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. Last Updated: 07/27/2016

Ministry Makes Grab for Pension Savings

A plan that would effectively confiscate some of the contributions piling up at the State Pension Fund has cast into doubt five-year reforms and could curb vital investment, critics including, the Economic Development and Trade Ministry, say.

The Health and Social Development Ministry, which oversees the reform, has suggested using the money of so-called abstainers, who have not chosen a private fund manager for their pensions savings, to cover a deficit at the state fund.

"Money from abstainers' contributions may be used for two goals -- to finance transfers of other savings to private pension funds ... and to pay current pensions," a document published on the ministry's web site this week said.

But the Economic Development and Trade Ministry sees the proposals as the de facto abolition of the savings scheme and a return to an outdated pay-as-you-go system.

"With pension savings we can also lose an investment resource, which may be used to fund long-term infrastructure projects," Deputy Economic Development and Trade Minister Andrei Sharonov said.

The pension fund deficit stood at 93 billion rubles ($3.5 billion) at the end of 2006, while the monthly pension averaged $90 in 2005. By law, the government is allowed to use the $89 billion budget stabilization fund to cover the pension deficit.

The plan may scare those Russians who have so far failed to transfer their pension savings, leaving the state pension fund awash with cash it can only invest in the local bond market.

Russia opted in 2002 for a "three-pillar" system under which people born after 1967 would be entitled to a basic pension and also contribute to insurance- and savings-based schemes.

Put off by a lack of trust in the state and poor publicity, 95 percent of those entitled have done nothing. As a result, their contributions are being funneled into the state pension fund, managed by state-owned Vneshekonombank.

Those are the contributions that the Health and Social Development Ministry are targeting to cover the shortfall needed to pay today's pensioners.

The fund had net assets worth 267 billion rubles ($10 billion) at the end of 2006 but it is restricted to investing them mostly in government bonds whose yields, at below 7 percent, fall short of inflation.

However controversial, the health ministry proposal may prove popular with almost 40 million current pensioners who will have a powerful voice in forthcoming elections.

Russians elect a new State Duma in December and will choose a successor to President Vladimir Putin in March 2008. The election campaign is gaining momentum and the health ministry proposes that the changes take effect in 2008.

"This proposal would finance pensions during an election year, and it is known that pensioners are the most disciplined voters," said Pavel Teplukhin, partner at Troika Dialog, which runs one of the country's leading private pension funds.

"Now, when people saw the difference between different styles of pension management, they attempt to change the rules of the game radically. The state should not behave like that," Teplukhin added.