Russian parliament backs cut in pension savings

Reuters News
Posted: Nov 23, 2012 11:11 AM

By Jason Bush

MOSCOW (Reuters) - Russia's lower house of parliament, the Duma, has approved a pension reform law that will cut savings without raising retirement ages, ducking a tough decision on how to finance the budget burden of an ageing population.

The parliament made one concession to Russia's nascent asset management industry, retaining a higher levy for workers who opt to keep their retirement account with a private asset manager.

But critics including business leaders, economists and pension fund managers say the new rules will store up trouble for future budgets and slash future funds available for investment in financial markets.

Russia's population has declined sharply since the collapse of the Soviet Union and pensioners have formed an important part of the voting base of President Vladimir Putin.

The law approved on Friday will reduce the contributions that employers pay into mandatory retirement saving accounts on behalf of employees, from the present 6 percent of salary to 2 percent, beginning in 2014.

Putin has backed the change, under pressure to plug a huge hole in the budget of the State Pension Fund.

He has ruled out raising the retirement age from its present 60 for men and 55 for women, a step that many economists have advocated as the most effective solution to the rising burden of pensions.

"Bottom line is that the Kremlin backed a shortsighted, politically painless solution, because it is unwilling and or unable to deal with the popular blowback over raising the retirement age," Jenia Ustinova, an analyst at Eurasia Group consultancy in Washington, wrote in a recent report on the reform.

Employers presently pay a 22 percent payroll levy for pensions, which is split between a 16 percent levy paid to the State Pension Fund to pay present pensions - the 'pay-as-you-go' system - and a 6 percent levy that is accumulated in an individual retirement account.

For most workers, the split would be changed to 20 percent for pay-as-you-go and 2 percent for the individual account, increasing the immediate funds available to pay present pensions, but adding to the burden on the government budget in future decades.


In a limited concession to the asset management industry, the law envisages that the savings levy will remain at 6 percent for workers who have chosen to have the retirement account managed by a private asset manager - unless these workers expressly request otherwise.

The measure reduces the immediate impact of the changes on private fund managers, who presently manage the accumulated pension savings of around 20 percent of eligible workers. Most of their existing clients are not expected to switch.

"If there's some possibility of retaining the existing clientele and maybe retaining their 6 percent level, that would certainly be helpful," said Alexander Lorenz, head of the Russian pensions arm of Austria's Raiffeisen.

"But the whole thing is disappointing. I don't see the sense in what is really a band-aid. It is not really going to alleviate the longer-term problem of the pension fund deficit."

A different rule would apply to workers who have not expressed any preference over who manages their retirement account. For these workers the 6 percent levy would automatically be reduced to 2 percent, unless the worker expressly opts to keep the levy at 6 percent.

Over 80 percent of eligible employees have their retirement savings managed by Vnesheconombank (VEB), the state development bank, which automatically manages the savings of employees who express no preference.

"The cut in the defined contribution rate from 6 percent to 2 percent ... remains negative news, signaling that the reversal of pension reform in Russia is still on," analysts at Alfa Bank wrote of the new law.

Despite the passage of the law by the Duma, some analysts believe that further changes to the plan are likely before it is due to come into force in 2014.

"This scheme looks too complicated ... The probability of the system being changed (again) in one or two years is close to 100 percent," said Yulia Tsepliaeva, chief Russia economist at BNP Paribas.

(Editing by Ruth Pitchford)