Russia’s pension reform has been slow in coming. For the past eight years, a three-pillar system has gradually been taking shape, and over the past two years, developments to the second pillar appear to have now been finalised. Back in January, President Putin signed the law to allow private asset managers to participate in the management of funded pension assets, causing a wave of excitement that the second pillar was about to be significantly opened up. Some 58 eager private asset managers applied to the government for licenses, and in September, 55 of them were authorised as eligible to run the pension fund money. But, initial excitement now over, the asset managers are aware that there is still a long way to go before the effects of the reform will be seen, and the level of commitment by the Russian government to the reforms is being questioned.
The new three-pillar system incorporating a mandatory funded pillar was launched on the 1 January 2002. Whereas, previously, Russia’s pension system was run on a pay-as-you-go system, the new model divided pensions contributions collected from taxes, allocating a certain percentage to a central fund – the Pension Fund of Russia. These assets were collectively invested into eligible instruments until a formal manager was appointed by the state. The Russian people would then a) receive statements on their contributions, and b) receive a letter advising them that their contributions could now be invested by a state-appointed bank, or by one of the newly licensed private asset managers.
With such an immense and ambitious plan, there were bound to be hiccups. Some 40m statements and letters were supposed to reach the Russian public by 1 August with the aim to all responses being received by 15 October, and funds transferred at the beginning of January 2004. By mid-August, however, only 1.7m letters had been delivered. According to the Russian press, printing centres just could not cope, and “paper jams” and “dust” were causing the delays. As a result, the government has, under much duress, set 1 November as the date for all letters to have reached their destinations, with the deadline for responses as 31 December.
Some management companies are sceptical about the hold up, believing it an excuse for the government to keep control of the money for as long as possible. And with only a short amount of time between all letters being received and responses having to be made, an argument is also being put forward that the public may feel too pressured to choose a private manager and will, therefore, “conveniently” remain with the state-appointed manager.
Indeed, the process for “opting out” and choosing a private manager has not been made easy. Those who do not reply to the letter simply stay with the state-appointed bank as their manager, and those who wish to “opt out” have to have their forms signed by designated officials and return the responses – which, the postal system may not be able to cope with suggest some critics.
The theory that the state wants to keep control of the money is aggravated further by its choice of state asset manager. There is clearly no proof that the tender process was rigged, but critics are quick to point out that Vneshekonombank which was selected is state-owned, and that the mandate for special depositary was won by, Unified Depositary Company, which represents Russia’s major state-owned bank Vneshtorgbank.
Speculation aside, it is hard to argue away the lack of information and transparency. The Russian government has done little to educate and inform its people of the choices being put to them, nor have concerns been addressed. Indeed, one clear issue that will disadvantage the private pension fund managers is convincing the Russian people that their money will be safe. “The Russians have lost their money two or three times now, and therefore do not put a lot of faith in financial institutions,” says one anonymous source. Expands Claudia Rübig, a consultant with Hewitt Associates: “The experience with pyramid schemes, and the ‘GKO bubble’ left many Russians suspicious of various types of investments.” She believes that Russian people may prefer to keep their pensions savings in state vehicles, at least initially. One other hindrance that may concern the public, and therefore discourage take up is regulation. “Due to the lack of experience with pension funds, the regulation of the pension funds is less developed than, for example, the insurance business,” says Rübig. The figures certainly back up Rübig’s opinion. According to RIA Novosti political analyst, Marina Shakina, public polls show that only seven per cent of Russians are prepared to trust their pensions savings to non-state managing companies.
So with such little money coming their way, is it worth private asset managers’ time? 58 obviously thought so, but why? As one foreign investment manager points out: “The margins are so thin, why bother?”
While managers agree that yes, margins will be thin initially, they are optimistic that the market will grow to make it worth their while. “There are ultimately billions of dollars involved here in the long-term,” says one manager. Bernie Sucher, chairman of Alfa Capital, one of the 55, thinks it’s important to be involved from the beginning despite the lack of initial profitability. “Some are of the view that, unless you are in from the beginning, you may never get in.” Sucher also believes involvement illustrates commitment. “If you are not committed in this area, then your other clients may perceive you as uncommitted elsewhere. It is negative PR,” he says.
Some managers will find it easier than others, however, to attract the Russian people. The larger names will obviously benefit from brand awareness, but, says one onlooker, some corporations will benefit from the fact that they are large employers. He argues that, companies may encourage their employees to invest with their affiliated private asset manager. Battling against such competition could prove costly for the smaller private asset managers. Says Sucher: “It is an immature market, and some managers lack experience. They will need to make sure they have done their sums correctly. Ultimately those companies which have other developed business areas which the new pensions business can slot into for now will stand a better chance of success.”
While the cards may seem stacked against the private managers, however, the optimism that the market will grow should ensure that the second pillar funded system will not fail. “Initially probably just higher-educated people, the rich, and those involved in financial markets will ‘opt out’, but others will follow if they see that the private managers are not walking away with their money, and if they see that there are positive returns,” says one Russian manager.
Says Mattias Westman, director of asset manager Prosperity Capital Management: “it is likely that this year many people will not choose to tick the boxes and pick a manager, but the market will certainly grow.” Prosperity is hoping to apply for a license from the government next year.
Faith in the market is also shown by DIT Moscow. One of the three asset managers to be declined a license this year as it failed to meet one of the requirements, a spokeswoman from the company said that it was hoping to re-apply next year.
Indeed, the general feeling among the asset managers is that they will be patient and take the obstacles thrown at them by the Russian government, and they will accept the initial losses and disappointments, because the potential prize that lies ahead will be worth it. The reforms have, after all, taken eight years already, they can wait a little longer.

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