The economic crisis led to a reorganisation of the capital markets, shaking the population’s trust in financial institutions and the promised value of pensions.
The economic crisis led to a reorganisation of the capital markets, shaking the population’s trust in financial institutions and the promised value of pensions. At the same time, the volume of population’s savings has shrunk and in the short-term perspective nothing seems to have changed. The European governments have introduced a series of measures to counterbalance these effects, whilst the population – according to a study undertaken by the Aviva plc – is becoming aware of the importance of the personalised long-term savings products.
To start with, the crisis occurred in the financial system, manifesting itself through the collapse of financial conglomerates, but its effects did subsequently spread to the level of the entire economy. There are fears that this will turn in the end into a social crisis. According to the latest OECD study (Organisation for Economic Co-operation and Development), which examines each country’s pension systems, the harmful effects of the crisis were felt first by the people approaching retirement age, whilst those under 45 years old still have time to invest to ensure financial security at retirement.
For this specific reason it is extremely important for the latter category to start saving for retirement early, in their active period, so as to ensure sufficient retirement income.
The 2009 Aviva study shows that 44% of Romanians do not understand the pension system, do not know what amount they will be receiving as state pension, do not know what alternatives are available for them, are not aware of the legislation and the ways in which they could subscribe to the privately managed funds, are not aware of the fiscal advantages currently provided for optional privately managed pensions (deductible contributions to the optional private pension).
According to the same study* only 18% of Romanians save for retirement, whilst 62% have not even started to save, even though 64% are aware that the state pension will not cover their financial needs.
“Romania is amongst the countries where pension spending and the GDP exceed the OECD average. It is a situation valid in the whole of Central and Eastern Europe (Poland, Czech Republic, Hungary), where it is necessary that, as well as the private institutions offering financial services for retirement savings, the state also offers solutions to stimulate the population to help themselves,” stated Mihai Popescu, CEO Aviva Romania.
“It is the responsibility of every person at the professional active stage in life, to choose the long term saving ways which can guarantee the financial support necessary to ensure the standard of living they desire in retirement. There very few people aware of this responsibility and most (81% of Romanians, according to our study*), expect the state to resolve the pensions problem.
“Financial safety in retirement cannot be assured by starting to save only a few years before pension age, this must be undertaken several decades before, even at the start of the working life, when prioritising expenditure and making plans for the future,” continued Mihai Popescu.
Government measures
The OECD study underlines that in certain countries, retired people have received payment in a single lump sum, whilst in other countries the value of the monthly pension has risen. Several governments have offered their citizens the option of drawing from their pension funds earlier than the legal pension age. The idea that it is the state’s who must support the pension funds has been circulated in a large number of countries.
At the same time, the study underlines the fact that these solutions are only viable short term and that the nature of the pension system management requires long term planning.
“When extensive fiscal stimuli will exist, together with an easy procedure for operating this deductibility, people will have an important additional reason to start and maintain a long-term savings programme which will allow them to have faith in the future in retirement and at the same time contribute to the reduction of costs and social pressures linked to the standard of living of pensioners. Furthermore, the associated increase of the pension industry assets and life insurance would create important investments in the local industry, which is what happened in Poland for example,” noted Mihai Popescu.
Investments, risk, performance
According to Aviva plc study, 37% of Romanians have stated that they have become more prudent and less willing to take risks they don’t understand very well. Our neighbours from Hungary (39%) and Poland (34%) think pretty much the same. Comparing the periods before and after the crisis – the number of those prepared to risk has gone down by 10%, compared to Hungary – 7% and only 4% in the Czech Republic.
In response to the crisis, investors moved to products with very safe investments, because the appetite for instruments with increased volatility has diminished.
The last Aviva regional study* shows similar tendencies in Central and Eastern Europe, indicating that the Romanian and Czech populations are more inclined towards the short-term investment products which entail a lower risk factor. In the Czech Republic, people are very keen on bank deposits. Although it is true that investment companies are extremely popular with people who choose medium-term savings, the true growth potential of these companies will be reached through the use of long-term savings solutions.
For example, on the Czech market there are four types of saving instruments, which enjoy state support and/or fiscal advantages, and amongst these there are life insurance and income from investment funds, provided that the investment period exceeds six months.
