Page 134 - IFR Opportunities in Russian capital markets

CHAPTER PENSION FUNDS 10 Background
The Russian government is in a bind, as contributions to the state pension fund do not cover outgoings.
Domestic pension funds are by far the biggest segment in the managed money market, although the bulk of this is raised through workers’ obligatory contributions to the State Pension Fund (SPF) as part of the social taxes.
The volumes under management in mutual funds are less than one-thirtieth of the money in pension schemes: there was about RUB400bn invested in mutual funds at the end of 2006.
As in other European countries, the Russian post-war baby boomers are coming up to retirement and the bulge in demographics means that whereas the contributions of two workers used to support one pensioner, the ratio will fall to one-to-one in the coming decade. Moreover, the problem is particularly acute in Russia, as the collapse of the Soviet Union hit birth rates hard as well as sending death rates up. It was only in 2006 that birth rates began to recover as Russia's economy emerged from the chaos of transition.
Russia desperately needs to reform its pensions system, and attempted to do so in 2003 by allowing workers to transfer part of their mandatory contributions to the SPF to privately- managed pension funds – the so-called ‘investable’ part of their contributions.
At the same time, 55 special asset management funds were registered that can invest part of workers’ social taxes in the hope of creating more resources for tomorrow’s retirees. In all, there are 56 pension funds if you include the state-owned bank Vnesheconombank (VEB), which is charged with managing the non-investable part of workers’ pension contributions.
However, the reform was botched, hijacked by the oligarch-controlled pension funds, and the state had to enforce the closure of many of these funds at the end of 2006 as it attempted to clean up the mess it had made with its half-baked reform.
The pension industry is only just emerging, but as the average Russian's horizon stretches out from ‘tomorrow’ to several years they are beginning to think about preparing for old age.
Pension reform
There was nothing really wrong with the plan, but as with so much of reform in Russia the key is in the implementation. At the start of February 2004 the SPF announced that a disappointing 2% of Russians had chosen to move their investable money to one of the companies – well down on the 10% who it had been hoped would take part – or about RUB1bn (US$30m); a fraction of the total RUB90bn (US$3bn) in the SPF which remains in the state fund and is managed by VEB.
The chairman of the SPF, Mikhail Zurabov, claimed that the poor showing was due to citizens being insufficiently informed about private management companies, either in terms of their credit quality or track records. However, independent fund managers in Moscow say the whole process was hijacked by the big pension funds under the control of the leading domestic conglomerates.
Of the money collected, management companies controlled by the government of Tatarstan took a quarter of the total and 10 companies associated with either the big banks or the leading industrial groups took nearly all the rest.
“Pension reform has got off to a disastrous start. There was a respectable blueprint that would have qualified funds with track records and transparent structures, but it was changed at the last minute”, says Elizabeth Hebert, CEO of Pallada Asset Management, which has been operating funds since 1992 and was one of the authorised 55 pension firms. “We ended up with 55 management companies, most of them unknown, that have no requirement to disclose their owners. Three- quarters of these companies are owned by groups and will invest into their related companies.”
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