‘New return records of non-governmental pension funds shouldn’t be expected’

What the Central Bank says

The total portfolio of pensions in non-governmental pension funds (NPFs) rose by 1,3% to 6,5 trillion rubles, moreover, there was no growth at all in the first quarter. All three segments of the portfolio demonstrated a surge — pensions increased by 1,2% to 3 trillion, pension reserves did by 1,4% to 1,5 trillion rubles, pension pots in the Russian Pension Fund (RPF) climbed 1,3% to 2 trillion rubles.

How the NPF segment works, such funds run three types of activity:

• non-governmental pension;
• mandatory pension insurance;
• professional pension insurance.

Non-governmental pension: in their activity, NPFs collect contributions, deposit pension reserves and pay pensions. Received money is invested in certain types of assets (low-risk assets, the list is spelt out in legislation). After a person who was deposited money reaches the retirement age, he or she receives an additional non-governmental pension.

Mandatory pension insurance: in their activity, NPFs are mandatory pension insurers, accumulate contributions transferred for accumulation and invest them via managing companies. After a person who was deposited money reaches the retirement age, he or she receives the accumulated part.

Professional pension insurance: due to the absence of legislation regulating the system for people working in hazardous or harmful conditions, this type of insurance is hardly provided.

Bill on return of savings

Generally speaking, accounting records in the three above-described areas are kept separately, that’s to say, money isn’t mixed in the funds. The advantage is that the money accumulated for non-governmental pensions won’t be used to pay pensions to pensioners. The structure and composition of funds’ assets are clearly regulated. Funds don’t have the right to be guarantors of third parties’ obligations, they may not deposit pension savings and reserves as pledge, they may not issue securities and be founders of organisations if this leads to absolute property liability. Pension savings and reserves may not be recovered as debts, they may not be imposed restrictive measures such as property arrest, for instance.

The government recently adopted a bill in the Duma. The bill obliges NPFs to return pension savings to clients if the illegitimacy of a transfer to other insurance companies is proven by the court. So the agreement on mandatory pension insurance is recognised as invalid, the client gets the insured amount of return on investment that was withdrawn during the early transition from one NPF to another.

Results of performance of NPFs in second quarter, reasons for growth

The return on NPF pension investment outstrips numbers of the Russian Pension Fund, in the second quarter of 2021, it was 5%. The growth of return is related to greater growth dynamics of the stock market (the index growth of at Moscow Exchange rose by 42,4% a year in the first half of the year) and a slower fall in the bond market. To save structural investment portfolios, NPFs sold a part of stocks whose rates had grown in a quarter. The money raised was used to buy public and subfederal bonds (for instance, in the government of Moscow and some other regions).

Though it is noteworthy that NPFs have a limited amount of investments in stocks (the Central Bank strictly regulates it). Stocks account for just 6% of pension savings and 9,9% of reserves. Debt market instruments — bonds — are the key part of funds’ portfolios. In particular, they held 51,4% in pension savings in the second quarter and 48% in reserves. In the first quarter, bond interest rates started to rise, which brought to a fall in the value of debt instruments and allowed funds to increase the return on their investments in bonds. We can say it was a one-time occurrence due to the increase in the Central Bank’s key rate, and new return records in NPFs shouldn’t be expected. They move together with markets.

In general 3 trillion rubles of savings in NPFs seem a lot. Judge yourself, the amount of natural persons’ money in the stock market is 4 trillion rubles. This means that people decide themselves and create their portfolios that aren’t limited to bonds. Of course, such an approach is fraught with additional risks.

All this suggests that the NPF market isn’t as big as it seems, and statistics prove this point. According to the Central Bank, 37 million people have pension savings in NPFs, moreover, there is a tendency for a fall quarter after quarter. Understanding that the market share is limited, funds aim to attract natural persons who look for more profitable instruments than bank deposits and launch new pension products in the market that can be interesting for clients. Particularly thanks to the minimum guaranteed income and short investment terms.

In conclusion, it is necessary to note that it is good news for ordinary NPF clients, since a 5% return is the average in the sector, the return in some NPFs is higher. The question is if the funds will manage to save such a pace next year, as they are seriously regulated when it comes to their portfolios and cannot fully skim the cream from the recovering Russian stock market.