also create a difference in the selection process of the best candidates for investing.