Russian pensions are booming
Reform of Russia’s supplementary pension system is having a strong and positive impact, while further regulatory changes are on the cards for 2013, writes Alexander Lorenz
Russia’s local pension industry is finally experiencing a major breakthrough in terms of sales and asset management growth 10 years after the introduction of a wide ranging pension reform in 2002. Recently introduced regulatory changes will, during 2013, provide for additional major impetus. Yet the wider outlook is mixed.
In 2002, the Russian government introduced a major pension reform which entailed adding a second pillar to the existing pay-as-you-go system as well as the third voluntary pension pillar. Under the newly introduced second pillar, all individuals born in 1967 or later received the right to an individual account held at the state pension fund, which would be funded by social security payments by employers to the amount of 6% of salary. At the same time, such account holders were given the right to outsource the account to a licensed non-state pension fund or to outsource the asset management to a third-party asset manager. Those that did not opt to outsource, in Russia termed ‘molchani’ or ‘the silent ones’ would have their assets managed in a pool managed by the state-owned VEB Bank. This pool now has reached RUB1,290bn (€32bn) or 1.7% of GDP.
Over the first years of the reforms the number of those that outsourced had remained subdued due to a lack of awareness, lack of investment in marketing and a negative perception by the general public. Over the past years, however, the amount of outsourced accounts has risen significantly based on new, more aggressive, distribution strategies.
The table below shows the development of accounts held by private non-state pension funds as well as the number of accounts signed over each year, ie, employees switching to privately operated non-state pension funds.
Around 5.5m people chose to switch to non-state funds in 2012, while the total number of clients of private funds reached 21m, or 25% of insured people, so penetration is far from saturated.
Massive inflow of assets
Figure 1 shows the assets accumulated under the second and third pillar of the Russian pension system. While second pillar assets accumulated by the industry have doubled each year from 2008 to 2011, this trend is expected to repeat itself for 2013 and beyond, but already at much more substantial levels.
Figure 2 shows the results of the second pillar campaign of 2012, including the pension fund operators and the number of agreements they were able to outsource from the state pension fund.
The conclusions we can make about the table are quite striking: all traditional distribution channels seem to be able to generate significant volumes of second pillar sales – banking branches, insurance agents, mobile phone operators and even captive structures. This is quite unusual by international comparison and it is likely that in 2013 these channels will continue to be effective in penetrating their relevant client base.
The latest reforms
In December of last year the Russian government introduced federal law FZ 243 which stipulates the following:
• As of 1 January 2014, contributions made into the fully funded part of the second pillar pension accounts of entitled employees will be reduced from 6% to 2%.
• The 4% difference will be diverted to fund the insurance part of the pension system towards funding payment of pensions to the current pool of entitled pensioners.
• This reduction applies only to the so-called ‘dormant’ accounts in the state pension fund and not these individuals that have or will have transferred their second pillar account to a non-state pension fund or asset management company until 31 December 2013. For those the contribution will stay at 6%.
What will this mean in practice? Many analysts had feared that these reforms will dramatically reduce the assets that will be available for the private sector. However, the expected reduction in fees from 6% to 2% is now changing the dynamics of the market. In essence, for non-state pension funds a client signed in 2013 is in terms of future contributions be three times as valuable as a client signed after 1 January 2014. Under these circumstances, the industry will in 2013 go into overdrive to sign as many clients as possible. Most likely the commissions paid to distribution partners will rise beyond the currently charged RUB 2,500 (€75) per contract.
What happens beyond 2013 is still somewhat unpredictable. While the law stipulates that, as of 1 January 2014, contributions will fall to 2%, the government has been giving mixed signals as to whether it will follow through with these measures. President Putin even commented that some participants could also stay at 6% if they decide to switch later.
Another possible scenario could be to switch to some form of mandatory corporate pension scheme for all employers in Russia. Russians are globally among the least disciplined savers, while at the same enjoying a 13% income tax rate and very high disposable incomes, which largely goes into consumption. Russia’s vibrant new shopping malls and booming retail sales are testimony to that. Diverting some of this disposable income into a employer/employee-funded mandatory scheme might be a sensible solution to impose at least some savings discipline.
Foreign investment in pensions
Foreign strategic investment in Russian pensions remains negligible. In corporate voluntary pensions, only Allianz and Raiffeisen actively offer corporate pension plans. In mandatory pensions, only Raiffeisen has a larger pool of assets accumulated under the second pillar – around RUB 11bn (€275m) as at year-end 2012.
It seems that the international business community is intent on sleeping through an opportunity to generate very substantial assets under management in a BRIC country. As a result, foreign investors will undoubtedly have to pay top dollar should they decide to enter the market later on. From what we can see, 2013 is the most exciting year for Russian pensions yet and the market is being ‘carved up’ here and now.
Alexander Lorenz is chairman of Raiffeisen Pension Fund in Russia