Assets shrink in Russia's privately managed pension system

The assets and memberships of Russia’s privately managed mandatory pension system shrunk in the third quarter.

Compared with the end of the second quarter, the value of pensions savings, at market value, declined in Russian rouble terms by 1.5% to RUB1,674.8bn (€22.3bn), while the number of insured shrunk by some 1.43m to 26.7m, according to Bank of Russia (CBR), the sector’s regulator.

The shrinkage is due to CBR’s annulment, in August and September, of eight pension licences.

A further five lost their licences in November.

By law, the CBR has three months to return the balance on the clients’ accounts, with up to a further month of internal procedure at the first-pillar Pension Fund of the Russian Federation (PFR), after which affected members will be free to join another fund.

None of the banned funds was among the 32 currently signed up to the guarantee scheme operated by the Deposit Insurance Agency (DIA).

Any non-state pension fund that has not applied by the end of this year to join the scheme will be barred from managing mandatory pensions savings.

The yield-to-date ranged from 22.5% to minus 0.25%, while inflation for the period totalled 10.4%.

Vnesheconombank (VEB), the state-owned bank that manages mandatory pension assets for those workers who have not chosen a fund, returned 12.17%.

The funds’ investment profile continued to shift towards the real economy.

As of 1 October, according to the CBR, the share of investments in bank deposits and cash moved from first to second place, to 28.7%.

This was driven by the CBR’s reducing the maximum investment limit in this asset class from 80% to 60% in September and to 40% by the start of 2016, as well as falling interest rates.

The biggest share was taken by corporate bonds, which, since the start of June, increased over the following four months by 9 percentage points to 39.2%.

The sectors in whose bonds the funds invested included oil and oil pipelines, road building, nuclear, hydro and electric power, railway stock, highway construction, telecommunications, steel and retail.

The share of stock investments grew by 4.5 percentage points to 13%, and that of Russian government securities by 2.3 percentage points to 6.1%.

To encourage further long-term investment, the CBR is supporting proposals to change the valuation of these securities from a daily to a ‘hold-to-maturity’ basis.

It also intends, as of July 2016, to introduce robust risk-management into the pensions sector in 2016, a move supported by recent OECD recommendations presented to the CBR.

The requirements will be phased in over two years, culminating in mandatory portfolio stress testing. 

As a strong supporter of the funded second-pillar, the CBR did not back the moratoriums imposed on pension contributions in 2014-16.

In its first strategic document on financial market development, published at the start of December, it warned of the risk of the moratorium’s being extended to 2017 and beyond.

This, the CBR wrote, would adversely affect public trust in the pension system, resulting in a reduction in the growth of long-term investments.