Sections

Central & Eastern Europe: A temporary pensions raid

Managers of Russia’s non-state pension funds are openly critical of the government’s current reform track, according to Krystyna Krzyzak

Russia’s mandatory second pillar is set to fall victim to a temporary pensions raid as the government looks for ways to cover its deficit.

Under the old system, in place since 2002, workers born in or after 1967 had to transfer 6% of their 22% pensions contribution to the funded system. These assets have been managed by either state-owned Vnesheconombank (VEB) or non-state pension funds (NSPFs), or have remained in the first pillar Pension Fund of Russia but managed by private asset managers. Some 20m members have their assets managed by NSPFs. VEB, which has to operate a highly conservative investment policy, is also the default option for the molchani – ‘silent ones’ – who failed to choose an NSPF or asset manager themselves.

Under the new proposed law, contributions accumulated in the second half of 2013 and those due in 2014 will now be directed to the State Pension Fund of Russia to fund existing first pillar pay-as-you-go pensions. Earlier there had been talk of directing the contributions to VEB. “This is the worst probable outcome, and a violation of my constitutional rights,” says Anton Rakhmanov, CEO at Sberbank Asset Management, adding that the two-year contribution freeze would have only covered 40% of the deficit, and that the government had the resources to plug the gap without touching the privately run system.

The new law also marks an about-turn from President Vladimir Putin’s earlier promises to channel pensions savings into long-term investments. To-date the funds have invested more than 70% of their assets into corporate bonds and bank deposits.

Rakhmanov is scathing about the government’s handling of the reforms. “The funds won’t be investing in the local economy, while the people don’t understand how the savings component works for them and what they will receive when they retire. It says that the government is not pragmatic or straightforward in promoting any reforms.”

According to Alexander Lorenz, chairman of the board at Raiffeisen Pension Fund in Moscow, 2013’s frozen contributions are estimated at RUB250bn (€5.5bn). “The core earnings of NSPFs are the mandatory portfolios, where up to 15% of investment income can be taken off by the fund, while conservatively, the average 2013 investment yield for second-pillar accounts can be 7-8%, so the funds will end up losing RUB1.5bn in fee income, he explains. “The freeze will not impact investment strategies dramatically, but for some players margins will wear a bit thin.”

“Under these circumstances I suppose fund assets can only increase through pension reserves generated by the NSPFs,” adds Galina Morozova, head of Sberbank’s NSPF. “Naturally, investment contributions in the coming years will grow more slowly than in the previous years, and private pension fund profitability will decrease.”

The 2013 contribution freeze is particularly galling for the NSPFs as they built up their client base ahead of the year end deadline when the ‘silent ones’ who had not chosen private management would have had their contributions cut from 6% to 2%. These contributions will now be cut to 0%, but the deadline has been extended to 2015.

“The new round of pension reforms spurred client interest in managing pension savings,” says Morozova. “The number of clients who signed up for Sberbank’s NSPF in 2013 surpassed the number of new clients for the previous year. For 2013, according to estimates, we will attract more than 1m clients, and we expect this rate of growth to continue into 2014, if there are no changes to legislation.”

According to recent government statements the monies will be returned in 2015, indexed in some way to inflation, but only when the NSPFs convert from their current status as non-profit making operations, receive approval from the Bank of Russia and sign up to a new pensions insurance scheme. Voluntary pension funds will likewise have to convert. “The current status makes it very difficult for a fund to change hands and next to impossible to raise investments. Own investment and earning opportunities are limited, too, as a function of that,” comments Lorenz.

“This is probably the only minor positive outcome – that there will be more regulation, clarity and transparency inside the NSPFs,” says Rakhmanov.

“Certainly, joint-stock ownership will make non-state pension funds operations more transparent. Moreover, this transformation will make them more attractive to investors and strengthen the non-state pension fund market,” adds Morozova. “However, not all the funds will be able to comply with the increased compliance requirements imposed on non-state pension funds, which will lead to a reduction in numbers. Only the largest and most sophisticated NSPFs will remain and continue working with compulsory pension insurance. If we are talking about Sberbank’s NSPF, then I suppose the given procedure should not cause too much difficulty.”

Some of the smaller funds have caused problems for the system. In the case of the recent bankruptcy of six funds, some RUB470m of savings belonging to 19,000 members have disappeared.

Lorenz agrees that the losses from the closed funds could have been prevented by stricter oversight, and oversight could have been more efficient under a different corporate or ownership structure, such as a joint-stock corporation. But he believes these were ultimately down to regulatory failures. “These cases were widely publicised as proof that the new round of pension reform is well-timed and long-called-for,” he told IPE. “If we take this spin off them, we can see them in their true light as instances of enforcement failure rather than inherent flaws in the system.” Morozova adds that stock-joint incorporation has not prevented bankruptcy among either insurance companies, which were joint-stock companies from their inception, or banks.

Other changes have been better received. Members would only be allowed to change their fund once every five years and not every year as is the case now, which would provide fund managers with greater certainty over their portfolios. The pensions insurance scheme, along the lines of the bank deposit programme, is also generally welcomed. “We support the creation of a system that guarantees the safety of pension savings. This will strengthen the market and increase confidence in private pension funds,” says Morozova.

Lorenz remains unconvinced.  “On the one hand, it is better to be safe than sorry and no extra guarantee is too much when we speak of life-time savings,” he notes.  “On the other, the current regulations for pension funds are strict enough – too strict, to be honest – and have several levels of protection against negligence and fraud. If there is a need for extra protection, this can only mean the current ones are not enforced well enough.”

 

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • DS-2486

    Closing date: 2018-11-16.

  • DS-2487

    Closing date: 2018-11-22.

  • QN-2489

    Asset class: Alternatives.
    Asset region: Global.
    Size: $100m.
    Closing date: 2018-11-30.

  • QN-2491

    Asset class: Alternatives.
    Asset region: Global.
    Size: $20m.
    Closing date: 2018-11-30.

Begin Your Search Here