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. Last Updated: 07/27/2016

Pension Reform Hits Snag as Law Delayed

President Vladimir Putin faces a first blow to his ambitious plan of structural reforms as a much-awaited pension system revamp may be postponed due to a delay in a key investment law underpinning it.

A government source said the Finance Ministry, the Economic Development and Trade Ministry and the State Pension Fund have failed to agree on a blueprint to outline ways of investing the billions of dollars currently distributed in pensions by the state.

Mikhail Dmitriyev, first deputy economics minister, in charge of drafting the bill, told reporters Thursday the entire pension reform hinged on the blueprint and that failure to get it approved by parliament by the year end would put it at risk.

"Without this bill it is very difficult to count on a successful passage of the entire pension package [in parliament] and a planned launch of the pension reform Jan. 1, 2002," he said.

Under the current system, which has no investment mechanism, working people finance pensioners as employers make payments to the Pension Fund, which immediately pays pensions of an average of $35 a month.

The reform, already in the pipeline for over a year, aims to replace the existing state-guaranteed pensions with a combination of a state-funded pension and a new flexible pension financed through long-term investment.

This would be a boon for the Russian financial market and industry, desperate for long-term money, analysts say.

The State Duma gave its first approval to three bills underlying the framework of the new pension system in July. It is due to start debates on the investment bill during its next session, which starts on Monday.

Dmitriyev said the bill, drafted by his ministry, aimed to set the legal basis and mechanisms of investing pension funds, the annual volume of which is expected to rise from $1 billion in the first year of reform to $2 billion in two years, into government and corporate securities.

The government source said other ministries opposed the bill and suggested launching the reform without the law at the start of 2002 as planned. The investment mechanism would be worked out later and all funds would meanwhile be put into state bonds.

But Dmitriyev said this could lead to the uncontrolled use of pension funds to mend budget holes -- a usual practice in previous years, which led to massive pension arrears.

Dmitriyev said the economics and finance ministries were working on a compromise investment bill that could be backed by the government and sent to the Duma in time to get it signed into law by a January 1, 2002 deadline, set by Putin.

The amended bill would foresee a two-year transitional period during which 80 percent of pension funds would be invested into government securities and the remainder into a range of papers, including corporate bonds and shares and foreign securities.

A state agency would manage 80 percent of investments into government bonds, including Eurobonds, while private management companies and mutual funds, selected at a tender, would be in charge of more risky investments.

The transitional period, due to be over by the start of 2004, would aim to refine the investment mechanisms, Dmitriyev said.