Graham Stack for Russia Profile
Russia’s private pension funds have got off to a quick start after the pension reform conceived in 2002 first created accumulative pension savings accounts parallel to pay-as-you-earn.
From 2005 to 2007, the amount of accumulated pension savings – grew from 183,9 trillion rubles to 401.8 trillion. Of this, the share held by non-state private pension funds increased from 1.1% in 2005 to 10.6% in by the first quarter of 2008, according to Expert RA.
But, analysts point out, this impressive growth from nil was mostly due to pensions funds’ corporate links giving them captive customers. Now they must make the difficult switch to retail to tap the broader market. A new government measure is intended to help, but might instead hinder.
According to Irina Rudykh of rating agency Expert RA, who held a round table on private pension funds July 15th that gathered decision makers from government and private sector, “private pension funds’ main resource to date has been their corporative backing.” All of the top 6 PPFs according to pension reserves are linked to industrial holdings.
“The dynamic growth of pension reserves held by private pension funds – by 63% in 2005 and 46% in 2006 – was based on the activities of corporate funds,” says Rudykh. “Most large Russian holdings quickly created ‘pocket’ pension funds which grew quickly, because they had ‘captive’ clients – company workforces – and grew from nothing. So the first stage of growth was easy. There were hardly any infrastructural costs or marketing costs.”
Corporate funds can count on stable and guaranteed demand from workforce numbering hundreds of thousands in the case of natural monopolies.
But this demand is restricted exactly to these hundreds of thousands, and as the captive market is now largely captured, this growth model has reached its limits.
As a result, according to Alfa Bank analyst Olga Naydenova, 2007 saw a slow down in the development of Russian PPFs, with pension reserves held by PPFs growing by only 16.7%, the lowest growth rate since the reform was launched. The majority of analysts ascribe this slowdown to the limits of the corporate PPF model.
Getting blood out of a stone
According to Rudykh, for these funds to keep growing, they must switch to retail on the open market.
However, as easy as the initial phase was thanks to corporate captive markets, as difficult the switch to retail is likely to be.
“This is a huge market, a whole order larger than the corporate market,” says Rudyk. “But there exists here a striking paradox that must be overcome: despite the extremely low level of pension security, there is still practically no demand at all in Russia for the services of PPFs on the part of private individuals.”
For a whole host of reasons, Russians are extremely passive in respect to pensions saving.
According to Oksana Sinyavskaya of Russia’s leading Centre of Social Policy think-tank, there are a number of deep-rooted issues that make tapping the non-corporate retail market like getting blood out of a stone.
“I think that the main problem is in the lack of knowledge and lack of trust. Russian people do not know much about the pension reform, and there were no information campaigns about it, as there were for instance in Poland or Sweden). Most Russians do not know about private pension funds, and how to choose a private pension fund or a private managing company. And they do not trust either the state or private firms. However they trust private pension funds even less than the public pension fund.”
Secondly, according to Sinyavskaya, is the problem of low income: “Although incomes of Russian population are growing they are distributed unevenly, and they were too low over a long period of time. So, now people prefer to consume than to save. And most of them do not have enough money to save. And when they have it, they prefer to invest in more liquid instruments with guaranteed interest, like deposits, or buy housing.”
A further brake is is that the actual amounts accumulating are still small. “This is still virtual money that people do not feel, do not consider real,” says Rudykh.
Under the terms of the Russian pension reform, where contribution payers fail to specify a private pension fund or asset management company, the money is assigned by default to VneshEconomBank (VEB), a state-owned development bank.
Currently, according to Renaissance Capital analyst Katya Malofeeva, 95% of Russians are failing to specify a private pension fund – so their pensions land with VEB.
The irony, however, in 2007, according to Malofeeva, was that VEB actually achieved a higher return on its assets than the private pension fund average. So pension funds are not doing well enough for the average Russian to care whether the money stays with the state or not.
“Private pension funds do not demonstrate high yields and are themselves not too active in promoting their services,” says Sinyavskaya.
“There are three reasons for this. The first is strict regulation of instruments available for pension investments. The second is a high volatility of Russian financial markets, caused by its mostly speculative character. And the third is, to my view, inadequate qualification of managers in managing companies. But this we cannot prove.”
Reforming the reform?
As rapid as the growth of private pension funds has been, starting from nil, they are still only a drop in the ocean in terms of what is needed to shore up Russia’s shaky pension system.
Some analysts call Putin’s pension reform a failure, and demand a fresh start.
Others say that, while the coming pension crisis has not been banished, the time lapsed for judging the success of private pension funds is too small, especially given the novelty of many of the concepts for Russians used to a cradle-to-grave welfare state. According to Rudykh, “what is needed now is not a new reform, since the original reform was only decided on after a real struggle, but a reform of the reform.”
In autumn 2007, the issue of how to improve on the pension reform was addressed by a new minister of social development, Tatyana Golikova, who replaced the unpopular Mikhail Zubarov. Successive presidents and prime ministers, most of them called Vladimir Putin, called for new measures to strengthen PPFs.
As a result, one of Putin’s last measures as president was to sign into law the ‘Co-financing Act,’ popularly referred to as the ‘thousand for thousand’ programme. The act provides incentives for individuals to pay into pension savings accounts, committing the state to add a thousand rubles for every thousand rubles of voluntary contributions, up to a total of 12,000 rubles per year.
“This will make a difference in stimulating interest in voluntary pensions savings in PPFs,” says Expert’s Rudykh. “While Russians don’t like to save, they are attracted by the idea of getting something for free.”
Alfa Bank’s Naydennova, however, criticises the government for failing to launch a large advertising campaign to acquaint Russians with details of the new initiative, which will become effective in October 2008.
A more fundamental objection to the new law comes from those PPFs which have no corporate ties and thus are already working actively in retail.
According to Renaissance Capital’s Malofeeva, the law “On Cofinancing” was passed after three months of lobbying from big business resulted in a supplementary provision: allowing employers to add another 1000 rubles to the original 1000 rubles of voluntary savings. These 1000 rubles ‘donated’ by the employer are then tax exempt.
Malofeeva argues that this means that the law will directly benefit the ‘pocket’ pension funds of large corporations and disadvantage retail-oriented PPFs.
Critics allege that a corporation with a ‘pocket’ pension fund, for the price of 1000 tax-exempt rubles, will see 3000 rubles returned to its pension fund, to be managed by its own assets management company.
Malofeev says that this clause, in combination with the existing backbone of ‘pocket’ pension funds, could badly distort the new law. Instead of stimulating the development of PPFs, by privileging captive corporate pension funds with no presence in retail, it could instead damage the development of PPFs.
The new law, according to its critics, will create a doubly privileged group of pensioners: employees of large, often state-owned corporations such as Gazprom: being both better paid, they are more likely to afford the voluntary contribution and thus qualify for parity state co-financing, while their employees will add a further 1000 tax-free rubles for tax minimization, and see major assets flow into the company pension fund.
There are however also voices supporting precisely this corporation-based development, arguing that corporate pension funds such as Lukoil Garant, Norilsk Nickel’s fund, and Basel’s Sotsium, with household-name industrial concerns behind them that will presumably be around in fifty years time, are more suited to win the trust of the population. They also point to formerly “pocket” banks such as Gazprom Bank that have mutated into national players on the banking market in their own right.
So it seems creating a save-as-you-earn pension system has now been declared another field of mutually-rewarding partnership between the government and Russian big business.
