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. Last Updated: 07/27/2016

Vyugin Worries About Pensions

Painting a grim picture of pension reform, financial markets watchdog chief Oleg Vyugin said Wednesday that the Health and Social Development Ministry was stalling on much-needed changes and that the pension fund was seeing returns dwindle.

"The only correct decision would be to replace those carrying out this reform because they have proven their inadequacy," Vyugin said during an investment conference organized by UBS.

Vyugin's Federal Service for Financial Markets agency shares responsibility for the reform with the Economic Development and Trade Ministry, the Finance Ministry and the Health and Social Development Ministry.

He did not say which agencies should be charged with the reform. Vyugin said his federal service agency had done its part by preparing amendments on the pension system, but the health ministry had not done its part.

A ministry spokeswoman declined to comment on Vyugin's accusations.

Vyugin also said the state pension fund, managed by Vneshekonombank, was seeing near-negative returns because it was required to invest in bonds, whose yields are falling amid rising inflation. Debate on the reform, including increasing the approved investment tools for the fund, has been going on for two years, but to no avail, he added.

State-controlled Vneshekonombank manages more than 90 percent of all pension savings, which land there by default if people fail to designate a different management company to handle their pension money.

The fund is only allowed to invest in government bonds, with annual yields of 4 percent to 6.5 percent, said Tatyana Bobrovskaya, an analyst with BrokerCreditService. She said only very active, successful bonds trading could help the bank set higher returns than inflation, expected to reach 9 percent this year.

"Private pension funds have been more active on the market," Bobrovskaya said, adding that they were also allowed to invest in more profitable instruments.

As well as government bonds, private pension funds can invest in other securities, including blue-chip corporate bonds, yielding returns of 7 percent to 9 percent.

More than 50 private pension funds manage less than 10 percent of all pensions, or less than $300 million in total assets, said Anatoly Milyukov, executive vice president of asset management at Gazprombank. "Russian investors have ample reason not to trust the financial markets," he said.

Earning the trust of Russians is easier said than done, however.

There is no other way, however, because the current situation, in which working adults support pensioners directly, is not sustainable, Milyukov said.