Russia’s plans to relax investment limits on pension funds don’t go far enough to ensure demand for the government’s $14 billion asset sale program, say Allianz SE, Kapital Asset Management LLC and Otkritie Capital.
The Finance Ministry proposed on March 12 allowing funds to invest in share placements, an effort to tap $65 billion of retirement savings for the planned initial public offerings and additional stock sales by state-owned companies. President Vladimir Putin would keep a mandatory positive annual return requirement for the funds, a disincentive for them to increase equity holdings, according to the money managers.
“This plan opens doors but to enter they need to get rid of the annual positive returns requirement,” Aleksei Belkin, who helps manage about $6.8 billion in assets, including retirement funds, as chief investment officer at Kapital Asset Management in Moscow, said by phone March 13. Pension funds “will hardly want to participate in IPOs on their own free will,” he said.
While Russia’s private pension funds are permitted to invest as much as 65 percent of their capital in equities, they have allocated only about 10 percent, according to a Goldman Sachs Group Inc. report on Feb. 4. In the U.S., pension funds had about 52 percent of their holdings in shares last year, according to a global survey by Towers Watson & Co. Many Russian private funds had a majority of their holdings in stocks before the Micex index’s 67 percent retreat in 2008 led them to become more averse to risk, Goldman said.
In neighboring Poland, pension funds hold 37 percent of assets in shares, a source of capital for eastern Europe’s busiest market for IPOs, according to data from the government regulator. Poland caps equity holdings at 48 percent. Russian pension funds delivered returns of 10 percent last year, compared with 16 percent in Poland, data from the National Association of Pension Funds and the Polish regulator show. The Micex Index added 0.7 percent to 1,459.03 by the close in Moscow.
Putin, in a bid to trim the budget deficit, told a cabinet meeting in January that share sales by some of Russia’s largest state companies must be opened to pension funds by jettisoning rules that restrict equity holdings.
Pension funds are currently limited to investing in about 30 publicly-traded Russian companies selected based on trading volume, capitalization and other criteria, as well as government and corporate bonds and bank deposits. OAO Gazprom, Russia’s biggest gas producer, and OAO Rosneft, the country’s leading oil producer, are both missing from the approved list.
The government plans share offerings for companies from VTB Group, Russia’s second-biggest lender to OAO Sovcomflot, the largest shipper, and OAO Alrosa, the nation’s diamond monopoly.
The sales should take place mainly on Russian exchanges, Putin said at his residence in Novo-Ogarevo, according to a transcript on the Kremlin website posted on Jan. 25.
The government may turn to Vnesheconombank, the state development bank known as VEB, which managed 68 percent of Russia’s pension savings investments last year, if its share sales fail to attract interest from private funds, according to Vladimir Tikhomirov, the chief economist at Otkritie Capital, which manages $8.4 billion, including pension money. The government currently restricts VEB from investing in equity.
“If a private fund decides that the share price is too high and won’t be interested, VEB might step in as an anchor investor,” Otkritie’s Tikhomirov said by phone on March 13 from Moscow. “As a result, the government and budget interests might be satisfied, while pensioners might suffer.”
The Kremlin’s private equity fund and its partners bought about half of the shares in last month’s IPO of the Moscow Exchange, which raised 15 billion rubles ($486 million) with shares priced at the bottom of the proposed range.
Finance Minister Anton Siluanov said in Moscow on March 12 that asset sales are set to resume in the second half of this year, targeting 427 billion rubles.
“If these amendments are confirmed, this will allow pension funds to enter and participate in initial placements of shares, not only in additional placements of stocks that are already trading,” Russian Deputy Finance Minister Alexei Moiseev told reporters in Moscow on March 13. This will allow pension funds to “invest effectively,” he said.
About 1 percent of Russia’s 143 million population participates in the financial market, while pension fund investments account for around 4.5 percent of gross domestic product, Putin said at the cabinet meeting in January.
In Poland, pension fund investments accounted for 17 percent of GDP last year and in the U.S. 108 percent of GDP, according to the Polish regulator’s and Towers Watson’s data.
The amount of pension money under private management in Russia will reach $60 billion by the end of this year, according to Goldman Sachs estimates in the Feb. 4 report. That represents 7 percent of Russia’s market capitalization.
“The government came up with this proposal to use state pension funds in privatization deals,” said Oleg Popov, who manages about $1 billion in assets, including pension money, for Allianz Investments in Moscow. “The fact that there’s a mandatory annual positive return requirement prevents pension funds from investing in equities and IPOs.”