MOSCOW -- It happened at last. After six years of contentious debate, President Boris Yeltsin signed legislation authorizing private pension funds May 7.
Not that Russian companies have waited all that time. Private pension funds have 7.28 billion rubles ($1.2 billion) in assets; that figure has doubled in each of the past two years, according to the Inspectorate of Non-government Pension Funds, Moscow.
"We expect the law will give a boost to further development of the private pension system," said Vladimir Tolstoy, general director of Moscow-based First Pension Fund. The fund is open to all Russians and has 40,000 participants around the country, as opposed to company-specific "closed" funds offered by big corporations such as Gazprom and Lukoil Holding.
"People have started to realize the government cannot provide them a decent lifestyle after retirement. They must be aware of alternatives," Mr. Tolstoy said. Individuals also must be persuaded of the soundness of such funds, following suspicions created by financial pyramids in 1993 and 1994.
"This law gives confidence to our corporate clients," said Alexander Morozov, general director of the 35 million ruble ($5.8 million) Imperia pension fund, Volgograd.
Under the law, a pension fund can be formed with capital of 1.28 million rubles ($210,000). There now are some 300 licensed pension funds in Russia covering 2.3 million people, but not all funds will meet the new capital test. Assets in the industry are highly concentrated, with the largest 26 funds accounting for 86.8% of total assets. Funds that fail the test face liquidation.
A 1992 presidential decree opened the door to private funds, but legislation to establish the funds was stalled by political in-fighting.
Russia's Federal Securities Commission -- the equivalent of the Securities and Exchange Commission in the United States -- fought enactment of a bill. Headed by Dmitry Vasiliev, a close ally of economic reformer Anatoly Chubais, FSC officials sought to maintain control over private pension funds, asserting they are financial institutions.
But the inspectorate and The Professional League of Non-Government Pension Funds, representing 33 major pension funds, ultimately won out. The new law says pension funds are social institutions first, and thus regulated by the Labor Ministry.
The Russian government will need to issue at least 30 sets of regulations to implement the law.
Some guidelines can be found in the law. Pension funds are allowed to invest in government and municipal bonds directly, but they must hire an external manager to invest in stocks or property.
"We mainly invest in GKOs (Russian treasury bills)," Mr. Tolstoy said. "That is how we can get (a sufficient level of) guaranteed income to our clients and (pay for) our office costs."
Russian funds guarantee a return equal to that offered for cash deposits by Sberbank of Russia, the country's largest state-owned bank. Last year, the cash return was about 18%, although actual average returns were 27%.
Because Russian private funds are young and relatively small, the law allows them to spend up to 20% of realized gains for administration for the first three years of operation and up to 15% afterward.
In a key change, the law would make pension contributions tax exempt, although investments and benefits will remain taxable.
While participation in private plans has been voluntary so far, the government is keen is take pressure off its pay-as-you-go system, which registered a deficit of 18 billion rubles in April.
A government decree is expected soon that would tack a 1% sales tax onto products that employers then would be required to contribute to private pensions. And rumors abound some portion of the state pension contributions could be shifted to private funds, encouraging employers to pay contributions; tax avoidance with the deficit-ridden state system is rampant.