With social security contributions of 38.5% of wages and salaries (of which 28 percentage points relate to State pensions), the non-wage costs of Russian labour are substantial. Partly because of this and consistent with quite widespread non-compliance with fiscal regulations, there has been considerable evasion of the corporate responsibility to pay social security taxes. Frequently, this has taken the form of declared wages being at the minimum level, supplementary cash payments being made to workers. Social taxes are only then paid on the minimum wage for the worker. Given the structure of the security benefit, this enables final pay to be increased shortly before retirement so that pensions will be more realistic while contribution have been minimised!
In the absence of any law on Non-State Pension Funds (NPFs), the Ministry of Finance is reluctant to arrange for a change in the tax code to give fiscal encouragement to the development of NPFs. In spite of the absence of fiscal privilege, however, large pension funds, created by major employers, have grown to a substantial size. This reflects partly the attitude of these companies in continuing to assume a responsibility for staff, their families and the general welfare of employees before and after retirement. Indeed, a worthwhile pension fund can be utilised to ease the termination of employment of workers - something which has become a necessity as companies respond to the rigours of a competitive market.
Whereas the total market value of mutual funds at the moment is less than $50m, the book value of NPFs exceeds $1bn and the real value of these pension fund assets is likely to be in excess of $5bn.
As NPFs develop, the capital markets of Russia are also developing, although they are still small. It has been interesting to see the change in portfolio structure applicable to NPFs. The Russian broker RINACO Plus has undertaken an analysis of funds. Table 1 shows the changes during the last two years.
In spite of this progress, the popular understanding of NPFs is low. Most workers in Russia still prefer cash pay to any future benefits.
In a survey of employees in manufacturing, trade and commerce, the most common benefits provided were as listed in Table 2
As illustrated, employee benefits most commonly take the form of benefits-in-kind or the provision of practical services, rather than benefits expressed in financial terms or deferred compensation. Sophisticated employee benefits, which use the services of financial institutions, are still in their infancy. Partly because of this, multi-national employers with expatriate employees in Russia have not taken the lead in creating a sophisticated financial benefits mechanism for expatriate staff. Given the fact that the tax code is under review, the social security base is under review and that non-State financial institutions such as investment managers and insurance companies are still in a formative phase, there are too many uncertainties and risks to which multi-national employers would not yet wish to expose their expatriate staff or their families. Nonetheless, the NPFs movement is developing. Occupational pension funds are growing strongly although institutions for personal pensions, involving the accumulation of individual long-term savings, are very fragile.
Multi-national employers must, for the immediate future, focus their expenditure on those benefits which will be perceived as being of more immediate value to employees than long-term deferred pay concepts.
David Callund is head of Callund Consulting in the UK and recently chaired a Euroforum Conference in Moscow on pension and benefits topics