Russian Pension Plan Lowering Funded Payments Sent to Putin

Russia’s government submitted proposals on overhauling the pension system to President Vladimir Putin, including a reduction to the funded component that had been opposed by the Finance Ministry and fund managers.

The government approved the plan and sent it to Putin by his Oct. 1 deadline, Natalya Timakova, Prime Minister Dmitry Medvedev’s spokeswoman, told reporters today outside Moscow. The proposal would lower the amount paid into the pension system’s funded part to 2 percent from 6 percent, said Alexei Levchenko, spokesman for Deputy Prime Minister Olga Golodets.

“There are some parts to this concept that the government sees as invariable, while the rest is submitted as proposals,” Timakova said, declining to say whether the Cabinet would insist on a reduced funded component.

The world’s biggest energy exporter faces a pension system deficit, including transfers from the budget, that may increase to 8.5 percent by 2030 from 5 percent of economic output, or 2.6 trillion rubles ($83.4 billion), if no measures are taken, according to Citigroup Inc. Putin ordered Medvedev to reprimand members of his Cabinet including Labor Minister Maxim Topilin last month for failing to move quickly enough on a draft strategy.

‘Socially Acceptable’

The government’s proposal estimates that leaving the system unchanged would bring pensions below a “socially acceptable level,” while transfers to cover the pension fund deficit will reach 3 percent of gross domestic product by 2030, according to Levchenko.

The State Pension Fund channels 16 percent of the 22 percent it receives to pay pensions to current retirees and shifts 6 percent to asset management firms. Vnesheconombank, Russia’s state development bank known as VEB, manages about 80 percent of the funded part of the system. While pension savings are transferred to VEB by default, employees can also choose a non-state company.

The Pension Fund predicts assets in the funded part of the system, created in 2002, will reach about 2.3 trillion rubles by the end of this year, up from 1.7 trillion rubles in January. Speaking at the St. Petersburg International Economic Forum in June, Putin said the funded pension pool will reach about 4 trillion rubles by 2015 and some of that money will be invested in long-term bonds to help finance infrastructure projects.

Hazardous Jobs

The strategy includes proposals to require employers to pay higher rates for workers involved in dangerous professions to reduce the burden of Soviet-era early retirement benefits now paid by the state. Officials also seek to boost the amount self-employed workers are paying into the system.

Reducing the funded component to 2 percent will release about 300 billion rubles per year, not enough to “significantly improve” the Pension Fund gap, Natalia Orlova and Dmitry Dolgin, analysts at Alfa Bank in Moscow, said in a research note today.

“We take the Cabinet’s decision as negative for the Russian business climate and for budget stability,” they said. “Taking defined contribution revenues from private savers will increase budget obligations in the longer term.”

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