Russian Federation: Russian Pension Reform Is Not Doing Well

Last Updated: 15 May 2008
Article by Leonid Zubarev

Russian pension reform has started in 2002 when the government divided the state labour pension into three parts.  The basic part is a guaranteed minimum equal to all participants.  The amount of contributions to the insurance part depends on the length of service and the salary of an individual participant.  Contributions attributable to these parts are recorded on notional individual accounts and are still used to finance the pay-as-you-go element of the state pension system.  The third funded part of the labour pension represents a savings element and can be invested according to guidelines set force by the government and can be managed by the state (Vnesheconombank), private asset managers or non-state pension funds. 

According to the Russian press, the reform has apparently failed.  The state owned Vnesheconombank still manages over about 98% of the pension money contributed to the funded part of the labour pension. The tender mechanism designed to give an individual participant a choice between the state owned bank, a private asset manager or a non-state pension fund has not been promoted enough. Most of the participants have simply ignored the opportunity. One of the reasons is believed to be poor advertising campaign.  According to the Russian Centre of Public Opinion Studies, in 2006 60% of respondents "have heard something" about the reform while 22% have admitted that they "have never heard of it" before the poll.  Half of the Russian population has no idea what is the aim of the pension reform and what issues it has to resolve. 

Private asset managers do not see reasons why they should spend their own money to promote the reform.  Last year the tender turned into a simple qualification exercise and 55 out of 56 bidders were allowed to advertise their services to future pensioners.  However, last year results discouraged private asset managers and earlier this year the tender has failed as there have been no bidders.

The government is concerned that concentration of the pension money in the hands of one state owned asset manager. About 140 bln roubles have landed at the accounts of Vnesheconombank simply because the employees have not made their choice and by default the money has been transferred to Vnesheconombank.  According to the Ministry of Economic Development, a draft law has been developed to introduce a completely different and to some extent a revolutionary approach.  The idea is to make private asset managers a default option.  If an employee does not expressly allow Vnesheconombank to manage his pension money, the State Pension Fund would transfer the funds to private asset managers and distribute the amount among qualified asset managers.  Investment income would also be proportionally distributed among all of the participants who do not opt for Vnesheconombank. 

From the financing point of view, the new system is also far from being a success.  The government has already taken an unpopular step and excluded the most active population (those who was born before 1967) from participation in the funded part of the labour pension.  However, according to the State Audit Chamber, this was not enough.  By 2020 there will be only 116 employees to 100 pensioners while today there are 135 employees to 100 pensioners.  The State Pension Fund deficit will amount to about 1.5% of GDP.  One of the possible ways for curing the situation may be a further reduction of the number of employees eligible to the funded part of the labour pension.  Their contributions can instead be routed to finance the basic and the insurance part of the state pension.  However, this could simply bury the remains of the trust in the reform and would mean a complete return to the pay-as-you-go mechanism.

Another measure that is being discussed is also far from being popular.  At present, Russian men generally retire at 60 and women at 55.  After a year or so of silence on this sensitive issue the government sources have again started a discussion about potential increase of the pension age by 5 years.  As a result, given the life expectancy for Russian men of 59 years the financial position of the State Pension Fund is bound to improve!  However, in view of the parliamentary and presidential elections in 2007-2008 and the fact that, according to the polls, over 88% of the Russians do not support the increase of the pension age, it is likely that neither of the unpopular steps will be taken before the election campaign comes to an end.

Additional burden on the state pension system is early retirement.  In Russia about 27% of the employees are entitled to early retirement and can become pensioners 5-10 or even 15 years earlier than the pension age.  So, a 40 year old pensioner is not an extravagant millionaire but, perhaps, a former military officer.  In response to this challenge the government has developed a law on professional pension systems.  The first draft appeared some three years ago but was heavily criticized.  The main point of disagreement was the list of professions that are subject to early retirement.  However, according to the State Pension Fund, controversial issues have apparently been resolved and the law can come into force in 2007.  The draft provides that employers in dangerous industries will be required to contribute another 3%-7% to fund early pensions for their employees until they reach the pension age and switch to the general system.

The business also does not remain disinterested.  The Russian Union of Entrepreneurs has developed proposals to amend the Tax Code and cancel the unified social tax completely.  It is proposed that the basic part of the labour pension should be funded through the state budget.  An individual employee would then have a choice to make a 4% contribution from its own income to which the state would add further 4%.  As an additional incentive it is proposed to exempt contributions from personal income tax while pension benefits would remain subject to tax.  However, it seems that given the current deficit of the State Pension Fund the government would not be willing to accept such radical approach.

On the front of the private pension provision there have been some recent developments that would hopefully make this sector more transparent and attractive to business.  The government decree No 432 dated 14 July 2006 introduced new procedure for licensing of non-state pension funds that came into force on 1 August 2006.  Having superseded previously enacted licensing regulations, the licensing procedure has for the first time introduced a definition of a "material breach of licensing conditions".  A material breach includes

  • non-compliance with minimum capitalization requirements;

  • non-compliance with qualification requirements for the management of the non-state pension fund;

  • breach of pension rules;

  • non-compliance with guidelines for investment of pension reserves;

  • non-compliance with reporting requirements.

Having discovered at least one of the above material breaches the Federal Service for Financial Markets may file a claim for revocation of the licence with the court.  In respect of existing non-state pension funds the Federal Services will first of all check the compliance with reporting requirements. 

Another area which causes concerns for the regulator is investment of pension reserves.  According to the Federal Service for Financial Markets, new guidelines for investment of pension reserves may soon be promulgated by the government.  The draft follows the model of allowing non-state pension funds to invest pension reserves in certain assets without using asset management companies.  In addition to state bonds and bank deposits the new regulations will allow non-state pension funds to invest directly into mutual investment funds (PIFs) including mutual funds investing into real estate.  Otherwise investment into real estate would not be allowed.

The new guidelines would allow investment of pension reserves by asset managers into shares and bonds of Russian listed companies, mortgage certificates and other assets. It would also be possible to invest into foreign securities that fall under certain conditions.  The regulations tend to limit a possibility of re-investment and do not allow investing more than 5% into shares and bonds issued by companies that are contributors (except where such contributors are also listed companies).

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 21/02/2007.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions