Interview of Yevgeny Yakushev, Executive Director of NPF SAFMAR, to Banki.ru
The “freezing” of pension savings does not frighten people: at the end of 2016, 4.7 million people changed their Pension Fund for a NPF, other 1.7 million people changed one NPF for another. Why do people transfer their pension savings to non-state funds and what changes will the individual pension capital bring to the system?
– The number of customers of non-pension funds continuously grow. What do people expect, taking into account that the savings are frozen for the last several years?
– As for now the pension provision is not the product to be bought, but the product to be sold. The most compelling story used by the funds to attract customers is that the funds accumulate ruble amounts that can be inherited. This is something objective and real. In contrast to savings of “silent” customers in points with unclear value calculated according to an obscure procedure. Who knows how many times the rules of the game will change. Therefore, people choose a simple solution – live money against virtual points.
The problem of changing funds and loss of the investment income has not been solved yet. When the system for guaranteeing pension savings was created, it was assumed that the guaranteed amount would be re-calculated and increased by the investment income every five years. If the fund is changed more than once in five years, the funds transfer the guaranteed amount only, and the insured person loses the investment income. If the amount of pension savings was increased by new contributions, the loss of investment income at this background would be rather small in percentage terms. However, they first created a new guarantee system and then froze new contributions. As a result, pension accounts increase at the expense of the investment income only. In average, it is 20% for two years: that is what people lose by changing funds.
Now we have developed the transition model, which does not correspond to the financial market. People can close their bank or insurance accounts and transfer their assets to another organization. Whereas in the pension market the assets must be taken not by the account holder, but by a new fund. For several years we have been discussing the application to the current insurer with ministers and departments. This will ensure the balance: not only the new fund will tell how long and successfully it operates in the market, but the current insurer will warn about losses as well. The person will be able to make a balanced decision and give an informed consent – in own opinion, this would significantly reduce the senseless annual “leaps”.
– What do NPFs invest in and how are they influenced by new requirements of the CB, in particular, the 15% restriction to investments in related assets?
– The regulator is inclined to think that funds should be fully responsible for investing pension savings. But there is investment logic. The regulator thinks that funds should invest in the financial market instead of bank deposits. Funds must prove to the regulator that projects they invest in are reliable, decent and well-grounded. That they will bring income customers and the NPF will not have any conflict of interest when buying them.
But there is a collision: the fund invests in a shareholder’s project or a shareholder has “shared” a good profitable project with the fund? It is a very complicated task in terms of interpretation. Given the size of funds, it is clear that we are all entangled in some related projects. Can the NPF of Sberbank deposit money in Sberbank? Or can NPF Gazfond buy shares in Gazprom? This is our financial market, where there are 40 or 50 issuers of shares and 150 or 200 issuers of bonds, this is the entire investment universe permitted for NPFs.
In 2008, some MCs bought “junk bonds” in their customers’ portfolio, although they acted according to the investment declaration.
We see a fast development of the concept of NPF regulation. First, the CB had special requirements to the portfolio and categories of securities that were permitted for purchase. Special depository controlled transactions, but not their structure and quality. Then, the CB began to introduce risk management procedures (where, how, on what conditions and what exactly was bought in the portfolio). Now, it is the stage of introduction of stress testing procedures for NPFs. The fund must have a long-time financial model for each tool and assess the behavior of such tool in various situations. The fund simulates different scenarios and becomes a powerful investment competence center.
– At the recent pension congress the First Deputy Chairman of the CB Sergey Shevtsov said that in the model of individual pension capital (IPC) savings of people who have chosen private MCs can be transferred to NPFs. How will the withdrawal from private MCs influence the pension market in the system?
– Initially it was supposed to separate the management function from the storage of pension savings. A fund is the administrator of pension savings that provides services to the customer. Management of savings is a function of a professional MC, accounting and control are functions of a special depository. The recent practice have shown that MCs are ready to share the success with funds, but they are not willing to be responsible for losses. Perhaps, that is why the idea arose to allow funds to independently invest pension funds and give them the possibility to be fully responsible for the result. What must be done if the fund transferred its portfolio to the management of a MC, and the market collapsed? To make the managing company a bankrupt? In 2008, some MCs bought “junk” bonds in their customers’ portfolio, although they acted according to the investment declaration. Such precedents disturb NPFs and most funds work with some large MCs having high credit ratings.
– Salaries are not increased, most people just do not have financial resources to save for the future pension. In your opinion, are people ready to participate in the IPC?
– Given the decline in real incomes, the number of Russians who can afford to save something is extremely small. In addition, there is a large stratification of income (most of the income belong to a smaller number of citizens). Therefore, there is a risk that trade unions and employers will negatively react to this idea and will discourage people from participating in the IPC. I think that only a small proportion of the population will participate in the new scheme during the first years after launch.
— Can you assess it in percentage? At the above mentioned pension congress Deputy Minister of Finance Alexey Moiseev said the figure of 50%.
– Fifty percent is like in the joke: you either participate or not. This is not a matter of assessment. The participation level will vary in different regions, we do not have homogenous labor conditions and quality of life. For example, the Urals, the Far East, Siberia – it is all official salaries, while the southern regions have a high portion of subsistence economy. Small official salaries, but the most popular car is a Mercedes. Russia has conceptually different structure of income and forms of employment in regions.
Obviously, we are gradually moving in this direction and the international discussion on the unconditional basic income will catch up with us sooner or later.
