Russia Pension Funds May Cede $16 Billion to VEB in 2014-15

Russia’s non-state pension funds may miss out on 500 billion rubles ($16 billion) of new money in the next two years while the government seeks to clean up the system, eroding demand for some corporate ruble bonds, according to the Finance Ministry.

The ministry proposes barring non-state funds from getting new contributions starting in 2014 until they re-register as open joint-stock companies and are accepted into a new insurance program, to boost transparency and accountability, Deputy Finance Minister Alexey Moiseev said in a phone interview. The process may take two years, during which money earmarked for them will be channeled to state development bank VEB, he said.

About one-third of Russia’s total 2.6 trillion rubles of funded retirement money is invested in stocks and bonds by non-state pension funds. VEB, which invests for people who haven’t selected a manager, focuses on government, mortgage and guaranteed infrastructure-related debt, earning a yield of 9.2 percent last year. Inflation ran at 6.6 percent.

“The measure will lower the demand for domestic corporate bonds,” Dmitry Dudkin, head of fixed income research at UralSib Capital, said by e-mail. “This will further widen the chasm between the state-related instruments and risks of private companies.”

By the end of September, the ministry will submit its proposals on non-state pension funds to the State Duma, the lower house of parliament, Moiseev said by phone on Sept. 20.

Pension Protection

The two-year period “is important to bring order to the regulation of the non-state pension funds system, to make sure only dependable and conscientious participants get access to the market,” Finance Minister Anton Siluanov told Bloomberg by phone. “It’s also important to set a strict prudential supervision on the financial market so that pension savings are protected.”

The temporary transfer of new pension savings to VEB is “justified,” the Interfax news service cited the bank’s chairman, Vladimir Dmitriev, as saying Sept. 21. Government and regulators have “consensus” on the matter, he said.

Money already managed by pension funds will stay with them through the reform period, Moiseev said. As soon as any of the more than 90 existing non-state pension funds re-registers and is accepted into the insurance program, it will receive funds back from VEB, he said.

“Market participants will lose about a quarter of their income, and people will underearn, because VEB’s return is one of the lowest on the market,” said Vadim Soskov, chief executive officer of Kapital Asset Management, which manages about 145 billion rubles, including pension money.

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