On the Romanian market the situation is similar: in other words deposits are the best-known savings instruments representing the first savings option for many Romanians. It remains to be seen to what extent the re-introduction of taxes on gains from banking and the capital market will send more Romanians towards other saving instruments such as life insurance.
Investments in investment funds or other products/services of the capital market are limited. The study shows that Romanians react to crisis by giving up anything entailing risk and turning to investment products offering guarantees through the transparency of investments in instruments of minimal risk with fixed revenue. We, at Aviva, have noticed a move of savings towards the investment programme Capital Guaranteed, which addresses exactly these current client needs.
The reduced capacity of the largest part of the population for saving is also demonstrated by the fact that the average of savings for the pension period through optional pension is lower than the fiscal benefits which would be received from the state (€200 per year as opposed to €400, not taking into account the contribution that could be made by the Employers, namely a further €400).
“The financial situation of each one of us is a matter of individual choice. Until recently, for most pensioners, safety was in state hands, but it is more and more obvious that for the generation which will be pensioned in 20 years time things will not be quite so simple. Each of us has to assume responsibility for his own future, and insurance companies have to offer clients all the information they need, so that the products acquired suit their personal needs”
“This year we have launched a financial education website – the first of its kind on the Romanian market - which should offer clients the necessary information for acquiring the suitable product. I invite you to visit it at www.e-viata.ro,” concluded Mihai Popescu.
More information about the Consumer Attitudes to Savings survey
* Customer Attitude to Savings - 2009 Aviva Group study, in 25 countries
- No result from the Aviva study can be reproduced without acknowledging the source : Aviva Life Insurance
- The Consumer Attitudes to Savings survey was undertaken in 2004 in 11 countries, in 2005 in 16 countries, in 21 countries in 2006 and in 2008 in 25 countries. Romania was included in the study from 2006. The countries where the research took place in 2008 were: Great Britain, France, Germany, Italy, Spain, Ireland, Holland, Poland, Turkey, Russia, Hungary, Czech Republic, Romania, Lithuania, Belgium, China, India, Singapore, Hong Kong, Taiwan, Australia, Sri Lanka, Malaysia, United States of America and Canada.
-ends-
For further information:
Lavinia Pavel – Tomi Tom (Aviva Romania PR Consultancy Agency)
Telephone: 0724 282 323
Email: lavinia.pavel@tomitom.ro
Notes to editors:
About the Aviva Group
Aviva is the oldest insurance group in the world and the largest in Great Britain, with a history dating back to 1696.
Today, the Aviva Group has 54,000 employees and 53 million clients in 28 countries world-wide*.
The Group is European leader in life and pensions insurance, occupying top positions in the majority of markets where it is operates.
Aviva has funds under management of over £379 billion, * which places Aviva in fifth position in the insurance companies world ranking.
Aviva Group Romania
Aviva Group Romania includes three companies: Aviva Life Insurance, Aviva Management Company for a Private Pension Fund, Aviva Investors Romania (acquired in November 2007).
About Aviva Life Insurance, Aviva Management Company for a Private Pension Fund
Aviva started its life insurance activity in Romania in 2000, holding currently a portfolio of over 50,000 clients (excluding credit life insurance) and has funds under management of 27 million pounds sterling. In 2007 Aviva has created a pensions company which deals with the management of the mandatory pensions fund Pensia Viva and which currently holds a portfolio of over 370,000 clients.
About Aviva Investors Romania
Aviva Investors Romania currently has funds under management of €10 million in eight mutual funds, of which five open, each based around a different type of investment: Aviva Investors (AI) Intercapital (a shares fund), AI XT Index (index fund), AI Capital Plus (a diversified fund), AI Orizont (a fixed -income – bonds – fund) and AI Tezaur (a monetary fund) as well as three closed investment funds: AI Everest, AI Leader, and AI Properties RO. Aviva Investors Romania is also prominent on the market as leader of private investment funds accounts.
Aviva Investors Romania has shown throughout the years that it is one of the most dynamic and innovative managers in the market. The company launched the first commission-free sales fund on the Romanian market (AI Tezaur) and the first bonds fund in Romania (AI Orizont). Aviva Investors Romania is also proud to support the growing investment funds market in Romania.
* according to data recorded on 31 December 2009