VEB’s department head: there is no alternative to pension savings on the long-term investment market

INTERFAX.RU – The pension savings market, the amount of which exceeds 3 trillion rubles, faces a new round of changes after the latest complicatedreform. The changes have not been formally approved but they are being actively discussed at the Russian White House. In its capacity of a state managing company (SMC), Vnesheconombank is a major participant in the pension savings market by managing pension funds of “undecideds”. Director of VEB’s Trust Management DepartmentAlexandr Popov told us about the future of the State Management Company (SMC) and the long-term investment market in case of freezing the funded portion of pensions or scraping it altogether.

-How is SMC (VEB) is going to operate under the conditions of freezing the funded portion of pensions for 2015?

-Of course, freezing for the year 2015 is not a very good signal. As to VEB in its capacity of a state managing company, almost nothing is changing because for the most part our Bank is responsible for managing funds of “undecided”. Only 280 thousand people have chosen an extended portfolio knowingly so contributions to the extended portfolio have been frozen for us since 2014. And freezing for 2015 and even for 2016 won’t change anything. Under applicable legislation we are to transfer funds upon applications of citizens filed in 2013and 2014about selecting a non-government pension fund.

-Is this a big sum?

-It will depend on the number of non-government pension funds that will be able to actually transform into joint stock companies and enter into a guarantee system. According to an estimate by the Russian Pension Fund on the basis of applications filed in 2013, it is about 327 billion rubles.

-Is VEB going to change its strategy for investing pension savings under the conditions of sanctions and volatile markets?

-Factually, sanctions do not have any impact on us but we might come up against difficulties with bond issues ratings. So far, rating agencies have refused to assign ratings only to new bond issues of state-run banks, which came under sanctions. As far as other banks are concerned, we don’t have any information.

-So, VEB is not in a position to redeem mortgage bonds of VTB 24, Gazprombank and Sberbank?

-Our investment declaration stipulates that as far as mortgage bonds are concerned ratingsare to be assigned only to bond issues. For all remaining bonds – corporate and sub-federal ones ratingscan be assigned either to an issuer or to a bond issue. This was not an obstacle for us before because if an issuer had a rating, a rating agency used to assign this rating to a bond issue automatically. We turned to the Finance Ministry for it toadjust our investment declaration to set conditions for mortgage bonds which are identical to those for other bonds. I hope that the Finance Ministry will help us.

-Aren’t you going to invest in other types of bonds?

-We don’t see it fit to do it now. Results of investing funds depend exclusively on the Bank of Russia’s key rate, which determines yield of bonds. Sharp and significant increases in a key rate do not go away without a trace.

-Will VEB be able by your estimates to generate yields higher or at least at inflation level, given the falling market.

-I find it very difficult to make any projections and we have no right to make them. In the current situation, a lot depends on the Bank of Russia’s actions, which in their turn hinge upon inflation trends, inflow or outflow of foreign investments and so on. This February, before the key rate was increased, yields on OFZs were about 8-8.5% per annum and after the key rate was increased, the yields exceeded 9.5%. Then in the summer everything started to steady and yields on long-term bonds started to go down. Now yields on OFZs are about 10% and we can see double digits with regard to corporate bonds including short-term ones.

-What can replace pension savings on the long-term investment market?

-Nothing, there is no alternative. By scrapping obligatory pension savings, we are in fact scrapping the emerging long-term funding market. By way of entering into a guarantee system, non-government pension funds would also be able to become long-term investors. Now they invest short-term as a rule for periods of no more than two-three years. The system is not stable and if there is no stability, long-term investments are out of question. Under such conditions, neither life insurance nor voluntary pension systems are going to develop rapidly.

-And what about irrevocable deposits?

-Who will bring oneself to make an irrevocable deposit for a period of five years? Nobody is likely to deposit money irrevocably for a period of more than one year. You need to be confident about your future. Nowadays everything is changing very fast and we don’t know what’s going to happen tomorrow. You should be a very courageous and confident person to put money into a bank irrevocably for more than a year.

-Or a very rich person?

-Or a very rich person, although in my opinion such people are not interested in irrevocable deposits very much. So, there are no other sources of money and we will not have them for a long time.

- Given the current situation, how is the bond market going to develop? Who is for example going to buy infrastructure bonds? There were several bond issues.And now that’s over and done with?

