August 5, 2014 / 9:42 AM / 4 years ago

Russia again eyes pension savings to plug budget hole - paper

MOSCOW, Aug 5 (Reuters) - Russia’s government is considering using contributions to employees’ privately-managed pension funds to help plug holes in the budget for the second year running, Russia’s Vedomosti newspaper reported on Tuesday.

Russia has already imposed a freeze on defined pension contributions to private fund managers in 2014, diverting around 243 billion roubles ($7 billion) into state coffers.

Now the government is considering extending this into 2015, providing around 300 billion roubles for the budget next year. According to Vedomosti, citing an anonymous government source, President Vladimir Putin and Prime Minister Dmitry Medvedev have already agreed to extend the freeze.

Medvedev’s spokeswoman was not immediately available for comment.

Steps to transfer savings from private management to the state budget reflect growing strains on Russia’s public finances, which are being hit by a severe economic slowdown exacerbated by Western sanctions over Ukraine.

But any further reduction in the sums allocated to private pension funds would represent a blow to the country’s nascent asset management industry, and a setback to the development of capital markets.

Russia has been steadily rolling back a pension reform launched in 2002 under which Russians were supposed to save towards their own retirement.

Under that plan, payroll contributions equivalent to 6 percent of salary were to be paid into individual retirement accounts, with a 16 percent levy continuing to go towards financing current pensioners via the State Pension Fund.

Last year Russia in effect made the 6 percent savings contribution voluntary, as Russians who do not express a preference now pay the whole 22 percent levy into the state Fund.

Even Russians who do choose to continue with the 6 percent savings contribution have not been able to do so in 2014 - and now potentially in 2015 - because of the freeze.

The diversion of funds helps to plug budget shortfalls in the short term, but would increase the long-term fiscal burden arising from an ageing population, analysts said.

“It is certainly negative news, as this move breaches the ‘social contract’ between the state and society to develop long-term private savings,” analysts at Russia’s Alfa Bank said in a note.

“Though this step may assist in improving the Pension Fund balance in the short run, in the long run, it would result in more social obligations to the state, being a risk for budget stability.” (Reporting by Jason Bush, editing by John Stonestreet)

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