Low Pension Returns Spur Call to Action

Prime Minister Mikhail Fradkov told ministers on Wednesday to come up with a financial markets action plan by year's end to improve pension fund performance.

Under reforms launched last year Russians can opt to pay into private pension providers, although the bulk of it goes into the State Pension Fund managed by state-owned Vneshekonombank.

Health and Social Development Minister Mikhail Zurabov said many of the fledgling private pension funds posted losses last year due to local stock and bond market underperformance.

"The bleak results of managing companies' activities ... are mainly due to the fact that managing firms have invested 27 percent to 30 percent of their funds ... in shares and bonds of Russian issuers," Zurabov told a Cabinet meeting.

The government believes, however, that administrative barriers, high taxes and a lack of enabling legislation are the real barriers to developing the country's financial markets.

"Only five to six companies carried out an IPO in the last year. This is a catastrophe," said Gref, lamenting the domination of Russia's stock market by a small group of energy firms.

"The Russian market's capitalization is 10 to 15 companies, which are being shifted back and forth. The market is speculative and has nothing to do with the development of the economy."

Oleg Vyugin, the head of Russia's financial markets watchdog, said state and private pension funds were subject to excessively strict investment regulations that should be revised. He said Russia should develop a derivatives market.

Russia had a boisterous foreign exchange derivatives market before the 1998 devaluation, when market players suffered huge losses. Legislation defines derivative trade as gambling.

"We must solve these problems in the next few years," Vyugin said, adding that Pension Fund rules should also allow investment abroad.

Gref and Finance Minister Alexei Kudrin opposed that idea.

Takeup of private pensions among Russians -- brought up under the cradle-to-grave Soviet welfare state and distrustful of financial markets -- has been very slow.

But Zurabov said assets under management in the funded scheme, designed to supplement the country's low state pensions, should rise next year to 251 billion rubles ($8.6 billion).

Economy Minister German Gref said the state pension fund's gains last year were 2.5 percent and private funds 0.5 percent -- or negative in real terms as inflation was 12 percent in 2003.

By contrast, a mandatory funded pension scheme set up by Poland -- a country a fraction of Russia's size -- has delivered double-digit rates of return since its launch in 1999 and now has $14 billion in funds under management.

Although Russia's stock market has posted stellar gains since the 1998 financial crash, shares have been hit of late by the crisis surrounding oil major Yukos, which faces possible breakup after failing to pay a massive tax bill.

And, say analysts, yields on government bonds -- the biggest pension fund holding -- are depressed by Russia's loose monetary policy, under which the authorities buy dollars and sell rubles to stop oil export earnings from forcing the exchange rate up.