The goal of this paper is to give an overview of the voluntary private pension system.In the beginning it presents both the features and the legal framework that guide the functioning ofthese pension funds in our country and the basic descriptive data regarding the membership and theinvestments made by the funds. With the help of STATA, it carries on by analyzing the factors thatdetermine the changes in the value of the fund unit and establishing the relationship that existsbetween the funds’ total asset allocation and the value of the fund unit. Based on mathematical toolssuch as multivariate regressions it can be concluded that the investments made in deposits,government bonds and listed equity have the greatest impact on the performance of voluntarypension funds.Voluntary private pension,investments, value of the fund unit

Luiza Mos

Victoria Seulean

English

Research Papers in Economics

Annales Universitatis Apulensis Series Oeconomica, 12(1), 2010 
  477
DETERMINANT FACTORS OF THE INVESTMENT PERFORMANCE OF 
VOLUNTARY PENSION FUNDS IN ROMANIA 
 
 
Victoria Şeulean 
1  
Luiza Moş
 2  
 
 
ABSTRACT: The goal of this paper is to give an overview of the voluntary private pension system. 
In the beginning it presents both the features and the legal framework that guide the functioning of 
these pension funds in our country and the basic descriptive data regarding the membership and the 
investments made by the funds. With the help of STATA, it carries on by analyzing the factors that 
determine the changes in the value of the fund unit and establishing the relationship that exists 
between the funds’ total asset allocation and the value of the fund unit. Based on mathematical tools 
such  as  multivariate  regressions  it  can  be  concluded  that  the  investments  made  in  deposits, 
government bonds and  listed  equity have the greatest impact  on the performance of  voluntary 
pension funds. 
  
Key words: Voluntary private pension,investments, value of the fund unit  
 
JEL codes: J32,G32 
 
 
Introduction  
The voluntary private pension system (pillar III), which is currently under implementation in 
Romania since 2007, is intended to support future pensioners, so they receive higher incomes in 
retirement. Participants’ contributions are invested by pension fund managers based on  the risk 
profile  of  the  funds.  What  happens  in  practice? The  monthly  contributions  of  the  participants 
become fund units in the participants’ accounts. To calculate the amount existing in the account of 
each participant (or so-called personal assets), it suffices to multiply the number of fund units with 
the value of this unit at a specific day.  
With the age of 60, if one paid at least 90 monthly contributions, one can benefit from 
voluntary pension, which will be paid by pension fund managers. If one has not attained the age of 
60 years, or has not paid at least 90 monthly contributions to the pension fund, according to the 
legislation in force, at the time one has the right to voluntary pension, one receives the existing 
amount in the account, either in a single payment or in installments over a period of 5 years. (Law 
number 204/2006) 
 
Literature review  
The private pension system basically involves amounts invested on the long and very long 
term. In this  context,  it  is  natural the participants’  concern  for safe  investment,  so  that  at the 
retirement age they can enjoy the extra income. The private pension market is now strictly regulated 
and controlled. The institution supervising this market is the Private Pension System Supervisory 
Commission (PPSSC). Located under the control of Parliament, the institution was established by 
Government Ordinance no.50 of 9 June 2005, approved by Law no. 313 of 10 November 2005. Its 
mission is to protect the interests of those affiliated to the Pension System, by assuring an efficient 
                                                 
