About the Reform

System of Pension Insurance in Russia

Today in the Russian Federation there is a mixed system of pension insurance, which includes  the following:

 – a Mandatory Pension System (hereinafter MPS);

– a Voluntary Pension System (hereinafter VPS).

MPS is intended to compensate citizens from the salary they have earned prior to going on a pension. This compensation is formed from two components: insurance (it is guaranteed by the state and depends on the insured person’s earnings), and the funded part, which depends on the earnings of the insured person and the results of investment. The MPS system works like this: the employer makes contributions to the Russian Pension Fund, and each of the components accrues from these contributions.   

Pension reform, which began in 2002, was intended to resolve the problem of the low level of pensions by introducing the funded component in order to make investments and obtain an income. The funded part of a work pension is that component. Each of us has the right to take charge of it, entrusting it to the management of one or another financial institution – a state asset management company, a private asset management company, or a private pension fund.

In the Russian Federation, in parallel with the MPS there is also a Voluntary Pension System, whose business is conducted by private pension funds (hereinafter PPF).

What is a private pension fund? A PPF is a special form of incorporation for a non-commercial organisation to provide social security. It is this which is the fundamental difference which distinguishes the PPF from other financial institutions.  Pursuant to statute, a PPF may not spend more than 15% of its investment income on administration costs.

A VPS provides individuals with the opportunity to ensure an additional income for themselves when the pension is triggered. The principle on which this system operates is as follows: the sum of pension contributions paid by the contributor under a VPS contract concluded in favour of the participant, is invested. Later, when the pension trigger occurs, those contributions, together with the investment income, are paid out to the participant in the form of a pension.

The size, and also the frequency of the contributions and the pensions to be paid out, are determined by the contract and the fund’s pension rules.

Mandatory Pension Scheme

Women of 55 and men of 60 are entitled to an age-related work pension, provided that they have a record of at least 5 years of insurance contributions – a period during which the respective employer has been paying insurance contributions into the RF Pension Fund.  For men and women who will reach pensionable age respectively in 2013 and 2012, or later, the work pension will accrue from two parts: the insurance and the funded parts.

The funded part is the only component of the work pension in the management of which we can affect the size of the work pension from the income obtained by investing that component.

Who has the right to a funded part?

- people born in 1967 or later;

- males born between 1953-1966 and women born between 1957-1966 for whom during 2002-2004 insurance contributions were paid to form the funded part of a work pension.

Part of the pension accrues from the contributions paid to the Russian Federation Pension Fund by employers in the form of special purpose insurance contributions. These contributions are calculated in a percentage ratio from the salary (FOT) for each employee (born in 1967 or later).

NB! You can affect the size of your pension yourself by managing the funded part of your pension. It is important to remember that the contributions are paid from your official salary.

Managing the funded part of a pension entails a conscious choice to transfer it for investment to one of the financial institutions.  Pursuant to statute, you can choose one of the following options:

• State Asset Management Company (SAMC)

Individuals who select the SAMC as its asset management company (today it is Vnesheconombank), leave their funded part in the RF Pension Fund (RFPF).

• Private Asset Management Company (PAMC)

The income which can be obtained with a PAMC may be higher than that with the SAMC. This is possible because of the broader list of instruments in which it is permissible to invest pension savings. But it must be remembered that the risks here are also greater. Accounting for the funds on individual pension accounts for insured persons is also done by the RFPF.

• Private pension funds (PPF)

Long-term investment and payment of pensions is the core business of a PPF.  In showing an income which competes with the PAMC, PPFs find themselves under the close monitoring of state authorities.

What is the special feature of investing the funded part of a pension in a PPF?

• Accounting of funds is done by the PPF itself (and not by RFPF, as in the case of a PAMC). It knows its clients personally, and is ready to answer questions at any time.
• A PPF selects the best asset management company (AMC) to work with. To reduce risks, a PPF may spread its funds across several AMC.

Once a year, an individual has the right to change the financial institution and select any other PPF or PMC, or return their funds to the RFPF (SAMC).  

NB! If an insured person does not handle the funds in the pension savings independently, then they are automatically transferred to the Russian Pension Fund (RPF). RPF, in its turn, transfers them to the trust management of the SMC.

Please Note: – funds in pension savings can be inherited. So if an insured person does not live to pensionable age, their heirs are entitled to receive the deceased’s funded part, with all the accrued investment income, as a lump sum payment under the procedure established by the RF government.

People who decide not to transfer their funded part are called “clammed-up.”

Voluntary Pension Scheme

A private pension scheme is a simple and effective means of independently saving for the future. The essence of a VPS consists in the following:

• The pension contributions paid by a contributor are accounted for on individual pension accounts for those contributors;
• The contributions are invested to obtain an income;
• The income obtained annually is apportioned among the contributors’ pension accounts.

The procedure for contributors to make pension payments, their size, frequency and duration; the procedure for fund participants to obtain their private pension, their size, frequency and duration of payment; the methodology for actuarial calculation of the fund’s liabilities; and the procedure for inheritance are all determined by the pension rules of the relevant PPF.

The pension rules of a PPF are subject to registration by the Federal Service for the Financial Markets (FSFR), which will check that they meet the statutory requirements.

Relations between a PPF, a contributor and a participant are built on the basis of the contracts concluded with the PPS, the relevant fund’s pension rules, and the law.

When the pension trigger occurs (depending on the scheme selected) a pension will be awarded and paid out to a participant from the funds on their individual pension account.

The guarantee of performance by a PPF of its obligations to participants is the reserve fund, the standard amount of which, and the procedure for forming which, are determined by the authorised federal body.

What is a reserve fund? This is a reserve formed by the Fund under procedure established by the authorised federal body and by the Regulations on the Fund’s insurance reserve.  It accrues to ensure that the fund remains solvent and stable. In other words, the reserve fund is a kind of “cushion” for financial security. Under the law the size of the reserve fund for a PPF is to exceed the sum of its obligations, as a minimum by 5 %.