Reform strategiesReform strategies

IMF conference: Designing fiscally sustainable and equitable pension systems in emerging Europe in post-crisis world

Reform strategies Reform strategies ––the experience of the experience of

emerging European emerging European economies and economies and their effects on their effects on

sustainability andsustainability andsustainability and sustainability and equity: equity: Russia Russia

MikhailMikhail DmitrievDmitriev Mikhail DmitrievPresident of the Center for Strategic Research, Moscow

Washington D C January 11th 2012

Mikhail Mikhail DmitrievDmitrievCenter for Strategic Center for Strategic ResearchResearch

1

Washington D.C., January 11th, 2012ViennaViennaMarch 18, 2013March 18, 2013

CONTENTS

Challenges to the Russian pension t

Part 1system

Th i f th 2012 fP t 2 The genesis of the 2012 reform

Th i d f k

Part 2

P t 3 The revised reform packagePart 3

22

Part 1Part 1

CHALLENGES TO THE

RUSSIAN PENSION SYSTEM

33

WORKING AGE AND OLD AGE POPULATION IN RUSSIAPOPULATION IN RUSSIA

Прогноз численности населения (млн.)Росстат, 2010 г.

90 45

85

90

30

45

80

15

70

75

0

4

2011 2016 2021 2026 2031

Трудоспособное (левая ось) Старше (правая ось)Working age (lhs) Old age (rhs) 4Source: CSR

Working age population declines

Annual average growth projections for working age population

5

USA EU-15 Japan Russia

5Source: The Economist, CSR

THE IMPACT OF OLD-OLD

Share of the very old in Russia is much lower than in Europe and Japan It will remain low by comparison to most of advanced It will remain low by comparison to most of advanced economies By 2050 Russia may only catch up with the current y y y pnumbers of very old in the advanced European economies share of Russians above 80 years old will be at 7% (just as

in Italy today);in Italy today); only 1/4 of Russian pensioners will be above 80 years old

vs 1/2 in Japan

66

Growth of older-old (80 and above) In Russia and the EU by 2060Russia

In Russia growth of older-old (80 d b )(80 and above) during the next 50 years will be much slower than in any of the EU members

77Source: EU 2009 Ageing Report, CSR

Private sector international benchmarks for the sustainabilitysustainability of the pension systems are rather favorable for Russia

8Source: Allianz Global Investors. 2011 pension Sustainability Index 8

SUMMARY OF DEMOGRAPHIC CHALLENGESOF DEMOGRAPHIC CHALLENGES

Russia will suffer from one of the world’s fastest working age population decline However life expectancy particularly for males will stay However, life expectancy, particularly for males will stay much below the OECD Share of the very old will remain low by comparison to y y pmost of advanced economies Current retirement age (with the account of widespread early retirement practices) is very lowearly retirement practices) is very low Therefore, the forthcoming demographic deterioration could be offset by standard parametric reforms which have

9

y palready been carried out in majority of advanced economies 9

IMPACT OF RETIREMENT AGE INCREASE ON REPLACEMENT RATEON REPLACEMENT RATE

(64 for males and females by 2030)

38

40

34

36

до реформыBaseline

28

30

32до реформыпосле реформы

BaselineAge increase

24

26

28

1010Source: Gaidar Institute

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

THE BEST SOLUTION:t i fparametric reforms

Increase of retirement age (up to 64 by 2030) More than

enough for a Early retirement reform

Preservation of mandatory

enough for a sustainable solution Preservation of mandatory

funded pillarsolution

But retirement age increases are ruled out by politicians because such decision is highly

1111

p g yunpopular among the public

CHALLENGES IN THE FUNDED PILLAR

Negative real returnsg Lack of portfolio diversification Poor governanceg Regulatory inadequacy and fragmentation Ineffectiveness of supervisione ect e ess o supe s o

1212

RELATIVE SIZE OF THE FUNDED PILLAR: small in percent of GDP but substantial

with regard to domestic financial markets

Pension holdings (% of GDP)

1313Source: Goldman Sachs

FUNDED PILLAR AND FINANCIAL MARKETS:important for the bond market

and compatible with the equity free float

1414Source: Goldman Sachs

Part 2Part 2

THE GENESIS OF THE 2012 REFORM

1515

THE GENESIS OF THE CURRENT CRISIS:

Acceleration of benefits beyond the meansAcceleration of benefits beyond the means

