Review Will Make Pensions Sector More Stable

Wikimedia CommonsAlexander Lorenz, Chairman of the Council, Raiffesien Pension Fund.

Agovernment review of pensions tightens control over savings held in private funds. During the review, corporate contributions estimated at more than $7 billion in 2014, are being diverted into the struggling, state-run pension system. Mark Gay interviewed Alexander Lorenz, Chairman of the Council, Raiffesien Pension Fund.

How common are private and corporate pensions in Russia?

Private pensions in Russia are lamentably unpopular. The industry watchdog gives no breakdown but one can safely assume that private pension penetration is still in single digits. The lucky 6.7 million of those not in the state pension system mostly comprises employees of the big monopolies like Gazprom or RZD, major Russian firms like LUKOIL or the affiliates of Western companies.

Corporate pensions are a novelty in C&B (compensation and benefits). Figures vary but 13 to 18 per cent of companies in Russia provide corporate pensions to their personnel.

What impact do you expect from the reforms?

The change in legal status will convert funds into joint-stock companies, at least those funds that wish to stay in the OPS, the obligatory pension insurance scheme. The central bank must also approve a fund joining the pension insurance framework.

The market will see further consolidation, as some funds will exit because of stricter capital and liquidity requirements. On the whole, though, the sector will emerge from this cleansing as more stable and transparent.

What measures would promote the private and corporate pension sector in Russia?

To put it briefly: more tax incentives. Currently, the payments a company makes towards its corporate pension plan are deductible against two taxes:

• corporate profit tax (assessed at a 20 per cent rate) up to 12 per cent of the payroll

• and the social security tax (assessed at a 30 per cent rate) on all pay.

The same goes for private pensions. Today, RUB 120,000 a year (less than $3,500) is the tax-deductible ceiling for payments towards one's pension plan. Not exactly peanuts, but not a sufficiently large incentive either.

The government would dearly like business to shoulder more of the pension-funding burden. Doing it directly by empowering companies is more efficient than doing it through higher pension taxes. A recent one-year experiment that raised the social tax rate by four points to 34 per cent was quite evidently a failure.

What can human resources directors do to encourage the use of pensions?

Corporate pensions have a lot to offer to Russian employers, but it takes an experienced HR manager to fully assess the potential of a corporate pension and to realize the value of such intangibles to a solid employer brand. They need to sell the corporate pension story to the board.