March 15, 2016 / 11:11 AM / 3 years ago

Exclusive: Russia considers abolishing mandatory pension savings - sources

MOSCOW (Reuters) - Russia’s economic policy makers are in talks to abolish compulsory contributions to employees’ managed pension funds that had been aimed at sustaining the long-term health of the system, three sources close to the government said.

A woman counts money at a food fair in the village of Ulyanovka, south-east of Stavropol, Russia December 22, 2015. REUTERS/Eduard Korniyenko

The finance ministry and the central bank, who for years had resisted the pressure to scrap the mandatory payments because of worries about the future fiscal burden of pensions, have now conceded the point and are crafting ideas instead on how to encourage voluntary retirement savings, the sources said.

Dwindling revenues following sanctions and a slump in oil prices have left little cash to keep on patching an ever-growing hole in the State Pension Fund. The Fund, managed indirectly by the health ministry, covers current needs and has seen its contributions falling short.

“The decision is still pending, but the finance ministry and the central bank are discussing the ‘voluntary’ option,” said a source familiar with the talks, who spoke on condition of anonymity.

Two other sources, one in the finance ministry and another close to the government, confirmed the discussions.

While the move would ease the burden on the state budget, it could potentially reduce funds for long-term investment in capital markets if officials fail to ensure that Russians save for retirement on their own.

Under the current system, the state divides the funds paid by employers for each employee into two parts, with the larger portion going straight to current state pension payments and a smaller part to the employee’s individual pension saving account.

The second part, known as the mandatory accumulative pension, is usually invested in financial instruments by the state or privately-managed funds.

Reuters sources would not elaborate how the voluntary part would work as discussions are still going on. But if there is no voluntary part in the new system, then potentially all future employer contributions to the state would go to pay current pensions obligation.

Faced with a widening federal budget deficit, the finance ministry has for the past three years suspended transfers of money destined for the accumulative part of the system, using it to cover current pension obligations instead.

The decision to change the system, if taken, would in effect cement that practice.

The state has promised to return the suspended funds but no date has been given. This change might free the ministry from returning the cash.

WHAT INSTEAD?

Contacted about the talks, the central bank would only say that there were no discussions taking place about abolishing the accumulative part of the pensions system. It avoided commenting on whether such pension savings would be mandatory or voluntary, however.

Discussions are underway about how to maintain the accumulative part and options that would “ensure guaranteed pensions reimbursement for those participating,” a central bank spokeswoman said.

“Special attention is being given to finding tools which will allow workers to choose a more active position in forming their own pension savings,” she said in written comments.

But the central bank provided no details about ways to maintain the savings which ensure long-term money inflow into capital markets and which could ease future governments’ headaches on how to pay pensions to Russia’s aging population.

An official involved in the talks said only that the new plan would “help alleviate all the negative aspects of the abolition of the mandatory savings.”

If approved, the decision would be a victory for a wing of the government, spearheaded by Deputy Prime Minister Olga Golodets, which has long argued for mandatory contributions to be used to pay current pension needs.

This year, the finance ministry is to transfer from the state budget some 3 trillion rubles ($42.63 billion) to the State Pension Fund, one trillion rubles more than last year.

Central Bank Governor Elvira Nabiullina told Reuters in an interview last month that with the current budget difficulties, there is the risk for “accumulative pension contributions to be frozen again.”

Reporting by Darya Korsunskaya, Lena Fabrichnaya and Lidia Kelly; Additional reporting by Jason Bush; Writing by Lidia Kelly; editing by Katya Golubkova and Sonya Hepinstall

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