Russia gets taste of market
Non-state (private) pension funds (NSPFs) consider September 1992 the birth date of the pension industry in Russia. At that time President Yeltsin signed a decree making it possible to set up the first funds.
In legal terms they had to be socially oriented not-for-profit organisations. Then such a status was helpful, but 10 years later it became clear that NSPFs were first and foremost financial institutions. As a result of this new understanding, during the government reform of 2004 the jurisdiction over NSPFs was moved from the ministry of labour and social development to the Federal Service for Financial Markets.
The Russian pension reform of 2001 gave another - and more powerful - impulse to the development of NSPFs. 1 January 2002 marked the beginning of a mandatory funded pension pillar, which was made accessible for NSPFs in the summer of 2004. The potential of this new market (today the size of the funded pillar is approaching $10bn (€7.9bn), and is forecasted to reach $30bn by 2012) provoked stronger interest among financial companies, particularly, banks and insurers that started entering this market through buying existing or creating new NSPFs.
The share of pension funds belonging to banks and insurers rose to 6% and 4% respectively of the total number of nearly 300. 90% of all existing NSPFs still belong to individual corporations or industrial/territorial manufacturing holdings. Thus, only very few NSPFs can be called truly independent players in the open market.
Foreigners are already present in the Russian pension industry. Today, there are six NSPFs with foreign participation, and it would be fair to say that all of them are open market players. Two of them belong to banks (Austrian Raiffeisen Bank Austria and Dutch ING), one belongs to a financial holding (Dutch-Israeli TBIH), three belong to insurance companies (Norwegian Oslo Marine Group, French AG2R, and German Allianz). Different market entry strategies were used.
In two cases (Oslo Marine and ING) it was green field investment. In two other cases it was partnership with local players (AG2R partnered with The Russian Funds Group, Allianz partnered with The Sistema Group’s ROSNO insurance company).
In the remaining two cases existing NSPFs were acquired. TBIH bought a small regional fund called Victoria. Raiffeisen Bank bought NSPF Dobroye Delo (literally ‘good deed’) – at that time the largest retail fund. That fund originally belonged to the financial group of Alexander Smolensky and later was acquired along with The OVK Group by The Interros Holding.
However, since Interros had already had its own NSPF Interros-Dostoinstvo, Dobroye Delo was put up for sale.
In order to participate in the funded pension pillar an NSPF had to register special rules (a document similar to a fund’s charter) and to file a petition with the Federal Service for Financial Markets. There are exactly 100 funds that have done this; one of them, however, later recalled its petition.
Now, unfortunately, it is clear that NSPFs’ high hopes regarding the new pension system have not yet materialised.
After a very promising and dynamic start, the pension reform continued according to a more conservative scenario. For example, a decision was made to exclude everyone born before 1967 from the funded pillar.
As a result, an extremely low number of citizens switched (transferred their pension savings) from the State Asset Management Company, ie, Vnesheconombank, into NSPFs in 2004 – only 257,00. At that moment many parent companies (particularly banks) decided to freeze their pension lines of business due to low profitability.
Now, quite unexpectedly, corporate NSPFs became interested in the general pension market while previously they served only their own corporate parents. The expansion of corporate NSPFs into open regional markets was assisted by regional governments through their endorsement of so-called territorial pension funds.
During the past two years these corporate NSPFs have accumulated real (although very limited) experience of attracting non-corporate mandatory pension savings, which could be converted into a useful investment resource. To capitalise on this experience such corporate funds as Lukoil-Garant (Lukoil Oil Company), Blagosostoyaniye (literally ‘wellbeing’, Russian Rail Ways) and NSPF Electroenergetiki (RAO UES) started to expand beyond their corporate sphere of influence.
The 2005 result of attracting new mandatory funded pillar accounts to NSPFs set a remarkable record – the number more than doubled vis à vis 2004. In total more than 730,000 new accounts were drawn away from the State Asset Management Company across Russia; 600,000 of these were transferred to NSPFs.
Of course, with the total number of citizens in the funded pillar system at 54.6m, 700,000 is quite low, although still a victory. This growth was caused mainly by the fact that corporations actively ‘encouraged’ their employees to use corporate NSPFs for personal mandatory second pillar savings.
So far, the voluntary component of the pension system has also been dominated by corporate and territorial programmes. It remains very hard, however, to convince the population to make personal retirement plans in addition to those provided and guaranteed by the state. Russians at large are still afraid to entrust their savings to private entities and, besides, people are poorly informed about the particulars of the pension reform.
