Jul 12, 2017
Lost in transfers: how to improve your pension fund strategy

Author: Marina Rudneva

The Accounting Chamber announced the results of the pension market inspection

The Accounting Chamber has recently published the results of the pension market inspection. The auditors studied how Russian people transferred their pension savings in 2012–2016. For industry participants, the results were not surprising: we have been talking for a long time about the inadequacy of the legal framework, which contributes to the development of unfair competition in the compulsory pension insurance (CPI).

On the sidelines of the Moscow Actuarial Forum, a representative of the Bank of Russia confirmed that the regulator proposed to consider such a model of transitions, in which a citizen should first of all contact the current insurer when changing an NPF.
Key players on our market have been actively discussing the irrelevance of moving from one NPF to another for about a year. This procedure raises a lot of disputes and disagreements. However, everybody agrees that the current legislation needs to be changed — no one is satisfied with the mass violations by agents and subagents of the clients transfer procedure, since it is connected with the illegal use of electronic signatures and personal data of the insured person. It stands to reason that NPFs apply strict sanctions to identify such incidents, but the problem must be solved at the legislative level, otherwise it cannot be completely eradicated. And this was once again confirmed by the inspection of the Accounting Chamber.

What is wrong with the current Law "On Non-State Pension Funds"?

Firstly, if the transition is initiated by a new insurer, it is not in its interest to inform the insured that they are suffering financial losses.
Secondly, the application for transfer is submitted by the insured person only to the PFR.
Thirdly, the current insurer does not know about client attrition, the relevant information comes from the PFR with a delay of up to a year.

What does this lead to? A citizen is not informed about the consequences of the transfer from one fund to another, for instance the loss of accumulated investment income, in the former NPF. We are talking about millions of Russians, who annually transfer their pension savings: Last year the PFR approved 6.5 million such applications. Thus, according to various estimates, in the preceding year, the amount of financial losses of Russians from such transfers could amount to RUB 70 bln. Thus, according to various estimates, in the preceding year, the amount of financial losses of Russians from such transfers could amount to RUB 70 bln.

For this reason, about a year ago, the leading players in the CPI market developed a draft law on transitions. It is aimed at protecting the rights of insured persons and insurers when citizens submit applications for changing funds. It is based on the banking model as the most transparent, tried and tested in the financial market: when the client comes to the bank to close his deposit and withdraw his funds, he gets a clear explanation of how much interest he will lose in the case of early account termination at this credit institution. Providing such information to the client is in the interest of the bank. A person compares the amount he loses, with the benefits offered by a new bank, and makes an informed choice.

In our case, application of the insured person for the transition (early transition) should be submitted only to the insurer, currently dealing with pension savings of such persons. The current insurer will be obliged to inform (and interested in informing) the insured person of the amount of potential loss of investment income in the case of early transition. Thus, a citizen who wants to terminate his CPI contract with the current insurer and to conclude a contract with a new one, will know the amount of income he loses and what he gains in the new NPF. Then he will be able to make an informed decision. According to experts, this will enable almost a 10-times reduction in the transitions market: Russians will get more information and, as a result, will make a deliberate choice in favor of this or that insurer.

There are also some opponents of this legislative initiative among the market participants — they say that citizens will not independently apply to the NPF to terminate the CPI agreement. That some funds have insufficient number of offices or that insured persons do not have information about the fund’s location. As a result, all this will lead to «retirement slavery». But we have been living in smart space for a long time: all necessary actions can be performed through a personal account, and NPFs are no exception. The main thing to be legislated is that the citizens choosing an insurer should have the right to be informed in time to make a decision on changing the pension fund taking into account full and clear information.

Like other players on the NPF market, we do expect that our proposals for improving legislation will be heard. Only in this case we will solve the urgent transition challenges.