The determinants of the decision to change the private pension funds. The Romanian case

What is it about?

Currently, in the post-communist Central and East European Countries, an intricate debate regarding the survival of their multi-pillar pension systems is needed. The authorities in the field search for solutions to protect individuals after retirement. Using a self-designed questionnaire and a related national survey conducted in 2010 for the Romanian major urban population, assigned to mandatory private pension funds, we analyse the socio-economic and demographic determinants for the decision to transfer from one fund to another. We find the reputation of the pension fund and the age of the respondents as determinants for the decision to switch the private pension fund in our binary logit model. Younger persons are more susceptible to switch the private pension funds.

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Photo by Caroline Hernandez on Unsplash

Photo by Caroline Hernandez on Unsplash

Why is it important?

This study fills the gap in terms of research regarding the determinants of the person’s choice of switching the mandatory private pension fund. No research was made for CEE post-communist countries. Some of our conclusions can be generalized for other post-communist countries, with similar multi-pillar pension systems. National authorities, practitioners, and academics may be interested in measuring the impact of socio-economic and demographic determinants over the decision to switch a private pension fund in Romania. The liquidity and the returns of the private pension funds can be affected by a significant number of transfers through the corresponding administrative costs. For clients, a significant number of transfers from a private pension fund can be a sign for the potential financial and/or reputational issues. Also, their administrative costs can raise and, finally, the level of the private pension provided at the end of the active life of their clients would be lower, caused by their higher costs. If the financial arguments for switching private pension fund and the socio-demographic profile of the individuals interested to switch are known, it can be easier to find the right measures to boost this industry. Only the private fund’s reputation seems to determine the decision to switch, and not the fund’s performance. This result can hide a decision based less on financial arguments and more on the public image of the private fund on the market. If the insured people are well informed as regards the utility of the private pensions, the most important principles of operation in this financial sector, about their rights and the associated costs, this industry can be developed at its entire capacity. Our study can contribute to the developing of this market. The supervisory authorities can use our research findings in their education campaigns, by providing additional details regarding the insured people’s perception about private pension market.

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