What can one expect from the new pension reform in Russia?

Essence of the new reform is from IPK to GPP, and then to NPO

The history of reforms in post-Soviet Russia is not so long, but it is unique, since we managed to make a hybrid of several approaches to solving the so-called pension crisis. This term has been circulating in the economic environment for already a long time, since the whole world is facing similar challenges and for a long enough time to form approaches. Let's see what is proposed to be done in Russia and how it correlates with textbooks on economics.

To put it briefly — the state has no funds for a high level of payments, people will have to save for a decent pension on their own. And, apparently, the state will allow people to dispose of these funds as their own.

The Central Bank plans to transform the system of compulsory pension insurance (OPS) into a non-state pension provision (NPO) in such a way that people can feel these funds as their property, which they can use as part of pension payments when they reach retirement age.

For information, we currently have two systems operating:

• The OPS was launched in 2002, the pension is formed at the expense of the Pension Fund of Russia (PFR), to which the employer transfers insurance premiums for the employee. The amount of contributions is 22% of the salary. Until 2015, part of the funds (6%) were transferred to the funded system, if there was an application from a citizen. In 2015, the famous moratorium on the transfer of funds to the funded system was introduced and all 22% go to the PFR for benefits to current pensioners. If you look at this system, you can see that it always needs new injections, it is very similar to a pyramid (especially in its Russian form), or an increase in the retirement age so that there are funds in the system. In fact, the moratorium has already been introduced, the retirement age has been raised. There is nowhere to move further — either to increase the amount of insurance premiums, or to make tranches from the budget. Both options are unrealistic — the business will go into gray wage schemes, and our budget is not rubber and will not be able to cope with the closure of the annual deficit of the PFR. For example, the deficit in 2021 is going to be about 495 billion rubles. The number of people working now is not able to support all pensioners. Demography and medicine are the main reasons for this situation, not only in our country, but in the world in general.
• The NPO — an additional pension system. Work is already underway here through non-state pension funds (NPFs). This system appeared in 2002 as a result of the first truly breakthrough pension reform, which took as a basis the best world practices and was made strictly according to the “textbook”. A citizen has the opportunity to choose a necessary pension programme, conclude an agreement with the NPF, and form savings as an addition to state payments. But from 2010, this system stopped working by the original scheme for a number of reasons. In particular, because of unscrupulous NPFs that discredited the system by their behaviour — they, as a rule, were part of banking groups and acted as a source of funding for these banks. Well-known Mr. Motylev comes to mind, who owned 5 banks and 12 NPFs and arranged such a fantastic money cycle, financing his development and other projects with the money of banks and NPFs. The result is sad — banks were deprived of their licenses, NPFs went bankrupt, the Central Bank allocated huge funds to save this group. People are wary of NPFs and are doing the right thing while such as Motylev are thriving.

Savings can be inherited

According to the plans, the funded part will belong to a person, not to the state, and the right to dispose of these funds will come not only after retirement, but also in difficult life situations. There is no exact list yet, it is under elaboration. Health problems and similar situations come to mind. Besides, savings can be inherited.

In general, from 2016, the state could not decide in any way what to do with the funded system, since the scheme introduced in 2002 no longer worked, the moratorium was introduced in 2015, and all our excellent reform of 2002 turned into a kind of construction on paper — everything seems to be there, but it does not work. All sorts of additions began, making the system hybrid, in fact.

For example, there were talks about the introduction of an Individual pension capital system (IPK). It was assumed that those 6% could be sent to the NPF, and after the end of working life, the pensioner would receive additional payments to his basic state pension. It was planned that the system would work in the so-called auto-subscription mode — that is, all people were participants of the IPK by definition. The system was not introduced as a result, instead, the retirement age was raised, prolonging the agony of the OPS distribution system.

In 2019, the IPK project was renamed the Guaranteed Pension Plan (GPP). The parameters of the accumulative system remained unchanged, adding the voluntary connection to the programme. On the advice of the Central Bank and the Ministry of Finance, the so-called individual investment accounts of the third type (IIS-3) were introduced — long-term investments for a period of 10 years or more. This was done with the aim of encouraging citizens to invest for a long time and form their own future income. Tax deductions were also given — after 10 years, a person could receive a deduction for the monthly amount deposited through the employer (but not more than 6%) or for independently deposited amounts (but not more than 120,000 rubles a year).

“We are given the idea that people should take care of their own pension”

The Ministry of Finance is going to submit to the government a law on the new voluntary funded system on December 15, 2021. Taking into account that NPOs have started updating the system, it is correct to expect that the new system will be a continuation of the IPK and the GPP. The advantage of the new system will be the availability of already formed capital, which is transferred from the mandatory pension insurance system, plus guarantees will be provided by the example of the deposit insurance system from the Deposit Insurance Agency of Russia (DIA). In fact, NPFs will offer another product in their line, and for sure most people will choose this least risky product. The only thing that is alarming — are we really going to completely abandon the OPS? If so, it will be a very radical step, but strictly according to the latest economic textbooks. It will be interesting to watch the development of events further.

In conclusion, I would like to note that our OPS system can guarantee the payment of an average pension only at the level of 12-13 thousand rubles a month. The PFR has no funds for more and there is nowhere to take it (it is expensive and politically unprofitable for the authorities). We are given the idea that people should take care of their pension themselves and form savings by using to the maximum the 6% allocated for this. But, taking into account the inertia of our population and general financial illiteracy, we will again slide to a single state management company (which was VEB in previous iterations of the accumulative system), to which citizens who do not believe anything, do not want to study and dive into details transfer their funds by default. The scourge of our society is infantilism (Soviet heritage, in fact — because they expected everything from the state). As a result, their income from VEB was negligible — at the level of 3-4% per annum. Let's wait and see.