1  Faculty  of  Economics  and  Business Administration,  University  of  the  West,  Str.  J.H.Pestalozzi, nr.  16,  300115, 
Timisoara; victoriaseulean@yahoo.com 
2  Faculty  of  Economics  and  Business Administration,  University  of  the  West,  Str.  J.H.Pestalozzi,  nr.  16,  300115, 
Timisoara; luizamos@yahoo.com Annales Universitatis Apulensis Series Oeconomica, 12(1), 2010 
  478
functioning of this system and authorizing and supervising the activities carried out in the Pension 
System. 
To ensure the smooth functioning of the private pensions market, among the duties of the 
PPSSC we can find: 
  to  prudentially  supervise  and  secure  the  proper  functioning  of  the  private  pension 
system 
  to control the activity in the private pension system 
  to  control  the  relationships  between  the  administrator  and  other  administrators  or 
companies,  whenever  the  administrator  transfers  some  of  its  attributions  to  the  latter,  which 
influence the financial situation of the administrator or are significant for conducting an efficient 
control 
  to control the set up and transfer of contributions by the employer to the pension funds 
  to issue norms regarding the private pension system(http://w4.csspp.ro/ro) 
To increase the safety of voluntary private pension system, according to the law, every 
private  pension  fund  assets  are  entrusted  to  storage  facilities  (credit  institutions  in  Romania, 
approved by the National Bank of Romania in accordance with banking legislation, or branches in 
Romania of credit institutions authorized in one EU member state or belonging to the European 
Economic Area). These institutions are approved by the PPSSC for storage. Also, transparency is 
ensured  by  the  pension  fund  managers’  obligation  to  submit  to  the  Private  Pension  System 
Supervisory Commission a monthly report on each investment fund. Also to protect the interests 
of the participants, a pension guarantee fund is set up. This ensures the payment of the participants 
and beneficiaries of pension funds, when the managers are unable to ensure them. (Şeulean V., 
2003) 
The maximum contribution that can be paid if one decides to participate in a pension fund 
is 15% of monthly gross wage income, or assimilated income. It is important to remember that the 
contributions to the pension funds are deductible within the limit of 400 Euro / fiscal year. One 
can participate simultaneously in several pension funds, as long as the monthly contributions do 
not exceed the 15% of gross monthly income, but naturally, it will require a higher level of fees. 
One has the option to suspend or terminate payment of contributions to a pension fund, requiring 
it to notify the fund administrator and the employer in writing at least 30 days before the date of 
suspension or termination of the contribution. There is always the option to resume contributions 
at any later date. It should be noted that if a termination of payment of contributions to the pension 
fund occurs (if one has not transferred to another fund), one will still retain rights and can benefit 
from the voluntary pension. The contribution to the pension funds may be divided between the 
participant and employer. This is done either by provisions included in the collective bargaining 
agreement, or if it does not exist, by a protocol signed by the employer with the representatives 
employee. (Law number 204/2006) 
Asset allocation is a portfolio choice among broad investment classes. According to Swensen 
(2005), construction of a  financial asset portfolio involves a combination of science and art. The 
science encompasses the application of basic investment principles to the problem of combining core asset 
classes in an efficient, cost effective manner. The art concerns the use of common-sense judgment in the 
challenge of combining incorporating individual characteristics into the asset allocation process.  
Some studies (e.g. Ryan and Fabozzi 2003) show that post 2001 bankruptcies of US pension 
funds had their roots in the actuarial evaluation techniques rather than in asset losses, if long-term 
stock  return  is  considered. According  to  Bader  (2003)  and  McClurken  (2006), post  retirement 
benefit plans, pertaining to the ‘first pillar’ of a pension system, should not invest in high-risk 
financial  instruments  because  this  would  lead  to  problems  related  to  moral  hazard  and  to  the 
evaluation of ‘superfluous risk’. 
Other authors, such as Bikker, Broaders and Dreaw (2007) study the impact of stock market 
performance on  the  investment policy of Dutch  pension  funds  and show that  their  investment Annales Universitatis Apulensis Series Oeconomica, 12(1), 2010 
  479
policies are partially driven by the cyclical performance of the stock market. In addition they point 
out  that  pension  funds  respond  asymmetrically  to  stock  market  shocks:  rebalancing  is  much 
stronger after negative equity returns.  
 
Research methodology  
To  better  grasp  the  evolution  the  voluntary  pension  funds  in  Romania  we  start  by  an 
assessment of the dynamics of the participants and the investments. All the following analyses are 
done using data from the active voluntary pension funds: we consider the six funds that begin their 
activity in September 2007
3 and continue with the 13 that are active at the end of July 2010
4.  Using 
data provided by PPSSC we get the following graph. It is not hard to see a significant increase in 
the number of members from September 2007, when there were 14543 participants until July 2010, 
when there were 207214, AZT being the fund with the most participants. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fig. no. 1 – Dynamic of voluntary pension funds members 
 
Further  analysing  the  number of participants we consider  the  age differences.  It  can be 
concluded that the increase observed in the total number can be also seen in every one of the three 
categories considered (16-29 years, 30-44years and over 45years). It is no surprize that the largest 
part of participants are of age between 30 and 44 and the smallest part is the one of young people 
who are between 16 and 29 years old.  When considering gender, there is no significant difference 
between the number of male and femal participants. Another important aspect that needs to be 
analized is the evolution of the funds’ total fund allocation (fig. no.2).In the beginning, most of the 
investments  were  made  in    cash  and  deposits,  later  on  the  funds  diversifing  their  investment 
portfolio but still addopting a safe investing strategy. 
                                                 
