Leonid Fedun, co-owner of Lukoil, will fill in the Prime Minister on future pensions.
Prime Minister Vladimir Putin will today take part in the Second Pension Forum at the President Hotel. The National Association of Pension Funds (NAPF) has prepared proposals for reform of the market which will be presented by Leonid Fedun, an oilman and Vice President of the Russian Union of Industrialists and Entrepreneurs. He will propose a system for ensuring pension contributions, developing new instruments for long-term investment and new capital requirements for management companies.
Putin is likely to be impressed to hear that the pension system's total investment potential exceeds 1 trillion roubles (here and elsewhere data from Fedun's report are cited). Non-government pension funds are ready to invest about 600 billion roubles. That is a substantial amount for the comparatively small Russian stock market, but Fedun believes that pension assets are not used effectively: more than 70% are invested for a term of under a year. He attributes this to the lack of long-term instrument in the market. He will urge the government to work out a system of investing pension funds in infrastructure projects.
The report will use the government's buzz word "stability" and explain why there is not enough of it. "If the citizens who retired on pension in 2008 had paid up pensions they would have lost up to 30% of their pension savings to the crisis," the document says. A system of pension savings insurance similar to the one operated by the Deposit Insurance Agency could save the future pensions for Russians, according to Fedun.
Pension insurance, the report says, must be mandatory and cover savings that are to be redeemed within 15-20 years. Enlargement of the Pension Savings Fund could be an extra factor protecting pensions. "Our analysis shows a Non-state Pension Fund can operate without loss if it has at least a million participants," Fedun argues.
According to our data, at present only a few such funds, including Lukoil-Garant and Blagosostoyaniye, meet that criterion.
Fedun will also propose increasing the capital requirements for management companies that work with pension money. The capital requirement should be at least 100 million roubles. In future, the minimum capital for management companies should be at least 10% of the pension portfolio managed.
Insurance against crisis
Market participants say that some of Fedun's proposals are far from novel. For example, pension contribution insurance has been proposed before (see RBC Daily of June 2). However, not all NPFs are prepared to incur such expenditure, especially since the system of "mutual insurance" is not always effective, especially in times of crisis. The opponents of the idea invoke the example of the guarantee fund of the Russian Union of Automobile Insurers (RSA). The President of RSA Andrei Baturkin announced in September that by April next year the Union may not have enough money to compensate the damage suffered by victims.
The President of NPF Sberfond-RESO, Andrei Neverov, believes that problem can be solved by introducing a system of reinsurance. "Money could be placed not only in Russia, which would lower the risks, he says. Reinsurers would also use market regulation of NPF risks through a system of tariffs."
By contrast, the idea of increased capital requirements to managing companies has met with no resistance. "We have long advocated introducing capital requirements with regard to pension assets," the President of First National Pension Fund, Vitaly Plotnikov recalls. "We proposed it not only for management companies but for the funds themselves." If the practice had been in place last year that would have minimised the pension funds' losses. As it is, NPFs lost up to 20-25% of their assets during the crisis, Plotnikov says. "The 1:10 ratio could easily have covered all the losses."
Fedun's suggestion that the stake should be put on major funds were dismissed by the market participants as one of his delusions. "Only a few funds can meet that requirement, and that would seriously limit competition," says the head of one NPF. "Why are we depriving our clients of the right to choose? In the West a person can keep his savings in several funds." Vitaly Plotnikov mistrusts the figure of "a million clients." "Everything depends on the income and expenditure ratio, and from that point of view I know some small regional funds that can be described as stable."
A blow to corruption
The report on the pension system will propose solutions not only for improving the pension system but also for combating corruption, which has been so much in the public eye recently. Corruption can be defeated by reforming the pension system the way the US reformed its own in the 1970s, when a rule was introduced whereby a policeman who broke the law could forfeit his pension. "What stopped policemen from corrupt actions was not lofty moral ideals, but the fear of losing a considerable pension," Fedun's report argues.
Albert Koshkarov