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Russian funds fall victim to crisis

The fallout from Russia's economic crisis has paralysed the country's pensions system, with state provision momentarily collapsing and Russian supplementary and private schemes reporting catastrophic investment and capital losses.

Evgeniy Yakushev, vice president at Moscow-based Rinaco Asset Management, believes the current economic catastrophe is hitting the country's non-state pension funds particularly hard.

With government legislation stipulating that fund investment include a minimum of 30% in the GKO Russian state bonds, and many schemes significantly more committed than this, the non-state pension funds are now declaring themselves unable to pay liabilities with worthless bonds. Only larger corporate funds such as Lukoil are still able to fund benefits by bankrolling them with company money," he says.

Funds with large equity holdings, Yakushev adds, have suffered a similar fate as the stock market collapses, leaving them with no market value on their shares. "It is very bad news all round for funds and pensioners, made all the worse by the government not understanding the implications for insurance companies and pension funds of the default on the currency and Russian investments. As a result there has been top level meetings between funds and Alexander Sysuev, the government official for social security to discuss how to rescue the pension fund industry," he explains.

The state PAYG pension fund is currently running a debt causing a two month delay in benefit payments, and Yakushev says the proposed plan is to increase benefit levels through higher wages, once this defecit is cleared.

"At the moment, the suggestion to raise salaries and prompt higher pensions contributions, as in 1991, is the only solution being offered to combat soaring inflation which has seen prices rise by 15% in August alone and re-duced the value of state benefits to a third of its former level," he says.

However, his major concern is that the government appears to have forgotten the 200,000 Russians currently suffering a default on their supplementary pension plans, alongside an equally concerned 2.5m members of non-state funds. Reforms are urgently needed, he says, particularly for the long term safety of a pensions system faced by burgeoning numbers of retirees at the start of the new millenium, as the post war baby boom kicks in.

"In my view, we must start looking at a funded occupational system and the need for an investment industry now for pension funds and institutional investors, if the Russian system is to survive and develop in the future," he says.

Igor Gorunov, executive director of the non-state fund of Moscow-based Mos Business bank says the situation is improving though, following the election of new prime minister Yevgeny Primakov.

"At the moment there is increasing hope of government action, because the Russian ministry of finance has said it will address the issue of the GKO state bonds, in which funds were obliged to invest," he says.

Gorunov says things are bad but not disasterous for the Mos fund, despite its 55% former holdings of GKO's and 25% inRusian securities.

"Like most non-state pension funds, the fact we are still young means the contributions wiped out were relatively small, and we can still keep our pensions payments up with the fund's assets. Long term though, we need to start receiving the same treatment as private funds, where pension assets are treated as personal savings and protected by government, or there will be real problems," he explains.

Gorunov expects new legislation on this issue within the next month.

David Callund of Callund Consulting agrees that the major concern in the non-state funds has been one of liquidity, given the moratorium on government debt and redemption, rather than any prolonged problems of liability payments.

"Most funds should be able to ride out this crisis as their assets are part of regional government debt, and not held to the same repayment shackles as central government debt," he points out.

Open funds are under stress because people have stopped their payments, he says, but occupational schemes should not yet be suffering any liquidity concerns because their pensions payments only amount to about 1% of assets per month on a terminal funding basis. Hugh Wheelan"

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    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
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    Closing date: 2019-06-28.

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