As a stimulus some corporate funds offer so-called ‘parity’ schemes, when an employee who agrees to enroll in a corporate pension plan receives an additional (percentage matching) contribution from the employer. More companies are beginning to offer internal corporate pension plans using open market NSPFs.
Retail customers are also appearing, but this is a very weak trend. Part of the problem is in the lack of marketing and advertising on behalf of the NSPFs – no new and original pension products are being developed and promoted in the marketplace. Only direct sales and a small set of standard pension products are used by all NSPFs across the board. One positive development is the formation of sales networks in the regions.
Recently, the NSPFs’ business results for 2005 were tallied. As in previous years, more than half of all NSPF reserves from voluntary (non-state) pension plans are concentrated in the hands of Gazfond, which serves the pension needs of Gazprom.
Last year, according to the Federal Service for Financial Markets, the number of voluntary pension accounts in NSPFs grew 10% and reached 6m persons. Total voluntary pension reserves of Russian NSPFs grew 63% in 2005 and reached roughly RUB277.4bn (€8.146m) as of 1 January, 2006. In 2003, the increase was RUB51.1bn, in 2004 - RUB78.2bn, and in 2005 - RUB107.6bn.
About 85% of all voluntary reserves - nearly RUB240bn - are concentrated in 10 largest NSPFs (see table). In recent years, Khanty-Mansiysky NSPF showed the fastest growth rate and became one of the top three funds. In its region on the municipal level it started investing voluntary pension reserves in housing construction on the one hand and in mortgage lending on the other with much success.
Today, market funds (independent funds operating in the open market) are far below the statistics of the corporate leaders, but even here there are some noticeable results. In the Ural region, for example, independent private NSPF Strategy from the city of Perm has been very active, it launched an aggressive marketing programme and began to invest, among other assets, in housing construction, which is perceived favourably by potential clients.
Other active independent NSPFs include Pension Kapital (belongs to financial group IFD Kapital), First National Pension Fund (the Investment Group Russian Funds together with a French insurance group), ING and Raiffeisen.
In conclusion it is important to mention that the development trend of the Russian pension industry changed several times in recent years. The spike of activity in 2003 was followed by a major slowdown in 2004 and by stagnation and eventual return to a positive vector in 2005.
Today, a few perspectives of the pension market growth can be identified. For a long time preparatory work has been conducted to introduce mandatory occupational pensions for employees in industries with difficult or hazardous labour conditions (about 6m people). Considering that 100% of these contributions will go through NSPFs, the growth potential for the industry here is $1-1.5bn a year.
There is a huge untapped potential in the retail voluntary pension market. The entire working population of Russia - about 40m people whose financial wellbeing has improved considerably in recent years - can be viewed as future clients. This market segment is stagnating for several reasons.
Firstly, the primary demand for voluntary pension plans/insurance (that are complementary to the state pension system) has not been formed yet. Secondly, there are no appropriate tax incentives. Thirdly, there is a definite lack of pension products with necessary features as well as the lack of effective sales channels.
Corporate pension programmes have a great potential to expand into large non-raw material enterprises and companies of the ‘new wave’, which were created in the post-Soviet period and operate primarily in new business segments, eg, trade and technology. These include local companies with foreign capital and numerous medium size businesses.
The mandatory (state) second pillar pension system is expected to grow at the average rate of $2-3bn a year during the next seven years. FundsHub estimates that by the end of 2006 the private sector will manage to attract about 5% of all accounts in the mandatory second pillar – today this process is the fastest among employees of large corporations. This segment will expand through the growth of accumulated contributions from existing accounts and through the increase in the number of new accounts drawn out of the State Asset Management Company.
In terms of technology a new growth impulse is expected from new sales mechanisms such as scratch cards and the internet, from better access to account information through ATMs, the internet and mobile phones, and from better disbursement mechanisms such as ATMs.
Today, the Russian market for pension services can be characterised as potentially very large with extremely low current levels of supply and demand. Independent open market players are an overwhelming minority.
There is only a handful of foreign players. New foreigners that contemplate setting up NSPFs are Latvian bank Parex and American insurer AIG.
The most recent events include the transfer of NSPF Interros-Dostoinstvo from Interros holding to its partner corporation Norilsk Nickel (Interros announced pension industry to be outside its core business expertise). There are clear signs of renewed demand for NSPFs; among those interested to acquire or build an NSPF are financial institutions or corporations, which do not yet have their own pension funds. The real competition in this market is just beginning.
Alexander Kupriyanov and Vadim Loginov are with FundsHub.ru
Who is who among Russian NSPFs
By ownership and by type of clients existing Russian NSPFs can be divided into several clusters.
