A new law regulating private pension funds in Russia offers tax breaks to companies contributing to pension funds. There is hope that the law, adopted in May, could mark the beginning of a private pension fund industry in Russia.
The law, passed by Parliament and signed by President Boris Yeltsin, is intentionally vague, however, requiring additional regulations from the Ministry of Labor. The ministry's inspector of nonstate pension funds told a domestic fund manager in early August that the regulations, dealing with such things as actuaries, licensing and asset diversification, will be ready by October.
At the beginning of 1998 there was only 7.3 billion rubles ($1.2 billion) under management in Russian pension funds, a pittance compared with the estimated $7 trillion in U.S. pension assets. Most of this is in so-called "pocket" funds set up by top Russian companies. While there are more than 300 nonstate pension funds in Russia today, three funds set up by oil companies Surgutneftegaz and LUKoil and gas giant Gazprom represent more than half of all nonstate pension fund assets.
"After this new law, a lot of companies now want to set up private pension schemes, in part because of the tax incentive," said Michael Butera, head of pension services with Pallada Asset Management in Moscow, which manages mutual funds for domestic investors. The new law allows employers to contribute 1% of their pre-tax profits to nonstate pension funds or charitable causes.
Earlier this year, Pallada was acquired by Boston-based State Street Global Advisors. With State Street's resources and expertise, Pallada has begun working with Russian companies to assist in setting up their pension schemes. A minority shareholder in Pallada and one of its founding shareholders is AEW Capital Management, a Boston-based pension money manager.
"The cleanest plan to set up is a defined contribution plan with the employer providing matching funds of 50% or more," said Mr. Butera. "Defined benefit plans are very risky due to the unstable investment environment."
Pallada is helping the regional utilities company Irkutskenergo, located in the Siberian city of Irkutsk, develop a pension plan that should be in place by the beginning of next year. Pallada is specifically advising on the administrative systems for running the plan and has invested in an Irkutsk-based asset manager that will manage money for the company's pension fund.
Irkutskenergo is one of Russia's more financially savvy companies, with a reputation for relatively good investor relations and transparency.
The company was among the first to issue American depository receipts in the United States and regularly has its books audited to International Accounting Standards by one of the major accounting firms.
"A pension plan that provides for its workers can't mean anything but good for investors in the company," said Mr. Butera.
Russian employees will need powerful incentives to contribute money to their investment accounts, given the country's checkered history of pyramid schemes and a volatile investment climate. The difficulty in encouraging Russian citizens to gain exposure to domestic equity and debt markets is seen in the modest amount of capital that has trickled into the country's 20 domestic mutual funds, all but six of which still have less than $2 million in capital. "Getting free money in the form of matching funds from employers will be quite an incentive to employees," said Mr. Butera.
Russia's domestic mutual funds expect to benefit from the enormous growth potential of private pension funds. Dmitry Khilov, a mutual fund manager with Moscow-based investment firm United Financial Group, said his company certainly will be interested in attracting business from nonstate pension funds.
"We have been in discussion with a number of pension funds and are hopeful the law will result in pension capital coming into the unit investment trusts (domestic mutual funds)," said Dominic Gualtieri, portfolio manager of Moscow-based Templeton International's Templeton Open-End Fund, a $3 million domestic mutual fund.
Other fund managers, however, are not forecasting a flood of pension capital anytime soon. "I don't think there is huge potential, even after the tax issue is resolved, because voluntary pension funds are really the same kind of vehicle as unit investment funds, which already exist," said Nikolai Klekovkin, head of the Credit Suisse unit fund management branch in Moscow.
Mr. Klekovkin said there will be much more potential for pension fund business following further government pension reforms that are now in the works but face an uphill battle in Parliament.
"The ideal system would stand on three pillars: a state pension scheme, as already exists; mandatory private pension plans, which require employees to contribute but let them choose between funds; and nonmandatory plans, which is what our unit investment funds already offer," said Mr. Klekovkin.
Market participants generally are pleased with the new pension reform law. The Federal Securities Commission, however, lobbied unsuccessfully for several items, including strict separation of founders and managers of funds; a limit on investment in securities issued by pension fund founders; and a requirement for the funds to use specialized depositories.