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. Last Updated: 07/27/2016

Pension Fund to Buy $5Bln in State Bonds

The State Pension Fund plans to invest nearly $5 billion in domestic government bonds next year, fund head Mikhail Zurabov said on Thursday.

"In 2003 the total estimated volume of investments will be 140 billion to 150 billion rubles," Zurabov said, Reuters reported. The fund is expected to accumulate and invest 70 billion rubles by the end of 2002.

Before January, when contributions to the fund were split into three parts -- base, insured and accumulative, or invested -- no interest was accrued on the hundreds of billions of rubles between collection and disbursement.

The money accumulated in 2003 will be fully invested in state ruble bonds, as the mechanisms for investing in other instruments allowed by law, including Eurobonds and corporate paper, have not been put in place.

"We understand that investing in a narrow spectrum of instruments is not great," said a spokesman for the fund. "By the end of the year, however, it should be resolved."

The current pay-as-you go system is already feeling the strain of an aging population that adds about 1 million new retirees each year. The working population cannot generate enough money to provide adequate pensions for current retirees.

"We believe it's a key element in the future economic growth of Russia," said Adam Payne, marketing manager for Troika Dialog.

"Pension reform is important politically, because it's the only way to raise pensions to a normal level," said Renaissance Capital economist Alexei Moiseyev. "Pension reform was one of the most important components of the economic growth in the United States and England in the 1990s. It generated a very large amount of money that was then invested in the economy."

Investment banks and funds have been eyeing the billions of dollars that is to be released into the market over the next several years. The invested portion of the fund has grown more rapidly than many expected.

Prime Minister Mikhail Kasyanov, in opening comments at Thursday's Cabinet meeting, praised the progress made on pension reform and said that next year invested pensions should reap a real profit of 6 billion rubles.

Starting in October 2003, after receiving their account statements in July, people can choose from a list of government-approved asset management companies. Troika Dialog estimated that about 20 companies, including itself, meet the criteria listed in the law. And beginning in 2004, future retirees will have the option of investing in nonstate pension funds as well. Legislation on the role of such funds is still pending.

People who don't choose will have their money handled by a state fund management company. The law that regulates such a company passed the first reading in the State Duma on Thursday.

"This is one of the cornerstone pieces of legislation," Payne said. "Given the progressiveness of the law, it should add a huge amount of strength and liquidity to the financial markets."

Zurabov said the fund is still developing rules and methods for money management, approving asset management companies and forming its investment portfolio and accounting procedures.