Nov 14, 2016
"Going public via an IPO proved that people trust us"

Author: Marina Rudneva

Marina Rudneva, CEO of PJCS FUTURE Financial Group on the issues of the pension business going public via an IPO and its first results

Marina Rudneva, CEO of PJCS FUTURE Financial Group on the issues of the pension business going public via an IPO and its first results.

— For the last 20 years, the Russian pension system was subject to serious reforms. From your point of view, how far have we come? Do the citizens demonstrate confidence in and trust pension funds today?

— From my point of view, the most positive and strategically valuable decision was made 14 years ago, when the pension saving system was introduced. It is still in force, and moreover, for the last two years, its effectiveness, transparency and stability have multiplied. It is still in force, and moreover, for the last two years, its effectiveness, transparency and stability have multiplied. This does not include indexing, which has not been carried out in full yet for this year. Should we compare the state system of indexing pensions with how the NPFs manage the cumulative component of the pensions then we see that efficiency of the non-state funds is many times higher?

What do we see now? As soon as the citizens started feeling confident in the system and people started more or less getting interested in the subject of future pension savings, as well as understanding it, the moratorium came. On top of this, in September, we overheard at the Moscow Financial Forum that, unfortunately, the accumulation system would be renewed in its original state. At the same time, a model of a totally new system was also presented. It looks like pension reform in the country does not have an end; the constant changes cause serious doubts as to whether the system can be trusted at all.

— There is an opinion that the pension system, as it exists today, does not meet contemporary requirements. That, if there is no change, then the situation of the provision of pensions in the country will deteriorate. What do the market operators think of that?

— On the contrary, the changes of the last three years show that the pension system meets all current market requirements. Making the funds public, which resulted in the opening of information to the ultimate beneficiaries, introducing NPF to the guarantee system, tightening the Bank of Russia’s requirements for risk management and investment policy statements — all of these measures were aimed at making pension funds more manageable, reliable, stable entities in the current market conditions and the regulator succeeded in that. The pension system became contemporary, transparent, clear and effective.

— Non-state pension funds shall ensure a cumulative component for the future pensions of Russians. Consequently, not only shall they have the funds to manage but also profit. How can this task be solved in the context of "freezing" the cumulative component and current economic crisis? What are the perspectives of the NPF market in the current conditions?

— Citizens are earning less income and the Russian economy gets less funding as a result of the "freezing". The pension money could have become one of the sources of long-term income, as they did few times before. The Group’s funds were invested into the real economy many times and one of the best examples of this is the construction of the section of the turnpike between Moscow and Saint Petersburg. We could have had the possibility to participate more actively in other large infrastructural projects as well if there had been no "freezing". Those projects, which are comparable by the return period with the accumulation period of the citizens, i.e. pension money, are an optimal tool from an investment standpoint.

However, we are continuing to develop even in these conditions. The refinancing rates grew during the crisis; fund rasing rates grew respectively. This directly concerns all of the bonds.
One needs to remember as well that capital and shares remain undervalued during the crisis. We expect that all shares that we have acquired are undervalued, that their potential value is a lot higher and that they will grow in price. Furthermore, our pension group is still at a stage of accumulating funds and payouts will only start as of 2023. So, we do not have large costs now and we can afford long term investments for up to 3, 5, and even 10 years.

— How do you assess the proposal of the RF’s Ministry of Finance and Bank of Russia to upgrade the pension accumulation system? Is it correct to reject mandatory pension savings in favor of the insurance system and to transfer the accumulation problem away from the state and employers onto the shoulders of the citizens?

— There are problems with money collection for the budget during the crisis and the government has to take measures, these of which seem to be the most obvious for now. So, the Central Bank and the Ministry of Finance proposed a concept of quasi-voluntary system of pension savings by the citizens, which is suggested to be introduced as of 2018–2019. Voluntary contributions will be deducted from their salaries by default, although should a person not want to pay, he may refuse to do so by informing his/her employer. The idea seems to be good yet idealistic.

First, the majority of the population has insufficient financial literacy; there is no culture of self-dependent money accumulation for retirement. The entire system in the US, for example, is built on self-dependent money accumulation, but that is a totally different country with a different mentality and different traditions. Over here, nobody wants to think of his or her retirement now — it feels boring, sad and poor. Family business has just started in the country, the continuity is being formed, and if we start planning to accumulate savings, then the next generation will probably consider that to be a normal practice. And this was where the reform introducing a cumulative component led.

Secondly, people are not in a financial position to save money for the future. Secondly, people are not in a financial position to save money for the future. There is a possibility to take a break and temporarily stop paying their pension contribution in the provisions developed on voluntary pension insurance. If a person does not recommence the contribution himself, however, then it will resume automatically after a year. People will not understand that and will get confused; experience proves that they would rather submit an application on the transition to NPF and wait calmly for retirement.
That is why it is important to keep a mandatory accumulation system now, even with a gradual decrease of the mandatory contribution, rather than cancel it totally. Let it be not a 6% but a 3% contribution. The citizens would have the possibility to transfer the other 3% to us by themselves. Then this will become some sort of co-investment program.

