Pension Savings: 2016. What's Next?

Positive moment in 2015 – preservation of the funded pension system and creation of a system to guarantee the rights of insured persons. 33 non-state pension funds (NPFs) that entered the guarantee system accumulated 96% of all pension funds of NPFs. However, the system can still get some new funds: the main thing is to submit an application until 31st of December. Several dozen NPFs are now under the regulator's control check. In 2015 the Bank of Russia has tightened the regulation of NPFs and intends to continue this process in 2016. The regulator's ‘cleaning’ has led to the exit of a few unreliable NPFs from the market.

The negative outcome is another ‘freeze’ of pension savings and non-extension of the right to choose between different pension provision options. This is also the main intrigue of the 2016: will the issue with the selection be addressed next spring? Will the pension savings continue to be ‘frozen’?

Social obligations of the government – namely pension inflation indexation – are not met in the next year: at least, such decision is not yet accepted, and pensions will be indexed for sure by only 4%. However, optimists say there may be a second indexation, which will depend on the situation in the economy. We will see.

The main result of the year, in our opinion, is the growth of trust of the population in the pension system. This is an amazing paradox. On the one hand, citizens do not particularly trust ‘private funds’ and rely on the government for the issue of pensions. On the other hand, people massively go to NPFs. According to opinion polls, the trust of Russians in non-state pension funds has increased over the last year. And this is despite the steps that have been taken by the authorities, which to some extent discredited the pension industry. At the end of the year there were queues in the offices of the funds and their partner branch networks: people feared for their funded pension, heeded the advice and ran to transfer it into NPFs urgently. It is possible that there is the following logical chain: distrust of the government policy for the pension provision – belief in a non-state pension option.

What will happen with the pension market in 2016? Experts of the ‘Laboratory of Pension Reform’ shared with our readers their thoughts.

Deputy CEO for Business Development of ‘April Capital’ AM JSC Sergey Lukin:

What will be different in the coming 2016 year? I believe that it will clarify, at least temporarily, the quantified indicators of non-state pension funds. Enlargement of the participants in the private pension provision market is inevitable and will continue. The result of this process will also be a redistribution of assets between asset managers. The market component in asset management will gradually lose its relevance.

With that in mind, we may expect new regulator's actions aimed at ensuring the ‘stability’ among NPFs that are ‘unstable’.

In the coming year we may hear about yet another extension of the moratorium on transfer of funds to the funded part of the pension for those who does generate it. Inflow of new funds to the pension system is a vital condition for its existence, but there is concern that the ‘iron lung’ would be shut off again. It is highly possible that the citizens would not react to what would be happening.

Analyst at National Rating Agency Daria Yudaeva:

Third year in a row, the government imposes a moratorium on pension savings. Thus the stock market and banks will be cut off significant investments. According to the Agency estimations, by 2018 the loss of banks may be about 500 billion rubles, and of stock market – 1.5 trillion rubles. This is an approximate forecast of the development of events, based on the current structure of pension savings investments in assets. Under these circumstances, in the next two to three years there are no any prerequisites for the growth of Russia's debt and stock markets in the part related to pension savings.

The general trend of Russian pension market leads to the situation where there will only be about 10 pension groups, which will be joined during 2016 by most of NPFs that went through corporatization. Most likely, funds will continue to actively attract customers, despite the fact that the government has decided not to renew the choice of pension provision options. Those who abstained will not be able to send new contributions to the funded part of the pension. However, the transition between different NPFs is still possible.

Next year will also intensify the struggle for the customers of those funds that were not included in the guarantee system. Agents and employees of NPFs will conduct purposeful work on clients of these funds. At the same time large pension groups will accelerate buying of funds not included in the guarantee system, because they contain a sufficiently large number of clients on compulsory pension insurance. The estimated cost of acquisition of these funds will be minimal.

The ‘cleaning’ by the Central Bank will continue, which will result in revocation of licenses of more NPFs. Also, taking into account the requirements of the Russian government, will significantly increase the amount of long-term investment of NPFs in the real economy – up to 50 (or more) percent of the total amount of pension savings.

