Page 135 - IFR Opportunities in Russian capital markets

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ifrintelligence reports/Opportunities in: Russian Capital Markets
In one of the more galling examples, the authorities decided to disqualify the local subsidiary of Dresdner Bank, which has two years’ experience of fund management in Russia. However, the pension authorities accepted an application from a company called the Management Company of Pension Funds that was registered the day before the deadline for submission of licence applications closed.
The reason for the ‘Brand X’-style name of this company became clear the day after the results of the selection process were announced and the same company, one of those to qualify, was advertised for sale on the internet for US$1m and sold to the Tatarstan regional government.
In the end, the authorities registered any company that applied for the special permission to administer pension funds and made no attempt to weed out the weak (or often paper companies) from strong companies with proven records.
The campaigning to attract workers to funds was further mired by some of the management companies (legally) offering company managers a US$1 bounty on each worker they persuaded to sign over their investable portion to them, according to fund managers. An estimated 40% of ap- plications were from employees of one of the leading financial-industrial groups.
Pension reconstruction
Since the reform, the pressure on both government and employers to fix the mess has been growing.
With the advent of consumer credit in around 2001 employees have been increasingly refusing to sign up to the payment scams companies use to dodge social taxes, including pension payments, as they need a ‘white’ income to raise credits from banks. With mortgages now taking off this pressure will increase dramatically.
At the same time, Russian companies are faced with a desperate shortage of experienced managers. Salaries are rising fast and are on a par with Western levels in some industries. While still unusual, companies are starting to introduce perks such as pensions to tempt good employees to work for them.
Russia’s Health and Social Development Ministry has also submitted a proposal that would drastically change pension reform procedures. The idea is to exclude a saving component from mandatory pension insurance. The money currently managed by VEB would go to pay off the SPF's deficit instead, while the population would be forced to transfer their pension schemes to private companies.
If the proposal is adopted, then from 2008 the transfers to VEB of the investable part of a worker’s contribution would no longer automatically go to VEB if the worker did not specify a private company to manage their money and give it to private companies instead.
The draft law was submitted to the government that would allow it to invest some of workers’ investable funds with private companies and the law could be in place by the end of 2007. In essence, Zurabov is attempting to encourage the nation to move their pensions to private companies.
The purpose is to make the pension market two-level, starting from 2013. The first component will be the PAYG (pay as you go) system, which will be controlled by the government. The second will be represented by private pension savings, independent from the government and encouraged by tax benefits but stripped of all state guarantees at the same time.
Pension market structure
Investment savings managed by the 56 management companies, including VEB, increased 52% in 2006 to RUB276.4 (US$10.6bn). The year previously the total funds under management grew even faster, albeit from a low base, and were up 86.9% year-on-year.
According to the Interfax-100 ranking of pension savings management, in the period from first quarter 2004 to fourth quarter 2006, VEB accounted for 96.6% of all pension funds under management. In other words, the amount of investable funds in the care of non-state run funds has grown from about 2% in 2004 to 3.4% of the total.
The concentration of savings managed by private management companies also increased slightly: the share of leading management companies in terms of the volume of savings managed, increased from 80.1% to 81.4%.
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