RU
Mar 27, 2017
Third rate pension

Author: Marina Rudneva

In 2016, the government recognized its inability to return «living» pension money to the citizens and proposed to carry out another reform, according to which people will have to save money from their own pockets. Changes to the system will require considerable expenses — about RUB 10–20 million.

In 2016, the government recognized its inability to return «living» pension money to the citizens and proposed to carry out another reform, according to which people will have to save money from their own pockets. Changes to the system will require considerable expenses — about RUB 10–20 million. Russian citizens might bear the burden of these expenses.

After the freeze in 2013, the cumulative pension of Russians became a regular source for current government spending. In October 2016, the government announced its plans for the next transformation of the Russian pension system. Tentatively from 2019, the citizens will be invited to form Individual Pension Capital (IPC). The cumulative pension will have a transition period, at the end of which it will integrate into IPC and disappear. At least, that is what the framework of the reform looks like. At least, that is what the framework of the reform looks like. The old and the new systems differ significantly: at present, the cumulative pension is accrued by an employer, money for the future will be withdrawn directly from an employee’s salary after the reform.

This will be the third sector reform in the last 15 years, with 20 to 30-year-old horizons Over the past four years, pension savings have been frozen and instead of money that was supposed to flow into the funds in citizens' accounts, points were accumulated in PFR. But converting money to points benefits only if the pay is not very high.

However, these are not yet the most important drawbacks of the government’s manoeuvre. The central administrator, a commercial entity, will be the core of the new pension system, which has yet to be established. If nowadays all the technical work is performed by employees of NPFs, the Pension Fund of Russia and the Federal Tax Service, then from 2019 the central administrator will begin to monitor financial and information flows, maintain a database, administer the collection of contributions, interact with individuals, etc. For NPFs these will be fee-based services that are commonly outsourced services.

According to our estimates, the creating of such a mechanism will cost RUB 10–20 billion, similar to the national system of payment cards. So far the tariffs for NPFs are not clear and most likely the pricing policy will include the establishment of the central administrator. The main point is who will set tariffs for NPFs. So far there is no answer. It is quite possible that might be an agency that does not know the business processes of pension funds. If provision of services in the central administrator is not commensurate with the current expenses for the same operations in NPFs, then ultimately citizens will bear the burden of these expenses — the funds will have to deduct the difference from the investment income.

Volatility, instability, complexity and ambiguity — these are the conditions NPFs will have to face when building their business models. And most of potential risks are caused not by external macroeconomic factors, but by the forthcoming reform.

In the meantime, the performance of non-state pension funds operating with cumulative pension is impressive, even though they have had a short term of operation. Thus, in 2015, 4.1 million citizens made the transition from PFR to NPFs. In 2016, the trend continued: as many as 4.7 million citizens showed their willingness to make the transition from PFR to NPFs. Moreover, in 2016, the volume of pension savings in NPFs has exceeded the volume of savings in VEB state management company, for the first time. The state management company controls RUB 1.8 trillion, while private funds control more than RUB 2 trillion. The system would continue to develop if it were not for the decisive problem of freezing of funds. Meanwhile, the funds attracted clients, improved corporate governance, complied with the strict requirements of the regulatory authorities, invested part of the savings left to them, and invested in the development of the industry.

Now the key question is: who will participate in the new expensive system with current salaries? In fact, the new reform’s target audience is the middle class. But people with higher than average incomes would prefer to buy a second apartment for additional income than to enter the new system. And what about NPFs' social function that helped to ensure that citizens with modest incomes had some savings upon retirement? It is safe to say that the government has not taken into account that category of Russians.

Editorial opinion may not coincide with the views of the author.