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Non-state pension provision in Russia: non-state pension funds from an economic and

social viewpoint

May 16, 2005

Moscow, Russia

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Content

Demographics/Pensions in Russia – wrap up NPFs – a variety of roles and principles Raiffeisen Group experience in the Pensions & Asset

Management Industry Corporate Pension Plan Issues Several tax considerations Contact Info Back up slides

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Demographics. Pension reform in Russia - wrap up

Around 65 Mio people out of 130 Mio

Ratio of workers

to retirees

“Optimal” ratio is above 3-1 to support pay-as-you-go pension system

Current ratio in Russia and most Western countries is 1,6-1

Russian Government’s forecast for 2020 is 1-4 (working individual to

retirees respectively)

Working

individuals

2nd Pillar

pension savings

Results of

NPF Raiffeisen

Top 20 of non-state pension funds as to the total volume of transferred pension savings

1st place in the Rating of the amounts of pension savings per capita

In 2004 more than 350,000 individuals in Russia transferred pension savings

to non-state pension funds and asset management companies in the amount

over RUR 1 bln. (for 2003 - more than 700,000)

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Pension Funds - Variety of Principles

Foreign experience in non-state pension provision

- Corporate pension plans (CPP)

- 401K plans

Non-state pension funds (further – NPFs) in Russia

- Captive pension funds – created in the 1990-s by big corporations

- Open pension funds – working for broader range of companies

- Products range: individual and corporate pension products

Different set-up and objectives

are usually highly dependent on equity and

therefore may be vulnerable

Differences in investment principles

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Pension Funds - Economic Role

NPFs are institutional investors with considerable resources and the source

of the “longest” money in the economy which triggers

… development of securities

… fixed income and

… IPO markets,

… cheaper loans

NPFs provide for long-term liquidity and are most stable institutions, as liabilities

are allocated over significant time frames (very often 25-30 years)

Providing for social benefits not sponsored by state, relieve tax pressure

on business, which long-term ideally results in lower tax rates (i.e. UST)

NPFs are the safest and most transparent form of long-term savings

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Pension Funds - Social Role

Ensure additional support to employees after retirement (currently 13% of the

companies provide CPPs to their employees, 23% plan to implement in 2006)

Provide a feeling of “being taken care of” (on average 6,5% of contributions over

the course of 15-20 years is a lot of savings!)

… pension benefits then eventually almost double as 73% of the plans are co-funded

Excellent retention vehicle (vesting)

Non-state pension funds are the leading providers of CPPs in Russia (36% market share*)

*NPF Raiffeisen refers to “2004 Ernst & Young Compensation & Benefits Survey. Final Report. Russia” for all statistics used on this slide

73% of companies opt for “defined contribution” rather than “defined

benefit” pension plans – internationally the trend has also been towards fully-funded

pension plans

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Raiffeisen expertise

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Raiffeisen Group Leadership in CEE/Russia

1996 -ZAO RaiffeisenbankAustria (RBRU) started operations in Russia

RBRU is a 100% subsidiary of RZB AG Main shareholders of RBRU are: Raiffeisen

Zentralbank Oesterreich AG, the European Bank for Reconstruction and Development, the International Finance Corporation

1999 - RBRU launched retail services At the moment RBRU is represented by 11 offices

in Moscow; two branches in St. Petersburg, one branch in Ekaterinburg

2004 – RBRU established NPF Raiffeisen 2004 – RBRU established OOO Raiffeisen

Capital Asset Management NPF Raiffeisen and OOO Raiffeisen Capital Asset

Management are 100% subsidiaries of ZAO Raiffeisenbank Austria

2004 – Moody’s-Interfax gave long-term credit rating Aaa(Rus) to RBRU

2005 - Global Finance has ranked Raiffeisen group the best in client’s asset management

1927 – foundation of Raiffeisen Zentralbank Oesterreich AG (RZB)

RZB AG assets: EUR 62,8 billion RZB AG ratings: S&P - A1; Moody’s - A1 1985 – year of foundation Raiffeisen Capital

Management (RCM) The largest asset management company in Austria

(21% market share) Assets under management: EUR 26.7 bln More than 150 funds under management Four funds are AAA-rated, five funds are AA/A-rated by

S&P Running or planned operations in Hungary, Slovak

Republic, Croatia, Romania, Russia

ZAO Raiffeisenbank Austria performance in RussiaRaiffeisen Group presence in Central and Eastern Europe

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Pension & Asset Management Products

2nd pillar

Labor

pension

cumulative

part

2nd pillar

Professional

pension

(in 2005)

3rd pillar

Retail

individual

plans

3rd pillar

Corporate

pension

plans

Trust

asset

management

2nd&3rd pillar

NPF portfolio

Unit

investment

funds

(equity,

balanced,

bonds)

