MOSCOW - Russia is turning to private pension plans to bail out its inadequate state pension system.
The Russian Parliament is expected to take up legislation - possibly as soon as this week - that would create licensing and capital requirements and impose investment standards.
Tax issues - including critical tax exemption and tax deductibility of contributions - will not be addressed until Parliament takes up a finance bill later in the spring.
The problem is the state pension system is unable to keep up with inflation, which topped 300% last year. The state system provides a fixed benefit of 54,000 rubles (U.S.$13.50) a month - fine when the economy was stable, but woefully inadequate in a year of high inflation and 18% unemployment. Workers struck last year after a three-month delay in getting pension payments.
Many companies and individuals haven't waited for the government to provide pension legislation. By the end of 1994, some 800 pension funds had notified the government of their existence, according to the Pension and Actuarial Consulting Co., Moscow. That's more than double the 384 pension funds tallied in July 1994.
Eugeny Yakushev, president of Pension and Actuarial Consulting, said the largest number of pension funds are in the industrial regions, with more than 200 in Moscow.
Plans typically are defined contribution schemes, in which individuals can decide to participate. Some are sponsored by companies, such as the AutoVAZ plan.
Pension assets, while still tiny by Western standards, are growing fast. By January, there were 250 billion rubles ($70 million) in pension assets - nearly 28 times the level of 9 billion rubles at the end of 1993.
DC plans favored
While President Boris Yeltsin first issued a decree endorsing pension fund development in 1992, the Legislature only now is coming to grips with the issues.
Much of what will be contained in the bill is unknown, and numerous amendments are likely to stretch out the process.
Legislation is expected to favor defined contribution plans because it will require an individual account be provided for each participant, said Tim Sharples, an actuary with Callund Consulting Ltd., Bourne End, England.
The new legislation is expected to shrink the number of pension funds because of licensing and capital requirements. Capital will have to be at least 10,000 times the minimum wage, or about $125,000. But other proposals would boost minimum capital to as much as five times that level.
The legislation also is expected to provide financial control, independent audit and actuarial accounting standards.
Normal retirement age probably will be fixed at 50 for women and 55 for men. Current plans typically offer benefits at 40 and 45, respectively, after five years of participation. With life expectancy for men under 60, pension officials argue state pensions don't start soon enough.
Investment rules unknown
The legislation also is expected to include investments standards, but it is unknown just what the rules will include.
Currently, most pension funds hire one outside manager to handle investments. Only 11% hire two or three managers. Fees are stratospheric by Western standards, ranging from 4% to 15%.
While a study last year by the Ministry of Social Security found 28% of Russian pension funds invest in high-risk assets, many Russian funds adopt conservative approaches. The Inkom-Polis pension fund, for example, urges investment of up to 60% in short-term bonds. Officials there also believe the portfolio can invest up to 30% of assets in bank paper, but investments in stock should not exceed 5% of assets. Lack of adequate legislation governing real estate excludes that asset class from consideration.
The legislation will not address tax issues, including the tax-exemption of pension funds and tax deductibility of contributions. Such issues will have to await a finance bill.
The head of one Russian pension fund, who asked to remain anonymous, doubted the usefulness of the bill without the tax provisions.
But Valentina Panfilova, head of a governmental working group that has developed the draft bill, said the pension legislation will be important. "The long-expected law will set rather tough requirements for the pension funds. It should be adopted as soon as possible, because it will allow at least to start their licensing" by a government inspector, she said.