Alternative for Non-government Pension Funds: Saving Accounts

On March 11, 2010 newspaper RBK-daily published an article reporting on the discussion about the possibility of formation of individual saving accounts which will be managed by broker and managing companies1. Such accounts, in the opinion of the Institute for Social Development (ISD) experts may serve as an alternative to non-government pension funds for the citizens and the operation of non-government pension funds will have more market nature.

The ISD suggests introducing saving accounts for the citizens that would like to make extra savings for future pension. It is assumed that citizens will be able to transfer voluntary payments not to non-government pension funds but to saving accounts managed by the managing companies and broker companies. At the same time the owners of the accounts will have a right to choose different investment strategies and will be able to withdraw money only upon achievement of pension age.

According to the authors of the idea such accounts will be interesting to those who would like to make their own decisions on investing their funds. At present all the funds received by non-government pension funds within the framework of voluntary pension insurance are invested in concordance with Government Decree No 63 “On establishing the rules for non-government pension funds reserves placement and control over their placement”. As a result, according to the document, the fact that the citizens will have a right to choose between non-government pension funds and individual saving accounts will have a positive effect on the market: the work of pension funds will become more market-like and they will reduce expenses for serving pension reserves.

In order to attract the citizens it is suggested to grant tax privileges to them. For instance, in the form of tax deductions from the income tax or profit tax if the payments are made by the employer. The maximum rate of deduction should not exceed RUR 500 thousand a year.

In the RBK-daily article that was mentioned both the arguments for the attractiveness of individual saving accounts idea and against such an instrument for citizens are presented.

However, in connection with the worded idea two important questions arise.

First, according to the idea only additional pension allocations and not even accumulation part of the pension is envisaged to be transferred to saving accounts. In this context it is not quite clear why saving accounts (even considering possible tax privileges) should be more attractive for a citizen than existing long-term banking deposits with fixed interest rates that allow if not full then at least considerable compensation for the inflation. Besides, bank deposits allow using personal savings at any time in case it is necessary and not when the pension age established by the law comes. The latter factor is of special importance there being ongoing discussion on the increase of the pension age up to the level that will not allow a future pensioner to use either compulsory or additional pension savings.

Second, during discussion of the current idea it should be remembered that the work of the majority of the Russian citizens is remunerated only at the level that allows for only the most urgent life necessities and the employers rarely have a desire to finance even the minimum social package. As a result, according to the estimations made by the all-Russian centre for life level, about 100 million either belong to the “poorest” category or “on the edge of poverty” 2. Under these conditions the sources from which the funds to finance additional pension savings, whether they would be in the non-government pension funds or on the individual saving accounts, could come remain unclear.

It is most likely that due to the reasons mentioned there is no reason for a discussion around individual saving accounts to leave the realms of theory. The only prospect for the mechanism named lies in the legal permission to place accumulative part of the old-age pension on the individual saving accounts, which, in its turn, requires detailed discussion and thorough elaboration of the legislative addenda connected with the possibility for fulfillment of such an idea.

Kazantsev D.A. – Senior Legal Expert, Department of the Appraisal and Development of Normative-legal Acts