Russian Funds Band Together to Repel Government Cash Grab

Russia’s biggest retirement funds are uniting to scuttle a pension revamp they say would decimate an industry that’s poised to amass more than $70 billion.

Government proposals would divert taxes from future retirement plans to meet current pension payments and narrow the state system’s deficit. The money managers that earn fees for investing the cash have appealed to President Vladimir Putin to block the plan, which is dividing the government.

The battle pits spendthrifts in the Cabinet against hawks such as Finance Minister Anton Siluanov, who says the pension savings are needed to finance investment as an oil-fueled boom fades. A worst-case scenario under which existing retirement funds are liquidated may trigger a 1 trillion-ruble ($32 billion) sell-off in government bonds and drive yields higher, according to VTB Capital Asset Management.

“There’s still a chance to convince the authorities,” said Sergey Mikhaylov, chairman of Kapital Asset Management Group, which had 109 billion rubles in pension savings June 30, the most among non-state companies. Opposition from some ministers “could lay the groundwork for a presidential decision.”

Russia’s borrowing costs in rubles have tumbled this year as the government prepares to open the local debt market to global investors. The average five-year yield fell to 6.98 percent on Oct. 17, the lowest since December 2010, according to an index compiled by the Moscow Exchange based on trades. The rate was 7.0734 percent as of 3:31 p.m. in Moscow.

Photographer: Harry Engels/Getty Images

Russian officials are trying to revamp a pension system that risks being overwhelmed over the next two to four decades as the population ages. Close

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Photographer: Harry Engels/Getty Images

Russian officials are trying to revamp a pension system that risks being overwhelmed over the next two to four decades as the population ages.

Deficit Widens

The retirement overhaul comes as this year’s State Pension Fund deficit is set to reach 1.3 trillion rubles, equivalent to 2.2 percent of gross domestic product, up from 30 billion rubles in 2005, former Finance Minister Alexei Kudrin estimates.

A Labor Ministry plan backed by Deputy Prime Minister Olga Golodets would cut the share of payrolls that goes into individual accounts for future retirees, the so-called funded part of the system, to 2 percent from 6 percent, increasing the share that pays current retirees to 20 percent from 16 percent.

While that would narrow the pension deficit in the near term, it would reduce the future cash pool and deplete a source of long-term capital needed to finance economic growth, according to Siluanov. GDP rose 4.3 percent in 2011 compared with 8.5 percent in 2007.

‘Important Role’

The funded element “should retain an important role in financing investment into the Russian economy,” he said in an Oct. 12 interview in Tokyo. “We’re going to defend that position, and we hope that ultimately we’re able to make the case for saving this part.”

Russian officials are trying to revamp a pension system that risks being overwhelmed over the next two to four decades as the population ages. The number of people eligible for retirement as a percentage of the working-age population may rise to 52 percent by 2030 from 33 percent now, according to the Organization for Economic Cooperation and Development.

Private pension funds manage about 20 percent of the cash contained in the funded part of the system, where assets will reach 2.3 trillion rubles by year-end, the government estimates. The National Association of Non-State Pension Funds and five other financial-interest groups wrote to Putin in August asking him to help save the funded component.

“Stable Base’

‘‘A stable base of long-term investments is needed for the development of Russia’s financial market, cutting dependence on foreign investors,” said Alexander Morozov, chief economist for Russia at HSBC Holdings Plc in Moscow. “Pension savings make up the long money that could lower the vulnerability of the Russian financial market.”

Dismantling the system would choke funds that had invested 1.3 trillion rubles in domestic debt by end-2011, according to Vladimir Potapov, global head of portfolio management at VTB Capital Asset Management, who said that using savings already housed within the system’s funded component to pay pensions today would push up bond yields for short- and long-term debt by a percentage point or more.

“It would be a big blow to the fixed-income market, both for Russian first-tier and government borrowing,” Potapov said. “That would definitely push yields much higher than any central bank action.”

Putin, who’s searching for ways to rein in the pension shortfall without raising the retirement age, has ordered Prime Minister Dmitry Medvedev to return the Labor Ministry proposals for public discussion before submitting legislation by Dec. 15.

‘Complicated Discussion’

Golodets told Putin Oct. 16 that the government was caught up in a “complicated discussion” on revamping the pension system. The Cabinet proposals are preliminary and key parts are “under-developed,” said Ksenia Yudaeva, head of the Kremlin’s expert department and OAO Sberbank’s former chief economist.

Returns of retirement savings over the next decade will probably outpace annual pension adjustments for inflation, according to HSBC’s Morozov.

“In the next 10 years, the pension increases will be in line with or slightly above inflation, while the Finance Ministry will have to provide a return on state debt that exceeds inflation,” he said. “We’re going to see an entirely different situation.”

More than 74 million people had pension savings invested either with the state or private funds at end-2011, up from 55 million in 2005, according to a Finance Ministry report. The value of Russia’s retirement savings surged 92 percent last year to 1.76 trillion rubles, from 914 billion in 2010 and 286 billion in 2006, the report showed.

Dismantling the funded part “sounded like a bad idea,” said Kai Stukenbrock, head of sovereign ratings for the CIS and Middle East at Standard & Poor’s. “It basically means taking the money that flows in there to close holes today. That makes your situation a little easier today but creates more problems down the road.”

To contact the reporter on this story: Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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