-I think so, if the funded pension system is closed. We won’t have any new funds in our portfolio. And. then we’ll have to address an issue of what should we do with the money already under management of VEB and non-government pension funds. So far, those responsible for social policy in the Government say that the money will stay put. Anyway, the amount of our extended portfolio is big – with all outflows it will be 1.5 trillion rubles (now it’s 1.9 trillion rubles). And this portfolio itself might become a generator of cash. If things shape up in our favor our coupon yields will be about 100 billion rubles per year plus redemption of bond issues. These are all sources of investing but we won’t be able to invest this money for very long periods of time because pension payments are to start from the year 2022. So a maximum investment horizon for these 100 billion rubles is about 10 years. Non-government pension funds are in the same situation. It’s clear that they won’t have a big stake in buying infrastructure bonds.

- Did VEB purchase all bond issues placed by RZHD and UES FGC?

-Almost all final bond issues were purchased by the State Managing Company because nobody had money until 2035.

-If hey for example make a decision on scrapping the funded portion what will happen to pension savings under VEB’s management?

-As I have already said our portfolios and those of non-government pension funds might stay put. We could also try to withdraw these funds but it will be very difficult to do technically. There’s no way of selling the assets in the current situation without crashing the market. We can fix the current structure and the composition of portfolios and withdraw funds into the budget gradually from redeeming instruments and coupon yields. In our case,the final redemption date is 2048.

-Did VEB make any proposals for reforming the pension system? Did the mechanism that operated two years ago before the first “freeze suit you?

-In principle, the system was good enough for us. In our opinion, after our State Managing Company’s investment declaration had been expanded an adequate and efficient system came into being. It is transparent and easy to understand. After the crisis,the real value of money became positive in the long run, that is, bond yields exceeded inflation. After all, a normal investment environment came into being in Russia and it became possible to ensure real profitability for people. The problem was that non-government pension funds were not controlled adequately. There was nothing bad in the system of non-government pension funds and the ones that disappeared were small and not numerous. The problem was that they were not controlled in the right way. And if a system is not controlled there are always swindlers who want to steal money. But the problem is being rectified now.

-Maybe it makes sense to encourage a voluntary pension program?

-We studied pretty carefully the current pension systems in Europe and the United States. In the US, they have a system of voluntary pension savings, which has been in existence since the fifties. There an employer is obliged to offer an employee to transfer some money together with the employer into his pension savings account. And the employee can manage this money himself through brokers. An employee has the right to say yes or no – it’s his private matter. We have been discussing a similar system in our country. We visited an office of a well-known company where 85% of employees are university graduates with higher than average incomes. Nevertheless, only 45% of employees participate in this system. This is the way things are in the United States where the system has been functioning for 50 years, given their developed financial market, their financial literacy and their active involvement in the financial market and what could we expect in this case in our country? If our obligatory pension system could operate until the start of significant pension payments, I’m sure, it would be able to prove its efficiency. This would give impetus for voluntary pension savings and we would be able to gradually replace obligatory savings with voluntary ones.

-This year the state program to support mortgage lending is ending. Is everything going according to the plan?

-VEB’s program ended last year. We are completing the redemption of bondsfrom the program’s participants. We’ve got some problems associated with ratings of mortgage bonds. Other banks which were not affected by sanctions have not had any problems with rating agencies so far.

-All the banks that participated in this program said that they would issue mortgage bonds until the end of the year?

-All agreementshave been signed. Pools of credits have been accumulated. Some are working with rating agencies and some are obtaining sureties from the Agency for Housing Mortgage Lending. I’m sure we’ll resolve all emerging problems with the help of the Government, the Finance Ministry and the Bank of Russia.

-Are you discussing an issue of launching a new mortgage-lending program?

-We need money to launch a new program. Banks benefited from having a rate of 7%. We had never had such a low rate on mortgage bonds. So the banks were keenly interested in this program. The rate was reduced through VEB’s investing its own funds at a rate of 3% per annum but now Vnesheconombank does not have privileged money and it can’t borrow it anywhere. And in my opinion,we should think hard if it makes sense to stimulate a system that is expanding and developing successfully. VEB’s mortgage program was approved after the crisis when we had to reduce rates on credits. An the program achieved its goal. From 2009 to 2012 the rates were reduced from 15-16% to 12% per annum on the whole market – not only on the primary market for which the program was designed. And now as long as banks do not increase mortgage rates substantially everybody including us expects the market conditions to improve soon.