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Stalled Pension Reform Threatens
Bond Market
By Gleb Bryant, The St. Petersburg Times
Moscow
November 29, 2005
Pension reforms have ground to a halt because most people cannot decide where to invest their savings, leaving the state with a flood of cash which threatens to swamp the domestic bond market.
Under the three-year-old reform meant to stimulate the development of a pension fund industry, younger Russians were given a choice over where they invest part of their retirement savings.
But, put off by a lack of trust in the state and poor publicity, most Russians did nothing. Their contributions are being funneled as a result into a national pension fund managed by state-owned Vneshekonombank.
The Vneshekonombank fund has accumulated $5 billion in assets, but it is restricted to investing in Russian government bonds whose yields, at below 7 percent, fall short of double-digit inflation.
"Over half our population has no idea what a financial security is - let alone of the need to invest at all - because they are used to getting their pensions from the state," said Alexander Popov, head of the State Pension Fund.
Elderly Russians, having seen their savings eroded by hyper-inflation or confiscated in banknote swaps, now have to get by on state pensions averaging $80 a month - less than a third of the typical wage.
Late in the Soviet era, banknotes were taken out of circulation as a means of managing the money supply.
But, after surviving the 1998 financial crash, younger Russians mistrust financial markets and would rather spend their money on property or consumer goods than save for their old age.
"We need to inform people, maybe we can teach pension basics in schools," said Popov.
As part of the pension reform, a savings component was added to the existing pay-as-you-go system under which people born since 1967 have the right to choose where to invest about a quarter of their total contributions.
However, only a tiny minority has done so, and millions of so-called "silent" pension savers did not even bother to react.
Their money is now with Vnesh-ekonombank's pension fund, which by law can invest only in Russian treasuries. That is a problem, because the government is so flush with oil revenues that it has no real need to issue new debt. The Finance Ministry does issue bonds targeted at the pension fund but recognizes this is just a stopgap measure.
"Growing pension savings will exceed the amount of state debt in circulation within a few years," Alexei Savatyugin, head of the ministry's financial policy department, said.
The state is deciding whether to let Vneshekonombank invest in riskier assets, while giving private pension funds a bigger piece of Russia's pensions pie.
"Allowing Vneshekonombank into the market with all its billions would not simply mean market manipulation. It means there would only be one player left," Savatyugin said, referring to Russia's fixed-income and equity markets.
The bank has the means to buy up most of the country's narrow stock and bond markets and its entry would send prices soaring.
Popov said silent savers' assets could be split into two portfolios - conservative and riskier, allowing selected private funds to manage the latter. Meanwhile, the composition of the conservative portfolio should be extended to triple A-rated foreign securities and other state-backed papers.
Vneshekonombank would retain control over assets and choose private fund managers, in effect providing state guarantees for savers.
"We have to achieve the main goal of the pension reform - to provide a steady flow of long-term resources to our real economy. Right now we are just shifting money between pockets," Popov said.
Private pension funds rejoice at the idea but say that state backing for investments in riskier assets could be a disaster.
"It won't work. The state cannot give any guarantees, the volume of investment will soon exceed the state budget, a citizen should take the investment risk himself," said Pavel Teplukhin, head of Troika Dialog's asset management business.
Teplukhin, whose company manages pension savings for 20,000 Russians, said it would be easier to change people's mentality by compelling silent savers to opt where to put their savings.
He said polls show up to 12 percent of Russians are ready to invest in private pension funds but either have no information or consider the application process too difficult.
"The state made us understand that the pension reform is no longer a priority and left us face to face with 40 million people," Teplukhin said.
Troika Dialog has only just been allowed to publish figures on investment returns, which at 50 percent in the first nine months of 2005 beat the national pension fund's 12.5 percent.
"These figures should push people to make more active choices," said Vneshekonombank's Popov. "The more people leave us, the better."
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