3 AZT Moderato, AZT Vivace, BCR Prudent, ING Clasic, ING Optim, Pensia Mea 
4AZT Moderato, AZT Vivace, BCR Prudent, BRD Medio, BRD Primo, Concordia Moderat, Eureko Confort, ING 
Clasic, ING Optim, OTP Strateg, Pensia Mea, Raiffeisen Acumulare,Stabil Annales Universitatis Apulensis Series Oeconomica, 12(1), 2010 
  480
 
Fig. no. 2 – Voluntary pension funds' total asset allocation 
 
A more in depth analysis of the relationship between the value of the fund unit and the assets 
in which the voluntary private pensions have invested is based on the multiple regression model. 
This type of analysis is currently widely used for empirical analysis in economics. Likewise, the 
method of ordinary least squares is popularly used for estimating the parameters of the multiple 
regression model (Woolridge J. M., 2000). Before estimating the parameters of the model some 
basic assumptions have to be considered. The assumptions provided by the specialized literature 
are: Linear model with respect to the parameters, random sampling, zero conditional mean, no 
perfect  collinearity  and  homoskedasticity.  The  first  assumption  implies  that  the  model  can  be 
written  as  u x x x Y n n               2 2 1 1 0 where  n      , , , 2 1 0   are  the  unknown 
parameters (constants) of interest, and u is an unobservable random error or random disturbance 
term. The random sampling assumption implies that the sampling from the population has been 
done in a random manner. The third assumption implies that the error u has an expected value of 
zero, given any values of the independent variables; in other words,    0 , , 2 1   n x x x u  . The forth 
assumption states that  in the sample (and therefore in the population) none of the  independent 
variables is constant and there are no exact linear relationships among the independent variables. 
The no perfect collinearity assumption concerns only the independent variables but says nothing 
about the relationship between the u and the explanatory variables. It is important to note that this 
assumption allows the independent  variables to be correlated, as long as they are not perfectly 
correlated.  If  we  did  not  allow  for  any  correlation  among  the  independent  variables,  then  the 
multiple regression model would not be very useful for economic analysis. The last assumption 
means that the variance in the error term u conditional on the explanatory variables is the same for 
all combinations of outcomes of the explanatory variables. If this assumption fails, then the model 
exhibits heteroskedasticity. The homoskedasty assumption is needed to justify the t tests, the F tests 
and the confidence intervals for the OLS estimation of the linear regression model. Many tests for 
heteroskedasticity have been developed over the years and we have chosen for our analysis the 
Breusch-Pagan test. The steps of this test are: estimating the original regression model by OLS and 
obtaining the squared OLS residuals for each observation, running a new linear regression of the 
squared OLS residuals on the entire explanatory variable and calculating the F-statistic based on the 
R squared determined on the previous strep. (Wooldridge J. M., 2000)  
Considering  all  the  above  assumptions  we  conduct  two  analyses:  one  using  the  data 
provided by the Romanian Pension Funds' Association (http://www.apapr.ro) which is an aggregate Annales Universitatis Apulensis Series Oeconomica, 12(1), 2010 
  481
view of the investments made by the managers of the voluntary private pension funds, and another 
one using the data provided by PPSSC which gives details about the individual investments made 
by each of the funds on a quarterly base. 
The first analysis starts with a multiple regression model of the following form: 
 
u MF LE CD CB SB MB GB FUV                 7 6 5 4 3 2 1 0         (1), 
 
Where    GB=Government bonds, 
           MB=Municipal bonds, 
                   SB=Supranational bonds,  
                   CB= Corporate bonds, 
                   CD= Cash and deposits, 
                   LE= Listed equity, 
                   MF= Mutual funds. 
 
