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. Last Updated: 07/27/2016

Key Pension Changes Mulled

The government will this month consider a fundamental change to the pension system, a top Pension Fund official said Friday.

"The government could make any decision, either leaving the old scheme in place or ordering its complete overhaul," Mikhail Zurabov, head of the Pension Fund, said Friday.

If the economy continues to grow in the coming years, it would be beneficial to scrap the current pay-as-you-go security scheme, but if the economy turns south, it would be better to preserve the old retirement system, Zurabov said at a news conference.

Under the pay-as-you-go scheme, those in employment pay for the care of those in retirement, making deductions from salaries and other forms of income compulsory.

This scheme puts an additional burden on businesses — if outlays are large — and leaves the employees without strong incentives to make contributions.

The alternative is for employees to make contributions to their own individual pension schemes managed by private pension funds.

If current demographic trends continue, pension payments in real terms will be down 54 percent on 1996 levels by 2050. To maintain the current level of payments to the pension fund, deductions from salaries will have to grow from the current 29 percent to 63 percent, according to estimates made by Pension Reform Lab, sponsored by local advisory firm Pension & Actuarial Consulting.

Both political and demographic reasons are driving the government to define its position on pension reform.

"First, issues such as pension reform should be tackled in the first years of the new presidential administration, and second, we will face a favorable demographic situation in the coming five to seven years," said Yevgeny Yakushev, head of the collective investments department with investment banking group NIKoil.

It is expected that until 2005 or 2007, growth in the workforce will outpace the number of new pensioners, who were born in 1940 to 1945 when birth rates were low due to the war.

It is likely that the government will move to a mix of the pay-as-you-go system and private pension plans.

"It is not either/or — there are a lot of shades in between the two systems," said Matthias Zeeb, an economist with international pensions and actuarial consultancy Callund Consulting, which acts as adviser to the Pension Fund in the reform of professional state pensions.

"A combination of the two can be successful," he added.

The reform project is funded by the British Know-How Fund, part of the Department for International Development.

The Pension Fund, steered by Zurabov, will collect 350 billion to 360 billion rubles ($12.9 billion) this year, up from 249 billion rubles last year.

Next year, the target is tentatively set at 373.2 billion rubles and average pensions will grow to 1,260-1,300 rubles, above pensioners’ subsistence level, calculated at 1,030-1,056 for next year.

Pension outlays will decline to 28 percent of the paycheck from the current 29 percent.

The Pension Fund’s money is kept in the vaults of the Central Bank at no interest and is usually channeled through state savings bank Sberbank’s retail network.

Zurabov refused to provide information on the amount of money kept in the Central Bank, but admitted that the fund was one of the largest financial institutions in the country.

In the early ’90s, the Pension Fund was under the jurisdiction of the Supreme Soviet, which was abolished by former President Boris Yeltsin in 1993.

After the fund received its autonomy, its managers went to set up a Russian Social-Commercial Bank, the activities of which led to allegations of massive corruption on the part of independent observers and some State Duma members.

Zurabov said Friday the fund was no longer involved in any kind of commercial activities.

International accountancy firm Arthur Andersen is expected next month to finish the fund’s annual report for 1998.

An extensive audit of the Pension Fund has been one of the International Monetary Fund’s and the World Bank’s prerequisites for loans, but Zurabov said it no longer needs a loan of $100 million that it had discussed with the World Bank in 1999, so no other international audits but the one performed by Arthur Andersen should be expected.

The pay-as-you-go system dates back to the end of the 19th century, when it was first introduced in Germany by Chancellor Otto von Bismarck to guarantee social payments to retired soldiers.

The ideology of private social security rests on principles advocated by British economist William Beveridge, who postulated in the "Beveridge report" in 1942 that social security must be achieved by cooperation between the state and the individual.

Debate between advocates of pay-as-you-go and supporters of private pension schemes intensified after publication of a World Bank study in 1994 and culminated in a wide approval of a three-pillar pension system.

The first pillar stands for obligatory state funds, the second pillar is made up by obligatory private funds and the third pillar represents private funds for which fiscal benefits are granted by the state.