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Comment by Alexei Yakovitsky, Global CEO at VTB Capital, for The Banker

1 September 2017
The Banker
The Banker: Europe: Russia - Russia's pensions revolution

Russia is embarking on an attempt to modernise its pensions framework. But while it is clear that reforms are needed, both for the viability of the system and the future growth of the Russian securities market, decisions over the way forward are still to be made. At 55 years for women and 60 years for men, Russia has a low retirement age compared with its international peers. Rising life expectancy makes the need for reform even more urgent. For several years the government has covered substantial deficits in the country's pension fund through capital injections from the state budget. However, in September 2016, pensioners did not receive their scheduled inflation-indexed pension increase. Instead, prime minister Dmitry Medvedev arranged for a one-off payment of about Rbs5000 ($85) per pensioner in January 2017.

First attempts

According to an Alfa Bank research note by chief economist Natalia Orlova, the scheduled pension increase in September would have cost the state Rbs140bn before the year was out. By transferring the payment to a one-off award in January, pension payments remain at a lower base in 2017, which is expected to save the government about Rbs400bn in payments this year. In 2002, Russia went through a period of pension reform that saw the introduction of a system under which active workers financed current pensioners, and those born after 1967 saving parts of their pension contributions in individual accounts in state or private pension funds. However, in a 2013 review, that second pillar of individual contributions was made voluntary, highlighting the conflicting positions of the financial-economic and social blocs. Today, 35 million people have money invested in individual pension capital (IPC) accounts, says Marina Rudneva, board member and chief executive at financial group Future. "We are still at the stage of accumulation," Ms Rudneva told the International Financial Congress (IFC) in St Petersburg in July, adding that by 2023 the first payments will need to be made. But to cover that, the system requires new money: "We just need to understand how we can provide the conditions necessary for the system to work." Pension reform remains a delicate topic within Russia and change is unpopular. Any decision taken on the issue could influence upcoming elections, not least because pensioners make up about 40% of the electorate. Nevertheless, there is a broad consensus that the viability of the current system must be addressed, and market participants believe that IPCs could be the answer. A subscription system that involves every employee automatically being registered for an IPC would be an essential element in a reformed Russian pension system, Ms Rudneva told the congress. But auto- subscription is just one of a number of topics still up for debate. At an IFC panel discussion, a heated exchange over the choice of fund saw moderator Yury Voronin, chief of staff at the accounts chamber of the Russian Federation, argue that the population cannot make a decision over a fund themselves, as some people might not fully understand and hence not bother to sign up.

Encouraging participation

Meanwhile, Galina Morozova, chief executive at Sberbank National Pension Fund, took the position that a decision of this magnitude could not be made by an employer: staff should pick their funds themselves, she said, even if they want to opt out of the pension for a year. Still, employers will have a role to play, and central bank governor Elvira Nabiullina told The Banker that she believes there should be "some stimulus for employers to participate in this system". Some experts suggest that this could be in the form of tax privileges or exemptions, potentially with regard to profit tax. As for individuals, taking part in the IPC system is expected to also bring some tax relief, although details are so far unclear. Questions remain whether the system would also apply to the self-employed, who would make the payments and if they would have to be policed. "We see from statistics that our population are interested in participating in the system of pension savings," Ms Nabiullina said. Sberbank National Pension Fund started selling individual pension plans last year, as one of only a few pension funds in Russia. Since then, the fund has sold a million contracts, according to chief executive Ms Morozova, and customers have been making regular contributions, a fact that backs up Ms Nabiullina's statement.

Down to the details

Before a new pension system can be implemented, more decisions must be made, for example regarding its administration. One proposal for a central administrator would entail the institution managing all commercial information concerning the individuals' accounts. But should this role be taken by a public body, or by a private institution? "Ideally, we believe that the pension administrator belongs to everyone with the involvement of the central bank," Ms Rudneva told the IFC, adding that she believes this should ideally be a public authority. Ms Morozova suggested that, depending on how advanced any future pension administrator might be, she would be interested in outsourcing the keeping of pension accounts to save money. Such a registry might also be beneficial for the state when it comes to the payment of pensions.

For the market's sake

"The future of Russian pension reform is not clear yet, as there are some options on how exactly the concept of individual pension capital will be developed," said Anna Kuznetsova, managing director of Securities Market, a member of the executive board at Moscow Exchange. This means exact inflows into the Russian stock market "are hard to forecast", she says, adding: "But in any case, we expect a positive impact on the securities market from it." "[In Russia] we have a very underdeveloped local capital market in comparison to what you see in other economies of the size of Russia," Timothy Talkington, co-head of Goldman Sachs for Russia CIS, told the IFC. Russia's budding market has seen some issuance in 2017, and all debt and equity capital market (DCM and ECM) issuance up to August 17 was more than 100% higher than in 2016, according to Thomson Reuters data, but this has come from a low base. DCM issuance proceeds reached $29.1bn from 85 transactions, while ECM yielded only $3.1bn. Both are the second lowest figures across all countries listed on Thomson Reuters' investment banking scorecard. Still, VTB Capital has a "strong pipeline of ECM deals" and it is just a "matter of price expectations, sellers and buyers and a matter of market timing" when they will come, says Global CEO at VTB Capital Alexei Yakovitsky. "This year we have seen a total boom in the Eurobond market. Generally the demand for our services across foreign exchange and commodities has gone up," he says. "The market is back to pretty much the usual. You don't have the boom days of 2006 and 2007 but the market isn't closed. It is a functioning market; it is just not big." As the securities universe grows - albeit slowly - the market is still largely constrained by a lack of investors, especially long-term money. But Goldman Sachs' Mr Talkington told the IFC he believes the Russian capital market will grow as inflation and interest rates fall, especially in the investor base. "As deposit rates come down, investors, both institutional and retail, will be looking for alternatives to what they are yielding on a deposit in the banks," he said. While the market is likely to see some of the large share of pension money currently invested in deposits shift to the securities market - partly due to a lowering of the maximum exposure to deposits allowed by the central bank from more than 60% to 40% in 2016 - the Bank of Russia is considering further reductions to the cap to boost the country's capital market development.

Russia is looking into creating its own efficient pension system, taking into account international and local experience, as well as the wishes of its population, says Ms Nabiullina. "The efficiency of any pension system depends on the efficiency and deepness of the financial markets," she told The Banker. "You should design it to correspond to the state of the pension system, the state of the economy and the level of development in the financial market."

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