Constantin TANASE

> Life insurance companies have been selling insurance products with a substantial saving component for several years now. In the absence of a private pension system, these products were often bought as a form of creating an additional income for the retirement years. Naturally, insurers did not miss on the opportunity to underline this role played by their products, by naming them as suggestive as possible so as to point out their actual role of a pension. Thus, when the private pension system started, the Romanian market already had a “parallel offer”, more often than not accepted by the general public as a quasi-Pillar III. So, private pensions or private-pension type life insurance? The terminological confusion between the two products led to a new controversy.

Between “AND” & “OR”

A first dilemma would concern the competent decision-making authority, as well as the law that regulates the issue of life insurers using the name of private pensions for life annuity type of products. If we discuss the law on facultative pensions, then its provisions only apply to the activities of private pensions administrators, not to the one conducted by insurance companies. There might be still the issue of life insurance companies that offer such products and are also authorized to administer facultative private pension funds. If we discuss the insurance law, then the private pension supervisory authority has no competence in this sector, therefore no competence to propose amendments to the legislation on the activity of the relevant companies.

Besides all these, the statement saying that the use of the term pensions in the name of life insurance products is considered abusive, leaves room for counter-arguments worth considering. Here are some of the reasons.

Firstly, because life insurance and facultative pensions relate conceptually to the same type of investments: they are collective systems for long-term saving. Both products have the same objective - to offer the participants, at retirement age, an extra income, in addition to the state pension. Not least, the mechanisms of the two systems - unit - linked in insurance and defined contribution in pensions - are mainly the same: individual accounts, investment funds, minimum guarantees offered by the administrator/insurer. So why facultative pensions are entitled to this name and life annuity products are not? It’s hard to give a clear-cut answer. Terminologically speaking, a pension implies turning an amount into annuities. Do private pension administrators offer such a service at the moment? The question is obviously a rhetorical one, as long as the law on annuities is to be drafted several years from now. It’s difficult to tell now how many administrators will decide to offer annuities to their customers. Until this law was issued, the so-called pension funds administrators as they exist today are only collective investment bodies. In contrast, insurance companies offer their customers, at policy maturity, the possibility to transform the accumulated amount in life annuities. This is why the name of these products as pension products is fully justified.

Secondly, the confusion of terms dates back to the time when the law on facultative pensions was only at a draft stage, discussed by the Ministry of Labor with the players on the insurance market. Back then, the insurers proposed the inclusion of life annuity type products in the category of facultative pensions and the creation of a wider Pillar III that would also comprise several types of personal investments. If the formula were accepted by the law-makers, as it happened in other countries, the issue of abusive use on the term pensions would not exist today. Instead, we would have a more modern and comprehensive private pension system, based on three pillars.

Given this situation, banning the use of the term pensions in insurance products is rather a matter of form, not of substance. These products represent now over 30% of the total underwritten premiums in life insurance. The number of policies is also significant. More than 200,000 Romanians have a private pension insurance. When an official from a financial supervisory institution sends a message saying you bought products that are called pensions, but they are entirely something else, to the customers of insurance companies, such a message could create more confusion than the name itself. Moreover, such an approach is rejected by the future pension administrators, many of them being insurance companies. To an insurer, both businesses are equally important, as they are the result of considerable capital investments on which they expect a return.

Will there be a migration of the customers from insurers to pension administrators? For some of them, yes, but for the majority, no. For holders of life annuity insurance with a contribution period of more than 10 years, facultative pensions could not represent an investment alternative, the policy being closer to the maturity then to the beginning of the contribution period. For those with a contribution period of less than 5 years, because of high penalties, a significant part of their accumulated funds will be lost if they terminate the insurance policy to start a facultative private pension. In addition, the needs for protection are different for each individual. Persons willing to get a higher pension without including a personal protection component during the contribution period will opt for the facultative pensions pillar. But in case personal security and the security of their families is a major priority for a payer, the option of insurance policies with life annuity is the correct one.

The customers’ income level will also make the difference between the success of one product or another. The introduction of private pensions is expected to bring a clearer distribution of customers’ preferences. The segment of high-income customers will continue to opt for unit - linked products. The introduction of facultative pensions will also give individuals with lower income the possibility to provide for a decent income at retirement age. Therefore, the two products are complementary, not substitutive.

Every one of them covers, to a larger or smaller extent, the gap generated by the other one in the customers’ preferences. The contribution to the facultative pensions, for instance, is limited to a percentage from the gross income (15%), while for a life annuity insurance policy, there are no such restrictions. However, on the other hand, private pensions provide a deductibility of EUR 200 per year, a facility that is not currently applicable to life insurance. There are also differences in terms of commissions and fees for surrender, which are much higher for life insurance than for pensions. In addition, while the migration from one pension fund to another, that indicates better performances, is allowed, with very few restrictions, this is not possible in the case of life insurance. Nevertheless, unit-linked products are, from various points of view, more flexible and adapted to the customer’s needs. They allow the customer to participate, together with the company, at the assets investment policy for various investment funds and also offer a protection component, next to the investment one.

Just a few words on how the coexistence of the two long-term saving products is regarded on other markets. In all OECD statistics, the assets of the facultative pension funds are considered together with the ones of life insurance with an annuity component. In the dictionary of terms specific to private pensions, the same international organization defines the term annuity as being a form of financial contract sold mainly by life insurance companies, that guarantees a fixed or variable payment of a monthly, quarterly, bi-annually or annually, during the person’s lifetime or for a certain pre-defined period and mentions as a synonym of this notion the term retirement annuities.

As for its applicability in Central and Eastern European countries, there are some quite telling examples, we believe. In Poland, an employer has the option to set up an occupational pension fund for the employees or to offer them group life insurance, investment funds or contributions to other pension funds from Pillar III. In Slovenia, the number of pension plans on the market is calculated by taking into consideration all companies that provide such services, be it insurance companies or pension societies. Last but not least, in Estonia, there are two types of Pillar III pensions: life insurance policies offered by insurance companies (traditional or unit - linked), or investment funds for private pensions. So, basically, there are quite many cases where the similarity between the two products not only is beyond any questions, but it is used to provide more choices for the interested public.