Putin postpones the planned reduction of the contributions to the capitalized pension savings funds

Gazeta.ru  reports that the President of the Russian Federation Vladimir Putin decided to postpone the planned pension reform involving the reduction of contributions to the capitalized pension savings accounts from 6 percent to 2 percent of the total pension contributions. Sources from the Russian Government were reported to complain about the „strong lobby“ of private pension fund management companies, while some opponents of the reform go as far as to claim that it would have led to social unrest.

The decision to postpone the reform came at a time when it had already been approved by the Government and sent to the Parliament for approval. Even the government-run pension fund already prepared to receive a larger chunk of the pension contributions thus redirected from private retirement savings and amended its projected budget accordingly, which was also expected to be debated in the Parliament on November 16.

The motivation for the reform was to reduce the budget deficit of the government-run pension fund by increasing the pension contributions to the government fund at the expense of those made to individual retirement savings accounts managed by private funds. The redistribution would increase the annual income of the government pension fund by approximately 350 billion roubles (USD 11 billion) and thus only partially reduce its total annual deficit, which currently amounts to approximately 1.075 trillion roubles (USD 34 billion). The total budget of the government-run pension fund in 2011 was 4.1 trillion roubles (USD 129.3 billion, 7.6 percent of Russia’s GDP). The Government also planned to offer the contributors a choice between continuing to direct a part of their pension contributions to the private pension savings accounts and shifting to the government-run pension scheme entirely.

The deadline for the development of the pension system strategy was pushed back from November 15 to December 15, but President Vladimir Putin already stated that the contributions made to the private pension savings accounts should be allowed to stay there even after January 1, 2014, as it is important to demonstrate political and financial consistency. However, Putin is not satisfied with how the private pension funds’ investments are regulated, which was quoted as one of the main reasons for the planned reform. In addition, Putin would like the Government to loosen the limitation on maturity of pension funds’ assets, thus enabling them to finance infrastructure projects, which require a maturity of up to 10 years.

There are 40.8 million retired persons in Russia, with an average monthly pension of 8,500 roubles (USD 268). The deficit of the government-run pension fund, currently at 2 percent of the GDP, is expected to be reduced to approximately 1.2 percent of the GDP in 2020.

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