ROMANIAN NATIONAL BANK:  Private pension funds run the risk of losing out, by investing in short term bonds

Ştefania Ciocîrlan

NBR analysts consider that market risk is the main threat for private pension funds, as an increase in interest rates could cause the market value of fixed interest rate securities to drop. Even though theoretically this situation is offset by the shorter maturities of bonds which significantly lower the interest rate risk, it affects their ability to manage the risk involved in placing money in bonds with longer maturities, according to the NBR"s Financial Stability Report for 2009.

The development of private pension funds will have a positive impact on the local financial markets, due to their operations on the stock market, the report says.

The experts of the NBR said that the value of assets managed by private pension funds is still low, but this could change in the future, as they have a significant growth rate and will lead to an increased importance of this sector.

The assets of privately managed pension funds currently account for 0.24% of the domestic financial system.

The report of the NBR emphasizes that last year the Private Pension Scheme Supervisory Commission temporarily lifted the maximum cap for state securities holdings, as well as the minimum threshold set by each fund"s prospectus, for investing in other types of financial instruments, thus allowing for increased flexibility in managing their portfolios.

This move also occurred amid the turbulences in the international financial markets, which caused investors to become more risk-averse, and implicitly, caused the quotations of high risk financial instruments to drop, the NBR report says.