WagesBenefits

Wages

Benefits

1616

Source: NAPF

IMPACT ON THE THE PENSION FUND:

Mounting deficit

Valorizationand additional indexationand additional indexation

Adjustments of the contribution rate

Deficit Surplus

1717

Source: NAPF

INITIAL REFORM PROPOSAL(J l 2012)(July 2012)

New PAYG formula: emphasizing the role of the years of service instead of contributionsthe years of service instead of contributions

Redirection of 6% funded contributions to PAYGPAYG

One-for-all voluntary opting out to the funded ill ith 6% t ib tipillar with 6% contributions

Reform of early retirement schemes

1818

PROPOSAL DECLINED(N b 2012)(November 2012)

The initial proposal faced a strong and well articulated criticism by representatives of: business communitybusiness community financial markets civic society the media parts of the Government (including MinFin and Ministry of

Economy) The World Bank and the OECD

The proposal was portrayed as counter-modernisational and driven by bureaucratic self-interests

19

interests In November 2012 it was turned down by V.Putin

19

Part 3Part 3

THE REVISED REFORM PACKAGE

2020

New PAYG formula: points system focused on voluntary

New PAYG formula:emphasis on voluntary delayed retirementp y y

delay of retirementemphasis on voluntary delayed retirement

Old age pension = Basic pension + Insurance pension

Basic =Age ratio(for voluntary delay

Normative *pension = (for voluntary delay

of retirement)basic pension *

`Insurance pension

=Age ratio (for voluntary delay *of retirement)

Years of serviceratio *

Current value of one point

2121Source: Ministry of Labor and Social Protection

For the pensioners retiring at the official age

l t t ill d ll d li t 20%replacement rate will gradually decline to 20%60%

40%

50%

30%

10%

20%

0%2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Пенсионеры, получающие трудовую пенсию по старости (базовый сценарий)Baseline scenario

2222Source: Gaidar Institute

Пенсионеры, получающие трудовую пенсию по старости, не участвующие в программе (альтернативный сценарий)

Пенсионеры, получающие трудовую пенсию по старости, участвующие в программе (альтернативный сценарий)

Pensioners at an official retirement age Pensioners who delayed retirement

The indexation of the basic pension will be detached from the indexation of thedetached from the indexation of the

insurance pension

2323Source: CSR

Pension Fund deficit under the flexible retirement age scenarioretirement age scenario

3 0%

2,0%

2,5%

3,0%

0,5%

1,0%

1,5%

-0,5%

0,0%

,

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

-1,5%

-1,0%

из-за изменения правил индексации пенсийIndexation adjustment

2424Source: Gaidar Institute

из-за стимулирования добровольного более позднего выхода на пенсию

из-за изменения правил индексации пенсий и стимулирования добровольного откладывания получения

Incentives for later retirementCombined

Individual replacement rates in 2022for wages below and above averageg g

½ fo av. Wage

Av. Wage

2 av Wages2 av.. Wages

3 av.. Wages

4 av .wages

Source: CSRSource: CSR

25

Early retirement reform:

i t th P i F d d fi itimpact on the Pension Fund deficit

Baseline scenarioBaseline scenario

Phasing out of early retirementAdditional

2626Source: NAPF

contributions

REFORM AGENDA FOR THE FUNDED PILLARFOR THE FUNDED PILLAR

Voluntary opting in and opting out Implementation of the new payment law Portfolio diversification Introduction of guarantee scheme Consolidation of regulatory and supervisory authority Strengthening of pension fund governance g g p g Elements of self-regulation Risk-based regulatory and supervisory framework

27

g y p y New form of commercial legal entity for private pension

funds 27

MANDATORY FUNDED PILLAR:OPTING OUT PRINCIPLE

outcome: downsized but not wiped outoutcome: downsized but not wiped out

Replacement rates for various contribution ratesContribution rate to DC 6% Contribution rate to DC 4%Contribution rate to DC – 6% Contribution rate to DC – 4%

Contribution rate to DC – 0%Contribution rate to DC – 2%

2828Source: NAPF

CURRENT SIZE OF THE MANDATORY FUNDED PILLARFUNDED PILLAR

Number of contributors who opted out to Distribution of assets

Private pension fundsPrivate asset managers

pthe private pension funds (mln)(bln rubles)

gState asset manager (conservative portfolio)State asset manager (extended portfolio)

2929Source: NAPF

(Est.) (Est.)

Thank you for attentiony

3030