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Ministry of Labour and Russia's Pension Fund plan to abandon funded part of pension system as of 2015

Today, Vedomosti reports that the Ministry of Labour and Russia's Pension Fund are preparing the 2030 Strategy of Pension System Development, which is to be submitted to the government by 15 September. According to the document, in the next three years a contribution to the funded part is to be gradually reallocated to the pay-as-you-go component (the funded part will be reduced from 6% currently paid to 2-4%); and as of 2015 the funded part is to be completely scrapped and people will be able to participate in voluntary pension schemes with fixed payments (2% of salaries). This measure is a response to MinFin's plan to cut the federal budget transfer to the Pension Fund, as starting in 2013, fiscal spending will be limited by the 'budget rule'.

The recent news implies that the position of the Ministry of Labour is shifting favourably towards the funded part of the pension system, as previously they stated abandoning it without a transition period. At the same time, the prudent fiscal position of MinFin is strong. Abandoning the funded part of the pension system will not resolve the problem of the pension fund deficit in the long run, as the demographic trend predicts a gradual reduction in the labour force over the next few decades, we believe. Furthermore, the proposed measure contradicts the development of the Russian financial market, as there is only a slight chance that voluntary contributions will constitute enough long-term money for the financial system to function sustainably. However, this measure is still under discussion and will be concluded before 1 October. 

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

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