RUSSIA - The emerging non state pension funds industry is unlikely to flood the Russian financial markets, as many had previously anticipated, according to a report from Troika Dialog.
The October deadline for individual workers to choose a pension fund manager for the funded portion of their state pensions is rapidly approaching and these funds are due onto the market in January.
The Russian pension reforms, while revolutionary, do come with their flaws. Notably the low savings contributions, the limited incentives to report ‘grey’ income, and a high degree of government influence, outlined the report.
As a consequence, the system is unlikely to accrue funds in excess of 2% of GDP over the first five year, whereas by comparison Poland accumulated 6.5%.
However, unlike the situation in Poland, Russia will not suffer a shortage of liquid equity and corporate debt instruments as the new money flows into the market.
By 2006, US$10.5bn should have accumulated in the non-state pension fund (NPF), although due to poor infrastructure and communications of the reforms to the public, only about 40% of this will reach the market in the next three years.
The rest will be managed by the state owned company and invested in sovereign debt, which the Troika report predicts, should create an environment of artificially low yields on the domestic fixed income market.
Andrei Ivanov, analyst at Troika Dialog noted: “The NPF assets will represent a very small portion of the free float in the market and is unlikely to drive the markets in the coming three years.”
The pension reform’s greatest influence should be on Russia’s sovereign and corporate debt markets, with over 40% of NPF’s assets to be invested in corporate debt, or US$1.3bn over the next three years.
By the end of 2006, not more than US$1.1bn in pension money will be invested in equities, which is less than 3% of the estimated capitalisation of the market free float. Further ahead, an average of US$1bn a year should be invested in equity, which is 1.5% of estimated Russian trading turnover on the equity market.
“The real influence of pension money in the market will be felt within six to eight years,” said Ivanov.
“Comparing pension resources to the size of the economy indicates that pension money will be quite small and not exceed 5% of GDP in the coming ten years.
“Everything depends on the ability of Putin to enforce administrative reform in Russia, say in 2006-2008. These two years will be of critical importance to Russia and the pension system.”
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