The first cluster can be called ‘industry’ funds. An industry fund is usually established by the largest corporation in a particular industry.
The names of NSPF Gazfond (literally ‘fund of gas’) and NSPF Electoenergetiki (literally ‘fund of electric energy industry’) are self-explanatory. The former is affiliated with Gazprom corporation, and the latter – with RAO Unified Energy System of Russia.
NSPF Blagosostoyaniye was established by another huge corporation Russian Railways. Corporation ALROSA (Diamonds of Russia) is behind Yakut region’s fund Almaznaya Osen (literally ‘diamond autumn’).
The telecom industry is represented by fund Telecom-Soyuz (corporation Rostelecom). The oil industry is represented by funds such as Surgutneftegaz (namesake of its parent corporation), Neftegarant (Rosneft), National (Tatneft), and TNK-Vladimir (TNK).
NSPF Vernost is close to Russneft. Several NSPFs are close to shareholders of Lukoil: Lukoil-Garant, Pension Kapital, and First Pension Fund (the last two are also close to IFD Kapital and can be classified among independent financial industry funds).
Metallurgical funds include StalFond of the city of Cherepovets (literally ‘steel fund’, corporation Severstal), Ural region’s fund UGMK-Perspective (UGMK stands for Urals Steel Mills), Sotsialnaya Zaschita Starosty in the city of Magnitogorsk (literally ‘social protection of old age’, affiliated with Magnitogorsk Steel Mills), Sotsialnoye Razvitiye in the city of Lipetsk (literally ‘social development’, affiliated with Novolipetsk Steel Mills), Norilsk Nickel (namesake of its parent corporation, until recently it was called Interros-Dostoinstvo).
Aviation funds include NSPF Rostvertol (for aircraft builders) and Uchastiye (close to Domodedovo Airlines and to corporation EastLine, operator of Domodedovo Airport in Moscow). NSPF Port-Garant is affiliated with Vladivostok Sea Port.
APK-fond was set up by a group of grain/bread companies. Defence and machine building industries are represented by NSPF Oboronno-Promyshlenny Fund/OPF (literally ‘defence-industrial fund’), St Petersburg’s NSPF Oboronno-Promyshlennogo Kompleksa/OPK (literally ‘fund of the defence-industrial complex’), Ekaterinburg’s NSPF Uralvagonozavodsky (literally ‘Ural fund of rail car factory’), and Pervy Promyshlenny Alliance (literally ‘first industrial alliance’, affiliated with truck manufacturer KamAZ).
The second cluster can be called ‘professional’ funds – founded by certain professional associations.
This cluster includes NSPF Soglasiye (literally ‘accord’, affiliated with an association of theatre professionals), Torgovo-Promyshlenny PF (literally ‘pension fund of industry and commerce’, affiliated with the Russian Chamber of Commerce and Industry), Cooperation (affiliated with the Union of Consumer Product Manufacturers and Sellers).
The third cluster is ‘territorial’ funds, which are often close to regional governments or are diversified in serving various corporations of a particular region. This cluster includes many funds such as Moscow City NSPF (close also to Bank of Moscow), Sberegatelny NSPF (literally ‘savings’, Leningrad Oblast), Khanty-Mansiysky NSPF (Khanty-Mansiysky Autonomous District), Semeiny NSPF (literally ‘family’, Ekaterinburg), NSPF Erel (Yakut region), and NSPF Vremya (literally ‘time’, Udmurtiya region).
The fourth cluster includes several funds that are close to large private financial-industrial holdings.
NSPF Sistema is a namesake of its parent holding. Bolshoy Pension Fund (literally ‘big’) belongs to SUAL-Renova Group of Victor Vekselberg, Sotsium belongs to Basic Element holding of Oleg Deripaska. NSPF St. Petersburg is close to Ilim Pulp. Until recently NSPF Progress-Doveriye was close to financial-industrial group Menatep-Yukos.
The fifth cluster of funds can be defined as financial NSPFs subdivided into several categories by origin: bank, insurance and investment. NSPF Raiffeisen is an affiliate of a commercial bank with Austrian roots. Vneshtorgfond is a part of Vneshtorgbank. Sberbank of Russia has its own NSPF.
The following NSPFs are namesakes of their parent banks: Globex, MDM, Alfa-Bank, Lefko, and Promregionsvyaz (Promsvyazbank).
NSPF Rus previously owned by Insurance Company Rossiya, now belongs to private investment company AG Capital. Financial groups such as UrasSB, IFD Kapital, CIT Finance, and BrokerCreditService have their own NSPFs.
Alexander Kupriyanov and Vadim Loginov