But we hope that the NPF market as a whole in 2016 and subsequent years will be able to develop, despite the many changes in the pension legislation of the Russian Federation.

Director of Corporate Ratings at RAEX (Expert RA) Veronika Ivanova:

2016 will be challenging for NPFs and for all participants in the financial market. The Central Bank's audit showed that the main risk of the funds is substandard assets. Therefore, next year it will still be the most pressing problem for NPFs, even those that entered the pension savings guarantee system. Some funds will face it in connection with the withdrawal from the market and savings transfer to other funds, and some funds will face reinvestment risk (deposits with high interest rates will expire and the funds will be forced to look for new assets). At the same time the funds will be competing for high-quality assets with the highest yield, in order to earn higher than inflation. In addition, the funds will increase the costs to maintain current customer base. Considering that there won't be new savings of insured persons that previously formed their savings in the Pension Fund of Russia (PFR), funds will be able to build a customer base for mandatory pension insurance only at the expense of other NPFs.

Analyst at ‘Rus-Rating’ Agency Alexey Mitrakov:

In 2016 two things will have an impact on the NPF market: first is the cessation of choice option of pension provision in the mandatory pension insurance system, and second is extension of the ‘freezing’ of pension savings for 2016. In this regard, in 2016 in the field of mandatory pension insurance will come to an end arrival of new customers to NPFs and there won't be cash flow in the form of deductions for the mandatory pension insurance. In view of this, in our opinion, the following trends will occur in the NPF market in 2016:

1) due to the fact that the mandatory pension insurance will cease to be a driver of growth, NPFs will try to shift the focus of activities in the area of private pension provision;

2) will accelerate the process of mergers and acquisitions of NPFs, accompanied by the elimination of NPFs not included in the system of guaranteeing the rights of the insured persons;

3) will increase competition between NPFs in terms of attracting customers: to attract customers and retain existing customer base, NPFs will have to offer new products or entire product lines, develop loyalty programs, cooperate with various channels of products promotion, such as retail chains, independent brokers, and so on.

Analyst at ‘Finam’ Investment Holding Bogdan Zvarich:

In my opinion, we will not see any major changes in the pension market in 2016. The key discussion point may be ‘freezing’ of the funded part of pensions for 2017, due to the rather difficult situation in the country. Also, in our opinion, the government will do a single pensions indexation by 4%. Second indexation is likely to be canceled due to the poor economic performance. The government may come back to this matter later in the year, since by that time the economic situation in the country will start to improve, which will allow the government to find additional reserves for indexation.

CEO of VTB Pension Fund NPF JSC Larisa Gorchakovskaya:

2016 promises to be as eventful as the current year. Despite the fact that in December it was decided not to extend the right to choose a variant of pension provision, the possibility that the reverse decision will be made in 2016 remains. After all, for example, the insured persons living in the Crimea and Sevastopol had the possibility to save a funded pension only in 2015, while the remaining Russian citizens could have realized this opportunity since 2003.

Against the background of extension of the moratorium on formation of funded pension in 2016, one of the trends in the pension market will be the development of private pension provision, as an effective tool to maintain the accustomed standard of living after retirement.

Taking into account the government policy aimed at reorientation of pension funds from deposits to the development of significant federal infrastructure projects, in the next year it may be decided to change the limits of pension savings and reserves investing in various instruments.

In addition, in January 2016 comes into force the legislation stating the mandatory participation of NPFs in self-regulatory organization (SRO).

Chairman of the Board of Directors of the European Pension Fund Evgeny Yakushev:

In 2016 will continue the trend towards market consolidation as a result of market competition and the struggle for reduction of operating costs. We expect that the issue of choosing a variant of pension provision will be raised by the government in the spring of 2016 and do not exclude a positive decision, which would beneficially affect the whole Russian pension system. To save the possibility of formation of funded pension in the future is necessary from the point of view of common sense and respect for citizens' rights. Gradually will increase the discussion about raising the retirement age. This may change the degree of public opinion about the problem negatively perceived by the people.

Laboratory of Pension Reform, 30/12/2015