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Russian regulator sets out rules for pension fund risk management

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Bank of Russia (CBR), the country’s pension fund regulator, has published a draft ordinance detailing the risk analysis and stress testing it wants non-state pension funds (NPFs) to perform.

According to the document, each fund will be expected to establish a management system capturing market, credit, operational and liquidity risks.

The systems must ensure the funds’ investments solely serve the interests of current and future pensioners.

This process includes regular reviews of target asset structures that reflect the optimal risk/reward ratio, assessments of the asset management companies used by the funds, and best execution of transactions.


The NPFs will be expected to measure and assess the separate risks at least once a month and perform quarterly stress tests, as well as extraordinary stress tests in the case of significant changes in either asset structure or market-driven risk levels.

The stress testing scenarios of market risks have to cover a period of at least three years from the start of the test, and include adverse changes such as rises in interest rates, unemployment or inflation, and decreases in stock prices, the rouble, the price of oil and the credit rating (or default) of issuers of securities held by the funds.

The risk managers themselves will have to have had a minimum four years’ experience of risk management or investment-strategy development in a financial market industry such as pensions, insurance, banking or securities.

To avoid conflicts of interest, the managers should not be involved in trading transactions of either pensions savings or reserves (the assets used for financing the NPFs’ retired customers).

Furthermore, they should not be part of any remuneration scheme run by an NPF that would encourage them to take risks.

According to the document’s time-table, following approval of the ordinance, the NPFs will have to set up a risk-identification system within six months and a risk-management system within 12 months, with the first stress test performed within 18 months.

The CBR envisages that successful compliance by the NPFs would enable them to broaden their investment horizons.

“As NPFs start assessing risks from investing and prove their competence in this area,” it said, “the regulator is likely to ease the requirements for admissible assets.”

In the absence of significant international financing following the Ukraine crisis, alongside substantial capital outflows, the NPFs are being increasingly viewed as a source of investment funding for the national economy.

In February, president Vladimir Putin noted that the NPFs could participate in the privatisations planned this year to offset a budget deficit induced by collapsing low oil prices.

Meanwhile, the Ministry of Economic Development is working on a proposal to allow the NPFs to invest a small share of their assets into venture capital and private equity funds, although this may be deemed a risk too far for the central bank and the funds themselves.

Separately, the CBR is working on its proposals for further reforms of the pension system.

Specifically, according to Russian press reports, CBR governor Elvira Nabiullina wants the NPFs – rather than the state-owned Vnesheconombank, as is now the case – to become the default option for those workers undecided where to channel their second-pillar contributions.

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