Vladimir Dmitriev: Let us be Consistent in Implementing the Pension Reform

Published, 29.04.2005

On April 21, The Russian Federation Government approved a draft of guidelines for its debt policy. The draft offers to change terms and principles of Vnesheconombank's operation as the state-owned company in charge of managing citizens pension savings.

VEB Chairman Vladimir Dmitriev shared his views on these new measures with Interfax Agency and Izvestia correspondents.

Vladimir Alexandrovich, what do you make of the government proposals to expand the range of instruments in which VEB can invest citizens' pension savings?

Proposals to expand the range of instruments are not new. The most important thing is in what form these proposals will be adopted and in what form they will be put into effect.

Vnesheconombank is a state-owned company to which pension savings of the so-called "undecideds" were transferred - the funds of those who failed to make a choice to transfer their money to private management companies, as well as pension savings of those who left their savings with the state-owned company deliberately. The state-owned company manages these funds subject to the current investment declaration.

Earlier, we repeatedly brought proposals before the government to abolish a number of restrictions on investing these funds. Specifically, we made a proposal to the government to abolish a restriction that allowed the Bank to use pension funds to purchase eurobonds on a stock exchange alone. In view of the fact that the eurobond market is largely an over-the-counter market, these bonds were virtually excluded from a list of instruments in which we could invest pension funds. Last year the government supported our proposal allowing us to increase the number of government currency-denominated securities in our portfolio.

We also launched an initiative to expand the range of investment instruments at the cost of subfederal loans and corporate securities. The government appears to have supported the initiative but it remains unclear how and to what extent our state-owned Bank would be given access to the expanded portfolio of investment instruments. In any case, we can expand the range of investment instruments only by introducing amendments to the federal law.

What amount of funds from VEB's pension portfolio could be put on the corporate securities market without causing it to collapse?

We offered to expand pension savings portfolio investment declaration of the state-owned company at the cost of bonds of Russian Federation subjects, municipalities and corporate bonds of blue-chip borrowers. Shares are not to be included so far.

Our proposal is to allow us to invest 10-15% of the state-owned company's pension portfolio in these securities. This year, this amount is 10-15 billion rubles, it's quite a reasonable amount and it poses no threat to the corporate securities market. At present, the amount of sub-federal and corporate bonds included in a blue-chip quotation list of the MICE alone is more than 170 billion rubles. In our opinion, if the state-owned trust management company is authorized to invest "undecideds" pension funds in such securities, the amount of funds invested in them are sure to grow much faster than in the past.

How do you feel about the second proposal in the draft of debt policy to set up a federal authority in charge of determining investment volumes in one or another financial instruments?

To put it mildly, I think this proposal is quite strange. In fact, it is a proposal to establish another government trust management company represented by a certain new federal authority to be responsible for transferring the money of "undecideds" to private trust management companies and for formulating their policy. I can't understand the need for it.

Instead of opening up new opportunities for investing pension savings and provide people with comprehensive and accurate information on trust management companies' operation, on the basis of which people could make a decision about investing their pension savings, an issue of establishing a new state-owned trust management company is being debated. Without creating certain conditions, they rush to offer us a mechanism we don't really need so far.

Establishing a second state-owned trust management company, which will duplicate the work of the existing one, might result in increased spending of government funds and would not improve investment process as such. The pension reform has been underway for only three years and there have been already two attempts to change it radically. Will it increase people's confidence in the pension reform? Of course, not. At present, there is one state-owned trust management company and there are private trust management companies, let them show their worth, let the system work for people to see how their pension money is managed.

The Finance Ministry (MinFin) initiated the said proposals. Did they discuss them with you?

No, they didn't. Before the issue was discussed at the government's meeting, it had never been debated. In our opinion, all members of the investment system should have been involved into the debate. We are going to insist on holding an open debate; the Public Council for Pension Savings Investment is a good place for it.

If private management companies are given access to "undecideds" pension savings, don't you think that these citizens' rights will be violated, because there are people among them who chose the state-owned management company deliberately, although the number of such people is limited?

An answer to this question has not been given by those who worked out the government debt strategy. There should be an answer to this question but so far it is not available. Maybe, some citizens didn't make their decision because they want to see which private companies are most effective and reliable. And so far they prefer to leave their money with the state-owned trust management company. The fact is that the state doesn't appear to want its citizens to make a choice on their own.

We believe that we should be consistent in implementing the pension reform. The pension reform has been implemented for three years but we have not done the most important thing - we failed to inform our people of what is happening to the funded portion of their pension savings because standards for disclosing information have not been improved. People should be provided with comprehensive and accurate information for them to be able to make a choice consciously. Lack of information gives rise to dissatisfaction and makes it possible to manipulate public opinion. What did Vhesheconombank recommend to do to improve procedures for investing pension savings?

In our view, there is only one recommendation - we should as soon as possible get a decision on disclosing information on pension savings taken and conduct awareness campaign among people on the basis of this information. We should explain to people that in private companies their pension savings could generate higher incomes but at the same time they run higher risk than in a state-owned trust management company, and private company should constantly prove to people that they are reliable and truly professional.

And what will happen if there is another trust management company instead of Vnesheconombank?

It is safe to say that there is not any company, which could cope with such a large-scale task better than our Bank can do it. We are well equipped to perform this task. We've got everything at our disposal to perform this task: wide experience, good reputation, highly qualified personnel and infrastructure. We are prepared to be responsible for what we are doing. We believe that we perform well and we don't have any serious problems in our business besides various technical and bureaucratic barriers we come up against. That is why I can say that we are proud of what we are doing.

We are ready to compete with any private investment company, but to establish another state-owned trust management company in the form of federal agency would be, without doubt, a step backwards.

Is there any chance that Vnesheconombank would be transformed into a new federal agency?

I don't think this is the way things are. Many bureaucrats are not happy about VEB status and would like to diminish its role.

It's clear that it is impossible to talk about VEB's performance as the company in charge of managing pension funds in the absence of information disclosure standards but what can you tell us about last year's trend?

There is no doubt that the trend was positive. We are authorized to invest pension funds only in government bonds. On the government ruble-denominated bond market the trend in last year's second - forth quarters was negative but not as much as on the corporate securities market and that allowed us to generate guaranteed income but it was lower than the inflation rate.

Nevertheless, we should take into account the fact that pension funds are "long" money. Over a period of one or two years results don't appear to be tangible. But for a period of 10 - 15 years, given a policy aimed at reducing inflation, we can count on generating high incomes from this investment.

Last year VEB insured its responsibility for managing pension savings to the Russian Federation Pension Fund in the insurance pool "MAX". At present, Rosstrakhnadzor suspended licenses of two companies incorporated in this pool, namely "Avest" and "Avest-Classic", do you think that it will make you enter into a new agreement?

No, it won't. The fact is that Article 25 of the Federal Law "On the Investment of Pension Funds" sets forth requirements for own funds of insurers participating in the pools involved in insuring trust management company's responsibility. Even if two insurers withdraw from the pool, the amount of funds owned by the remaining pool participants remains to be higher than the one required by the Law, that is why we won't have to make an agreement on new terms.