Let's look into the future and see who will make insurance contributions in a few years. We see the growth of robotization, automation, development of artificial intelligence. There are forecasts that some professions will disappear, for example, an accountant or a lawyer, and drivers of heavy vehicles will be replaced by autopilots. It is clear that this will not happen tomorrow, but in this situation, who will pay insurance premiums in tens of years?
– In one of your publications you considered the transition to the concept of unconditional basic income. What do you mean and how will it affect the immediacy of the debate on changes in the pension system?
– This is also not today’s agenda, it is rather a conceptual design for the future. But obviously, we are gradually moving in this direction and the international discussion on the unconditional basic income will catch up with us sooner or later. I mean that all people receive certain basic income from the redistribution of the public welfare. However, those who work can afford additional savings for their own needs, including for the old age. We have a concept of social pensions when a person aged 60-65 years can receive pension at the minimum subsistence level regardless of whether they have the required working experience and whether they paid contributions. We can calculate the minimal subsistence level if it is paid to all citizens. This is just a computation, the amount will increase with the growth of economy’s efficiency, changes in the production nature and the scope of benefits that the society can redistribute.
– Do you mean that pensions must be composed of that unconditional income plus some voluntary contributions of individuals?
– Of course. Then we will have a pension system that works for everyone from 14 years old, when a person received the passport, and the pension differentiation is proportional to the income. The amount of insurance contributions reduces due to the decline in working-age population and half of the NPF’s income is transfer from the federal budget. The growth of financing of pensions by the state leads to reduced differentiation: both a director and a cleaner receive the same pension.
– If the unconditional income is introduced, the state will also have this burden.
– Now, we have departments responsible for the future pension system, and they must think strategically. The concept of the pension future is the task of the Ministry of Labor. Now it is taking people from the shadow and seeks the ways to make them pay taxes and contributions. However, most likely, it is not the most effective way to combat the lack of money to pay pensions. If people do not want to pay, they will find a way to go into the shadow. They come out, show themselves “in the light” and disappear again. The question is why people go into the shadow. Because they do not agree with the rules of the game and continuous changes reduce the credibility of the pension system. Savings are frozen, pensions are not adjusted. Experts of the pension industry understand objective reasons that have led to this. But the trust of people decreases, while the future of the pension system is above all the trust. If you now make insurance contributions, you should be sure that rules of the game will not change while you are making them. And you have the right for adequate compensation in the old age. But when the rules change every 5 or 10 years, people become disappointed and prefer to abandon paying any contributions to the state.
Everyone is disappointed in the pension system. Highly paid workers – because they have extremely low income replacement ratio. Older people – because they have worked for a great country, but receive small pensions.
Everyone is disappointed in the pension system. Highly paid workers – because they have extremely low income replacement ratio. Older people – because they have worked for a great country, but receive small pensions. People who are reaching the pension age will continue working, and this is discouraging, too. The main pension reform in Russia is to work until death. The future like quiet old age, travels, change of activity is absent. Old age in Russia is associated with poverty.
– But the IPC does not solve this problem – there are no guarantees that it will not be cancelled. So, I ask, what is the probability that people would like to engage in this new system?
– What if everything will be arranged correctly? Attractive tax benefits, support of the IPC introduction with a proper outreach campaign. The economic situation will improve, financial markets will grow and investment of pension savings will show the profitability above any bank deposits.
Let’s not forget that the pension system is a derivative of the labor market. It will not be effective with low wages, unemployment, lack of stimulus to pay contributions. If the labor market changes, alterations in the pension system can be expected.
– In addition to tax drivers to participate in the IPC, what other stimuli can exist?
– To save for old age, to store up a part of earning is a stimulus itself. The more income you receive, the more opportunities you have to use institutional forms for accumulation. The question is whether you have sufficient experience to invest in good instruments. Most people, as a rule, do not have sufficient financial education and responsibility, they risk losing their savings. So, people are induced to save using professional institutes that are supervised by the CB and play according to clear rules. In this sense, the IPC system has the right to exist.
– The key link of the IPC is a central administrator to which employers will automatically connect employees. Is it necessary to create a new infrastructure?
– Now the functions performed by the NPF as part of the saving element of the obligatory pension insurance are proposed to be transformed into the central administrator as part of the IPC system. It seems to me that we should use the development of new technologies creating the IPC infrastructure on a new notional base. At the end of February, the NPF association announced the beginning of consultations on the possibility to use the technology of distributed registers on the blockchain platform in the IPC system. Actually, what we need is not a new central administrator, but a unified unchangeable register consisting of data blocks where information on insured persons is kept (the personal insurance policy number, the tariff and its changes, the insurer and the change history, the guaranteed amount on the account). In any authorized transaction all information is recorded in a new block and automatically renewed in all process participants.
– Will it be less expensive for funds than a new central administrator?
– All NPFs have powerful servers, data processing centers that allow accounting of more than 35 million pension accounts. We will just keep own copy of the single register. This system will be transparent and fault tolerant. We have inner conviction that we can do it. The use of existing infrastructure is likely to be cheaper than creating a new one. But the problem is rather the legislation that does not have such concept as “blockchain” than the technical implementation. There is no regulatory and legal framework. If the problem is solved, the fund will connect to the register, retrieve and add information on its customers. This will be a closed non-public network and its members will be funds, the Federal Tax Service, the Deposit Insurance Agency and the regulator only. And for customers, to receive information on their accounts will be as easy as to go to Yandex web page. The NPF Association is going to make a report on this subject by the end of April.
Interviewed by Yevgenia NOSKOVA, Banki.ru.
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