Private

Wealth

Management

Trust

asset

management

corporate &

institutional

Investment

Management

Payment of

pension

benefits

Administration

individual &

corporate plans

DesignAdvisory

Research

RCM,Vienna

as CoC

Local

risk mgmt

RBRU CoC

Advisory /

model

portfolios

The widest long-term investment products range with strong local and international expertise

both in investment area and on administration side

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Legal Investment Constraints

3rd Pillar pension reserves

Eligible Asset Classes Non-State Pension Fund (weight in pension reserves portfolio)

Domestic Sovereign bonds

0-50%

Domestic regional and municipal bonds

0-50%max 20% of issue outstanding

Domestic Corporate bonds

0-50%max 20% per issuer

Domestic Equities 0-20%max 20% per issuer

UIF Units 0-20%max 20% under management of one company

Domestic Corporate Promissory Notes

0-50%max 20% per issuer

Cash and deposits 0-50%max 20% placed within one bank

2nd Pillar pension savings

Eligible Asset Classes

Non-State Pension Fund (weight in pension savings portfolio)

Domestic Sovereign bonds

0-100% max 35% of issue outstanding

Domestic regional and municipal bonds

0-40% max 10% of issue outstanding

Domestic Corporate bonds

0-50% max 10% of issue outsatnding

Domestic Equities 0-40% max 10% of market cap per issuer

Index UIF Units (invested in foreign assets)

max 15% under management of one company

Mortgage-backed securities

0-40% max 15% of issue outstanding

Foreign Currency up to 20%

Cash and deposits up to 10 % in one bank max 20%

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Investment Strategy: Philosophy and Performance

RC investment philosophy principles:Active investment managementLong-term real return as the major objectiveEffective investment processInvestment disciplineCollective decision making

H i s t o r i c a l a n n u a l r e t u r n s o n N P F R a i f f e i s e n p e n s i o n r e s e r v e s

1 5 . 9 9 %

2 7 . 1 3 %

1 3 . 2 5 %1 2 . 7 5 %

1 8 . 2 0 %

0 %

5 %

1 0 %

1 5 %

2 0 %

2 5 %

3 0 %

2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4Y e a r

Ret

urn

, % p

.a.

Assets Allocation

Moscow bonds 15.00%

Municipal bonds

35.00%

Equities

10.00%Corporate bonds

40.00%

Accumulated income from low-risk bonds

• Most part of portfolio is invested into low-risk bonds and deposits with fixed duration

• Risky assets leverage the returns

• Capital protection at maturity T with high confidence level (e.g. 95%)

Total returns

T

Constant Proportion Portfolio Insurance (CPPI)

Accumulated income from low-risk bonds

• Most part of portfolio is invested into low-risk bonds and deposits with fixed duration

• Risky assets leverage the returns

• Capital protection at maturity T with high confidence level (e.g. 95%)

Total returns

T

Constant Proportion Portfolio Insurance (CPPI)

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Discussions of Corporate Pension Plan

Issues

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Corporate pension plan issues

Should a potential Participant stay with the company for a certain minimum period of time before he/she becomes eligible for participation in a CPP?

CPP Eligibility

Scope of

participationShall all employees be eligible for participation in a CPP or just certain management levels, etc?

CPP special

conditions

Shall there be any special conditions (e.g. lump-sums, modified vesting rules, spouse option, etc) for those certain groups of employees?

CPP conditions

Which scheme to choose – “With Individual accounts”, “With Solidarity accounts” or “With Matching principle”? (see back up slide)

Pension contribution ratio (e.g. 3-3; 5-5; 7-5 employer – employee respectively), vesting type - cliff or graded (see back up slide)

Goals of a CPP

Retain; Incentivise; Assume certain level of social responsibility; Provide additional “deferred” compensation

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General Tax Considerations

Changes to Chapters 23 and 25 Part Two of the Tax Code effective January 1, 2005

Under new tax law, pension contributions to a Solidarity Account are not deductible for profits tax purposes

Investment return accrued on the Solidarity account is taxed in full (previously only the incremental investment return over CB refinancing rate)

UST is not due, as contributions are made from net profit

2nd pillar contributions transferred from State Pension Fund to Non-State Pension Funds are not subject to tax (there were considerations that 24% profits tax may apply)

Changes

to Tax Code

Solidarity account

Pension Savings

2nd pillar

Individual Account Contributions made to Corporate Individual Accounts are, as previously, deductible for profits tax purposes in the amount nor exceeding 12% of payroll costs

UST is due

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Our CVs Dina Zharova-Berbner – Chairman of the Board

Joined in 2004; started in financial industry in 1995; 9 years experience in banking, corporate finance and investments with Bank of China, Credit Lyonnais, Deutsche Post Group and Raiffeisenbank; MBA INSEAD (Singapore/Fontainebleau); speaks Russian, English, Chinese, German, French

Alexander Lorenz – Member of the Board

Joined in 2005; has 8 years experience in financial industry with the European Bank for Reconstruction and Development in London and Moscow; was a members of the Board of ING Bank Eurasia in Moscow and General Director of the ING Non-State Pension Fund, which he helped to establish. A member of the supervisory boards of several pensions funds in Central Europe; a member of the Executive Board of the Association of European Business in the Russian Federation; speaks English, German, French and Russian.

