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Pension system – moratorium on pension savings extended to 2015 and beyond

Yesterday, the government ruled to extend the moratorium on pension savings for 2015 and suggested that the obligatory funded pillar might be scrapped altogether.

All inflows to the funded part of the pension system (pension savings) are to continue being channelled to cover the PAYG funding gap next year, and probably beyond. The amount of pension savings to be diverted from the savings pillar totals some RUB 400bn, we estimate, or 13% of the overall federal transfer to the State Pension Fund. This, along with the tax manoeuvre in the oil sector, eases pressure on the federal budget next year: the budget surplus might be maintained (according to the government’s projections, while we foresee a small deficit). In turn, the urgency of increasing other taxes next year is also likely to abate.

In terms of other consequences, local financial markets are to be deprived of the only material source of long-term money next year. Financial conditions are thus set to remain extremely tight, putting additional deleveraging pressure on the corporate sector and the growth outlook for next year. Looking beyond next year, the abolition of the obligatory funded pillar of the pension system – in favour of other spending priorities (mostly military) – would effectively represent the reallocation of resources/capital from the private sector to the public sector. We believe exactly the opposite is needed to prop up Russia’s medium-term growth potential.

Nor does the abolition of the funded pillar resolve the longer-term fiscal challenges related to rising spending on the ageing population. If anything, a bigger share of the unfunded pillar would only make things more complicated in the longer term as the elderly dependency ratio (number of employed to pensioners) continues to rise. Apart from the dubious fiscal considerations, this might further erode economic agents’ confidence in the credibility of the government’s policy making and add to the already elevated policy uncertainty, potentially restraining private investments.

Daria Isakova, Vladimir Kolychev
VTB Capital analyst

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