Pension Reform In Russia: A New Stage

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Pension Reform In Russia: A New Stage

By Marina Shakina, Pravda

July 30, 2003

In the summer of 2003, Russia took another step in implementing its pension reform. Part of the pension contributions paid by employers into the Pension Fund, the state institution responsible for the provision of pensions, have for a number of years been entered into people's individual accounts. From 2004, this money will be allowed to roll over. Returns from the process will be accumulated and later paid as supplements to pensions.

All future pensioners will get notices from the Pension Fund on their individual accounts. Within three months they will be asked to decide which managing company they want to trust their pension savings with.

The thrust of the pension reform, in its 8th year now, is to move away from a distributive system to an accumulating (funded) scheme.

The need for the reform is due, as is the case in many other countries, to demographic problems. The birth rate in this country is falling, while the numbers of pensioners are growing, and in a few years' time will match the level of the working population throughout the country. The distributive, or pay-as-you-go, pension system, with working generations supporting the retirees, would then collapse.

Throughout the 90s one of the main social issues facing the state was rapidly dwindling pensions because of inflation and a budget squeeze on the Pension Fund. On top of this, the small pensions earned in Soviet times were regularly paid late , which added to social tension and public disaffection.

Over the past two to three years the Pension Fund has been experiencing no shortage of money, because the Russian economy is booming, but the problem of securing and increasing pensions which are barely enough for a hand-to-mouth existence is still on the agenda.

At one time, specialists raised the question of increasing the retirement age in Russia - today it is 60 years for men and 55 for women. This is not an unusual practice, as in the 90s the retirement age was raised in some European countries and today the same thing is happening in, for example, France. But in Russia these plans met with stiff public opposition . The average male life expectancy in Russia is 59 years; men simply do not live to see their pensions. What sense then is there in raising their pensionable age, wondered sociologists. In the end the issue was dropped.

The government expected that pension savings, once placed on the financial market, would contribute to the Russian economy, badly in need of "long money" or long-range credits. In 2004, the pension money is expected by specialists to reach 1-2 billion dollars. In three years' time, it will be between 6 to 7 billion dollars. Besides, the government hopes that the new pension scheme will bring to light the money circulating in the so-called "shadow" economy.

It is no secret that some workers in Russia get part of their wages in cash that no accountants keep track of. These are sums on which the company pays no taxes, or pension contributions, thereby leaving the state in a losing position . As the result of the pension reform, ordinary people will find it profitable to declare all their earnings, because their old-age savings will show substantial growth.

The investment scheme is difficult to understand and involves no small personal effort on the part of the ordinary Russian who is used to the state shouldering all the responsibility. The worker concerned must choose his managing company with which he will entrust his pension savings. The managing company may be state-run - for example, Vneshekonombank - or a non-state administered firm. All non-state companies will be issued with licences to handle pension money, licences governed by very strict criteria. The Pension Fund will conclude contracts with the selected companies to service pension funds.

The law also defines the financial instruments which can be used to invest pension money -- these are securities, shares, bonds, deposits made by lenders, and foreign currency. The liability of the managing company will be ensured and the law also sets very tight criteria for choosing insurance companies working with pension money. Additional guarantees that pension savings are kept intact will be a special depositary selected in a contest, a special government representative and a special public board, all of which will control the managing companies.

Public polls show that only 7 per cent of Russians are prepared to trust their pension savings to non-state managing companies. However, specialists explain this by the insufficient information available to people about pension reform, and believe that a wide publicity and information campaign may be helpful.

Financiers reckon that initial yields from pension money will not be high. And first payments from the accumulated (funded) part of pensions will not begin in Russia until 2013. The system will be working in full by the end of the first quarter of the century. All in all, the pension reform looks mainly to the future and - this has to be accepted - will benefit only future generations. On the other hand, there is certainty that this conservative approach will succeed, as distinct from plenty of instant-success plans which have been considered and rejected in recent years.