To correct for heteroskedasticiy (a chi2 value of over 3 determining the rejection of the 
homoskedasticity  null  for both  data sets  ), when estimating  the  regression  we  used  the  robust 
standard error estimates  in stead of the  normal  standard errors. The results can be seen  in the 
following figure: 
 
Fig. no. 3 – STATA Output for APAPR Data 
 
In order to avoid multi-colliniarity, only six of the seven instruments were considered. After 
performing the analysis it was determined that, in this aggregate view, the supranational bonds and 
the investments made in mutual funds were not statistically relevant in explaining the changes in the 
value of the fund unit. When considering the overall significance test we get a p value of zero which 
proves  that  the  overall  results  are  statistically  significant.  When  looking  at  each  of  the  five 
instruments, it is not hard to see that all of them, having a p value of zero, are highly significant at 
any level of personal significance. The value of the fund unit is influenced mainly by the changes in 
the return rates of the deposits made by the managers of the pension funds due to the massive 
investments made in the beginning as part of a safer investment strategy. Other instruments with a 
high influence on the value of the fund unit are the listed equity and the government bonds. 
The other analysis that is worth considering is the one which establishes the investments that 
influence a change in the value of the fund unit by taking into account quarterly data provided by 
the PPSSC(http://w4.csspp.ro/ro), over the same period. The results obtained are slightly different, 
mainly due to the fact that two sets of data were use, obtained from different sources. The main 
difference is that now the supranational bonds become statistically significant, as it can be seen in 
figure no.4. Annales Universitatis Apulensis Series Oeconomica, 12(1), 2010 
  482
Fig. no. 4 – STATA Output for PPSSC Data 
 
From the figure above it can be seen that all six instruments influence the changes that 
occure in the value of the fund unit, even at a 1% significance level. The investments made in 
government securities have the greatest influence, followed by the deposits and the listed equity. 
 
Conclusions 
It  is  a  known  fact  that  the  state  pension  systems  are  in  an  obvious  decline,  forcing 
governments  to  consider  substantial  reforms  of  pensions.  Specifically,  this  means  that  in  the 
relatively near future, private pensions will gain a key role in maintaining an acceptable living 
standard for citizens retired from active professional life. As a result, after the turmoil of the crisis 
will  fade,  the  government  should have as a priority to ensure a  legal framework  to encourage 
efficient participation and growth of private pension contributions. 
The rate of returns obtained by the voluntary private pension funds are clearly affected by 
the risk preference adopted by the funds’ managers through the investments they make. As it was 
shown, deposits, government bonds and listed equity have the most influence over the changes of 
the value of fund unit, and therefore over the returns. It should be noted that this model considers 
voluntary  pension funds  in  Romania,  which  are  a defined  contributions  type. Even  though the 
number of participants to the voluntary private pensions is increasing every year, the returns of 
these funds are still not as high as the ones of the mandatory private pensions. This may change 
when the legal framework and the fees will be similar for the two pillars. 
 
References 
1.  Bader, L.N., 2003. The case against stock in corporate pension funds, Society of Acturies 
Newsletter of the Pension Section, 51, 17-19. 
2.  Bikker J. A., Broeders  D.,  Drew J., 2007.  Stock  market  performance and  pension  fund 
investment policy: rebalancing, free flot or market timing?, DBN Working Paper 
3.  McClurken, 2006. Testing a moral Hazard Hypothesis in Pension Investment, Washington: 
Washington Univeristy. 
4.  Ryan R.J., Fabozzi, F.J., 2003. The pension crisis revealed. The Journal of Investing 
5.  Swensen  D.F.,  2005.  Unconventional  Success:  A  Fundamental  Approach  to  Personal 
Investment, Free Press. 
6.  Şeulean V., 2003. Social protection and insurance, Mirton publishing house, Timişoara 
7.  Wooldridge J. M., 2000. Introductory Econometrics - A Modern Approach, South-Western 
College  Publishing, USA 
8.  http://www.apapr.ro/images/STATISTICI/Seriitimp/p3%20investpiata.xls 
9.  http://www.csspp.ro/date-statistice-pilonul-3 
10. *** Law number 204/2006 regarding voluntary privately managed pension funds 

Introductory Econometrics - A Modern Approach,

number 204/2006 regarding voluntary privately managed pension funds

Social protection and insurance, Mirton publishing house,

Stock market performance and pension fund investment policy: rebalancing, free flot or market timing?, DBN Working Paper

Testing a moral Hazard Hypothesis in Pension Investment,

The case against stock in corporate pension funds,

The pension crisis revealed.

Unconventional Success: A Fundamental Approach to Personal Investment,

DETERMINANT FACTORS OF THE INVESTMENT PERFORMANCE OF VOLUNTARY PENSION FUNDS IN ROMANIA

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DETERMINANT FACTORS OF THE INVESTMENT PERFORMANCE OF VOLUNTARY PENSION FUNDS IN ROMANIA

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