One, of course, may still feel disappointed because of the "freezing" of the accumulation, but this 6% contribution is considered to be the state’s money according to the legislation now, and the state has the right to use it. Should the contributions become voluntary, they become private capital.

Any story is easier to believe if the state votes for it, including monetary support. There was time when the Ministry of Finance proposed a program of co-financing pensions, which was open for enrollment until 2015. The idea was that if one contributed RUB 12 thousand a year to a pension account, then the state would also match it with RUB 12 thousand to the same account. Many people participate in that program precisely because the state took the lead and provided cash support. Therefore, I consider that we have to advocate for and build such a binary system. If, for example, the "freezing" of the accumulation is canceled in three years, this system may prove to be effective and profitable for all parties.

— In September, it was reported that the O1 Group established FUTURE Financial Group, which, in turn, united a number of the leading funds. You hold fourth place in Russia by the number of customers and by the sum of managed assets. What is the objective of these pension entities? What benefits and possibilities will the financial group get?

— We became interested in the pension business in 2013 and we acquired the pension fund Telecom-Soyuz . We had RUB 23 bln of assets under our management then, mostly made up of pension reserves. Since then, we have grown by more than 10 times; there are now 5 pension funds and RUB 270 bln under our management today. Currently, the financial group unites 4.6 mln people.
When a business demonstrates such growth, one may already start talking of a holding company. At present, there is an objective to implement uniform business processes across all pension funds in order to optimize them and to build uniform systems of management and investment. Thus, the costs will become optimized as well. Moreover, consolidated accounts were to be formed, so that the pension business was not mixed up with the other businesses, and — as an ultimate goal — we planned to go public via an IPO.

— The IPO of FG FUTURE was the first one in the history of the Russian pension market. As a result, the shares are traded on the exchange and the Group has become a public joint stock company. What was the reason for such a bold decision? What will it deliver to the Company and its customers?

— We started preparing for an IPO from the end of last year in order to expand the assets and market share. Starting from 2014, the regulator set more new complex tasks in front of the pension business, and we need to do our best to complete them. It must be admitted that, after all the novelties, the pension business had become so transparent that there was only one step left: to go public. To be the first to do so is certainly hard. But the placement results prove that we have built an attractive business in the pension savings market. People grasped what a pension business is, trusted us and bought our shares.

— How tough was bringing a financial pension entity to an IPO? It is also known that you are also the first woman in Russia — as head of a company — who managed to do this. It is certainly hard to be a groundbreaker, isn’t it?

— It was hard. The most important part of an IPO is to explain to the underwriters, exchange and investors the essence of the business’ financial model and to show its viability. Before this, there were IPOs from the non-financial and industrial sectors, the financial sector was represented by banks only, and there was no pension business. I have to admit that there were no conditions for it, as well from the point of view of the NPF’s development. Moreover, everything that is happening to the pension system now has also left a noticeable trace. We had to explain how this scheme would work with the different variants of the reform. The Moscow Exchange welcomed all new issuers, but we had to prove our business models and pass all the committees there as well. There were complexities with the constantly changing legislation as well. We have a very professional team though and we succeeded.

— On October 27, the Moscow Exchange closed the order book for PJSC FG FUTURE’s shares. What were the initial results of trading? How interesting did the offer to enter the pension market appear to the traders? What volume of shares and at what price were the investors ready to purchase? Who were they: private individuals, funds, banks?

— We were estimated within a range of RUB 52 to 62 bln in our segment. We placed the shares closer to the higher limit. When we were making a decision to go public via an IPO, we were ready to sell a maximum of 20% and minimum 15% of the shares. We realized that we would not make that step in case we did not achieve a lower threshold of 15%. In the end, we sold the entire 20% and we had various investors: banks, insurance companies, private individuals via management companies and investment companies. A good indicator was more than a 1,000 of bids from individuals. We are grateful to the underwriters — the investment group ATON and VTB bank.

— What amount will FG gain from selling the block of shares and how do you plan to spend it? How much will this help to develop the pension business?

— As a result of the allocation, we gained RUB 11.7 bln. We plan to channel this money into three key objectives. First, to discharge of the debt to the shareholders. We plan to implement potential acquisitions at the expense of the second part: we will reserve this money and will track the market propositions. The third part will be invested into the business’ development and the enhancement of its customer service. Competition in the pension market will only start developing now. The consolidation has actually been completed and the question now is who will manage the assets in the most effective way from the standpoint of investment and operational processes. Investments are needed to optimize the operational process. The awareness factor, for example, is very important to retain the customers. We are developing a mobile application for our customer’s personal accounts, which will allow us to perform several activities at once — starting from checking the account to concluding a contract for the new products of our NPFs.

— What was the attitude of the other market operators towards you going public? May we say that there is a new trend in the market?

— They supported and congratulated us. In fact, we started a new sector in the Moscow Exchange. I have not yet heard of the announcements on IPOs from the other market operators, but the course of development in the pension sector tells me that this may, probably, become a trend. This is a logical and necessary move for the further development of NPFs in the current conditions.