Elena Gorshkova – Vice Executive Director, Head of Corporate Sales Department

Joined in 2004; started in financial industry in 1993; joined Raiffeisenbank Austria ZAO in 1998; previously held leading positions in custody and securities operations area with ING Bank (Eurasia) ZAO and Merrill Lynch LLC; graduated from Military University of Ministry of Defense, speaks Russian and English

Anton Osin – Senior Corporate Sales Manager

Joined in 2004; started in financial industry in 2000; 4 years experience with Arthur Andersen, Ernst & Young in Russia; experienced in the tax and consulting areas; graduated from the Moscow State Lomonosov University and Higher School of Economics; speaks Russian, English and German

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Back up slides

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NPF Raiffeisen offers the following defined-contribution corporate pension schemes:

“With Fixed Contributions and Individual Accounts”,

“With Fixed Contributions and Solidarity Accounts”,

“With Fixed Contributions and Matching Principle”

The above are base Schemes which can be customized to the corporate client’s needs

Corporate Pension Schemes

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Forms of Pension Benefit Payment

Life-long pension benefit means that you may receive pension benefit for the duration of your life. Pension benefit ceases upon death. No payments will be made to your heirs under this scheme

Payment of pension benefit within a fixed period means that you can establish a fixed period of time (not shorter than 5 (five) years) during which you will receive pension benefit. If you die before the expiration of such a period, pension savings accrued on your Individual Account will be paid as a lump sum to your Beneficiary or heir in accordance with the Russian legislation

Life-long pension benefit with a Beneficiary/Beneficiaries means that you have the right for a life-long pension benefit and can appoint a Beneficiary who will inherit the pension savings in case your death within a stipulated period of time

Payment of pension benefit until full depletion of funds means that pension benefit may be paid to the you as a fixed amount until full depletion of the pension saving accrued on the Individual Account. Such a fixed period shall be at least 5 (five) years. If you die before the expiration of this period, pension savings accrued on your Individual Account shall be paid as a lump sum to your Beneficiary or heir in accordance with the Russian legislation

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Sample Participation Case (Cliff Vesting) Participation details:

Birth date: 1965

Age: 40 years old

Gender: Male

Start date in plan: 2005

Retirement date: 2025

Contribution rate: 7%g.s. = USD70

Gross salary: USD12,000 p.a.

Type of Vesting: Cliff

Vesting period: 5 years

Scenario: Exit from the Fund before Pension age/at Pension Age

Vesting service: 5 years

Pension Contributions (PC): USD 4,200

Accrued Investment Return (IR): USD 708

Total (Vested): USD 4,908

Scenarios

a) Early exit from the Fund 2010 year

in 5 years:

Surrender value due USD 4,146*

b) Pension contributions at retirement

(continuous contributions 7% g.s.): USD 16,800 by 2025

Accrued Investment Return (IR): USD 15,705 by 2025

Total Pension Savings: USD 32,505 by 2025

Monthly amount of life-long

Pension**: USD 143

*(PC+(IR*80%))*(1-Tax)=(4,200+(708*80%))*(1-0.13)=4,146

** Life expectancy male (228 months)

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Sample Participation Case (Graded Vesting) Participation details:

Birth date: 1965

Age: 40 years old

Gender: Male

Start date in plan: 2005

Retirement date: 2025

Contribution rate: 7% of g.s.

Gross salary: USD12,000 p.a.

Type of Vesting: Graded

Vesting schedule: 3 years – 60%

4 years – 80%

5 years – 100%

Scenario: Exit from the Fund before Pension age/at Pension Age

Vesting service: completed 3 years

Pension Contributions: USD 2,520

Accrued Investment Return: USD 247

Total (Vested): (USD2,520 + USD247)*60%= =USD1,660

Scenarios

Early exit Corporate plan

in 3 years: 2008

Surrender value due USD 1,418*

*(PC+(IR*80%))*(1-Tax)=(1,512+(148*80%))*(1-0.13)=1,418

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Individual income tax consequences

Agreement in

his/her own

favour

Pension benefits Surrender value

Agreement in

favour

of a 3rd Party

Contributions

made

by a 3rd Party

Contributions

made

by him/herself

Pension benefit is tax

exempt

Pension benefit is

subject to individual

income tax

Only the amount of

investment return is

subject to individual

income tax

The whole surrender

value is subject to

individual income tax

Depends on the Agreement: Depends on the Payor: