24 May 2004 03:55
Pensions Snapshot: Russia
ByLine: Sam Greene
The government's much touted semi-privatisation of state pensions - meant to give workers a choice of providers
for a Swedish-style notionally funded portion of their state pension - has been largely a debacle. The selection process
for asset managers was opaque, resulting in a list of 55 providers, most without any track record, and little
information available to workers.
The result is that only a small portion of savers have chosen a private fund, as most left their money with the
government's default fund. According to Tessen von Heydebreck, a board member of Deutsche Bank who delivered a
lecture on pension reform at the recent Russian Economic Forum, only 2% of all eligible citizens - or about 700,000
people - have selected a private provider for their accumulative pension.
That, evidently, is the way the government wanted it, as it instituted a guarantee only for the state's fund,
and officials missed no opportunity to remind workers just how risky the private funds could be. Never mind that the
state's fund returned only around 8% last year, meaning a 4% loss against inflation of some 12%.
The fiasco, however, has driven home to ordinary Russians an unmistakable message, according to market watchers: no
one will take care of their retirement but them.
The result, private pension managers say, has been an upswing of interest in second- and third-pillar funds. Take,
for example, Sheksna-Gefest, the retirement scheme of giant steel-maker Severstal. More than 70% of the fund's
190,000 or so members are employees of Severstal or its subsidiaries. Most of the rest have come through the
third-pillar business set up by the fund's president, Andrei Nikitchenko, since he took over the fund in 2002. And
if current trends hold, he says, third-pillar savers will make up 50% of his clients in a few years.
Foreigners, meanwhile, are catching on. More than a year after ING became the first major international financial
services company to open a pension fund in Russia, and not long after Raiffeisen bought one, Deutsche Bank - which owns
40% of Russian investment bank and asset manager UFG - has announced similar plans.
Despite negative pensions headlines in the newspapers, Nikitchenko says he is optimistic.
"Because the reforms were handled badly, the role of the accumulative pension and the first pillar in general is
shrinking," he said. "But for the development of the three-pillar system overall, this is a plus."
Another plus, he said, is the government's decision to allow insurance companies to provide both third-pillar
pensions and second-pillar schemes on contract with employers. Adding the country's relatively strong insurance
sector to the market should help rationalise a pensions market that is dominated by more than 300 funds, many of which
are weak.
"The competition and consolidation will be good for everyone," Nikitchenko said. "It's not right
when 300 funds can survive in the conditions of weak competition. There must be more consolidation and strict
regulation."
The regulatory framework, however, needs both strengthening and liberalisation. Enforcement is often spotty and
opaque, market observers and participants say, and needs to be improved.
Nikitchenko and others, meanwhile, are supporting proposed changes that would eventually allow funds to invest up to
15% of assets overseas, beginning with 5% in 2005, 10% in 2006 and 15% in 2007.
IN BRIEF
- Former state pensions boss Mikhail Zurabov has replaced Alexander Pochinok as labour and social affairs minister in
the new government of Mikhail Fradkov. His replacement at the Russian Pension Fund is Gennady Batanov.
- The recent first-pillar pension reform was intended in part to help bring corporate payrolls out from under the
table, an effort that began with the institution of a 13% flat income tax in 2001. The next proposed step will be to
lower the so-called single social tax that employers must pay for their workers from the current 26%, possibly to below
20%.
- Russia's demographic situation, in terms of workers per pensioner, is worsening less quickly than in western
Europe, but the overall picture is considerably worse. Emigration coupled with declining health care since the fall of
the Soviet Union have led to increases in mortality and slowing birth rates, with the result that the country's
population has declined by nearly 0.5% since 1998 alone, to 145.3 million in the 2002 census.
[European Pensions & Investments News] |
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