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24 Sep, 2009 14:07

Pension unlocking could free up liquidity for economy

The Government is looking for funds to kick start the economic revival, with a scarcity of longer term funding options, likely to slow any pull out of recession. That has key players looking at pension funds.

Russian Pension reforms, dating from 2002, have created accumulative pension funds that – by default, if individuals don’t choose a private pension – are managed by Vnesheconombank on behalf of the State.

Over 7 years, only 12% have opted for a private pension – generally managed by private insurers or banks. They are seeing an average 40% growth this year.

When looking to invest these funds, VEB is currently limited to government backed securities, meaning an estimated 15 billion dollars is held back from the economy. Dmitry Korobchenko, Deputy Head of Asset Management at the Bank of Moscow

“Pension fund money is circulating in the economy. I'm talking about the money in private management. There are regulations about how that money can be invested. What per cent can be invested in shares – an aggressive strategy – and in Russian corporate bonds as well as government backed securities.”

More than 60 companies have fund management provisions under official agreements with the government pensions fund. A general lack of financial literacy, skepticism about private providers, and difficult transfer procedures, are limiting both access to the pension funds, as well as future returns for pensioners. Vadim Soskov, CEO of Kapital Investment Group says pensions funds can be more effectively used.

“Foreign pension systems have managed to make it useful for people even before they go on to a pension. They can take loans from their pension money for education, which can lead to a higher salary and therefore a better pension. We also should persuade people to move money into private managment which will be better for them and economy as a whole.”

With the bulk of government reserves already earmarked and the budget looking at some years in deficit, the government has already announced plans for domestic and foreign borrowings. The same driver is also likely to push pension savers to get a better return for themselves, and the economy.