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. Last Updated: 07/27/2016

State Duma Passes Bill for Investing Pensions

The State Duma on Wednesday passed a pension bill in the crucial second reading that sets out the instruments into which a portion of pensions can be invested.

The current pay-as-you-go pension system -- already under strain -- is a potential time bomb because the working population is shrinking as the retirement-age population swells. The government hopes to avert a disaster by moving partially to an investment-based system, which could also inject billions of rubles into the capital markets.

The bill needs to pass a third and final reading in the Duma, be approved by the Federation Council and signed into law by the president.

Since January, employer contributions to the State Pension Fund have been split into three parts: base, insured and accumulative, or investment. The fund has collected 13.8 billion rubles ($440 million) in the accumulative portion, which the pension fund estimated could grow to 100 billion rubles by 2010.

About 11 billion rubles has been invested since March, when the government passed a temporary, six-month resolution allowing the pension fund to invest using Vneshtorgbank and the Central Bank as brokers. The lion's share of the investments has gone into ruble-denominated government securities, although $10 million was recently invested in Eurobonds.

Analysts said that a larger number of investment instruments should keep investments safer and more profitable.

"A very large volume of investment [in government securities] would actually lead to an increase in inflation, which would in turn reduce the return on investment," said Yekaterina Bogdanova, deputy general director of United Financial Group Invest.

"The more instruments, the more diversification, the more reliable the investment," said Alexei Moiseyev, economist at Renaissance Capital.

One shortcoming is that the bill limits investments to domestic paper.

"The domestic markets, both fixed income and equity, are risky," said Tom Adshead, senior analyst at Troika Dialog. "Russia pensioners would be better served by being allowed to diversify."

Still to come is crucial legislation on who can handle the pensions. According to the reform plan, citizens will be able to choose non-state pension funds to manage their future pensions starting in 2004. The first payouts are set for 2012.