Russians have less than a month left to choose who to trust with investing the funded portion of their pension for the coming year. Now the options for future pensioners have expanded: from July 1, you can give your money not only to a private or state management company, but also to a non-state pension fund (NPF). However, the new option is completely disadvantageous.

The choice has become greater

The pension reform carried out since 2002 has made many Russians investors. All those who retire from 2012 and later will receive it depending on the size of their salary during their working life. Part of the unified social tax paid by the employer - from 2% to 6% of the employee's salary depending on his age - is transferred and accumulated in the citizen's individual account in the Pension Fund. Over time, the pension will be paid from these funds. But they do not lie as dead weight, but are placed on the financial market to receive additional income.

Citizens learn about the amount of savings in their pension account from the Pension Fund, which once a year sends out “letters of happiness” to all future pensioners, as the former chairman of the fund, Mikhail Zurabov, put it.

Each person decides for themselves who will invest this money. At first, they could be given to the trust management of the state (Vnesheconombank was chosen for this role) or one of the 55 private management companies that won the Finance Ministry's competition. But since July 1, NPFs have also been allowed to participate in the pension reform.

To transfer money to the management of a selected company or fund, you need to fill out and submit an application to the Pension Fund, the form of which the fund sends in "letters of happiness." The law allows you to do this from July 1 to September 30, so the deadline is close, and it's time to think about who to entrust with the care of your future pension.

Owners, not investors

There are fewer similarities than differences in how management companies and pension funds will work with the funded portion of pensions (FPP).

All savings, although they are recorded in individual accounts of future pensioners, are by law the property of the state represented by the Pension Fund. It remains their owner and transfers them to the management company. But the funded part of the pension transferred to the NPF becomes its property.

As an owner, the NPF must independently keep records of each person's savings, distribute them among individual accounts, and subsequently assign and pay the funded portion of the pension. These are the functions of the PFR. Management companies do not have such powers: they only invest the money received from the PFR.

But the management companies themselves place these funds, and NPFs cannot do this - they will have to hire the same management companies for this. Each fund can conclude contracts with one or several companies and transfer the funded portion of pensions to them for trust management.

This will allow funds to reduce the risk of poor management, and those who give their savings to NPFs will diversify risks across different management companies. Future pensioners can choose only one management company and entrust it with managing the entire funded portion of their pension.

Each NPF selects managers at its own discretion, informing clients of its decision. There is no direct indication in the legislation that NPFs can cooperate only with management companies that have passed the selection of the Ministry of Finance. But the head of the NPF Inspectorate, Vyacheslav Batayev, is confident that the funds will select managers from among the management companies selected by the Ministry of Finance last year and newcomers who will be selected in a new competition. And the corresponding amendments to the legislation will be adopted in the near future, the official is sure. The general director of NPF LUKOIL-Garant, Sergey Erlik, believes that most funds will transfer pension savings to the management of the same management companies with which they work within the framework of voluntary pension provision.

The selected NPF management companies will place funds not just anyhow, but in accordance with the investment declaration approved by the government. It is the same for all pension savings, regardless of whether they were received from the NPF or the PFR. This will be monitored by the fund's special depository: if it notices violations in the management company's work, the fund can terminate the agreement with this company and transfer the funds to another manager for management. However, formal violations are not necessary for this: the NPF can refuse the services of the management company at any time if it is dissatisfied with the results of its work, for example, low profitability or the structure of the formed portfolio. In addition, depending on its investment strategy, the NPF has the right to tighten the requirements for the portfolio structure - it is enough to provide for this possibility in the agreement with the management company.

Small pluses…

Each fund concludes contracts with all management companies on individual terms. Having larger sums than each future pensioner individually, NPFs will be able to negotiate with managers for more favorable conditions for themselves. Therefore, the commission for NPFs will most likely be significantly lower than when managing funds received from the Pension Fund of individual pensioners, believes Natalia Plugar, Deputy General Director of UralSib Management Company. Funds will strive to minimize the remuneration of not only the management company, but also the special depository, i.e. the costs of future pensioners will be lower, Plugar says. This will increase the profitability of investing the funded portion of pensions. By transferring their pension money directly to the management company, future pensioners cannot stipulate the terms of management, including the amount of commissions.

In addition, NPF clients will learn about the results of investing their savings at least a year earlier than those who choose state and private management companies.

The fact is that the client of the management companies, which transfers money to them for management, is the Pension Fund. Without its consent (and the Pension Fund did not give it), the companies cannot disclose information about the investment income received, and they simply do not have information about the state of individual accounts and their owners. Therefore, future pensioners will learn about the results of the management of the funds of the management company they have chosen only the following year from another “letter of happiness”. For example, the letters that the Pension Fund sent out this summer contained the results of investing the funded portion of pensions for 2002.

Pension funds, unlike management companies, know all their clients, and therefore can inform them at any time about the status of their personal accounts, although the law requires them to do this only once a year. Funds can inform clients about the estimated investment yield and the status of personal accounts at least once a month, after receiving a report from the management company on the results of investing pension savings, says Andrey Zheleznov, vice president of the NPF of the electric power industry.

…and a huge minus

This is where the advantages of pension funds over management companies within the framework of pension reform end. This is clearly not enough to compensate for the only, but fundamental, drawback - the huge costs that future pensioners will have to bear.

Firstly, it is necessary to actually pay the asset management fee twice. After all, NPF clients will have to pay for the services of not only the fund itself, but also the management company and special depository chosen by them. As with the Pension Fund, managers can withhold from the NPF up to 10% of the investment income plus 1% of the value of the assets under management, and the special depository - 0.1% of the value of the assets. These payments are made from pension money. And NPFs have the right to withhold “for themselves” up to 15% of the investment income remaining after deducting the remuneration of the management company and paying taxes.

However, some NPFs are ready to sacrifice part of their own remuneration. NPF “Garantiya”, according to the development director Vadim Loginov, plans to charge a commission of no more than 10% of investment income. But this is not so little.

But the losses of NPF clients do not end there. Transferring funds to non-state pension funds may threaten another big problem. According to the Tax Code, NPFs are required to pay taxes on all funds in the funded portion of the pension, as well as on the income from their investment, before calculating their own commission.

The tax benefits currently provided to NPFs can only be applied within the framework of voluntary pension provision agreements, explains Irina Plytkevich, head of the legal department of the NPF of the electric power industry. And the funds received by the NPF within the framework of the pension reform are equal to the fund's profit and are immediately subject to a 24% profit tax.

The fund managers do not yet know from what means they will have to pay taxes – from their own funds or whether these costs will be shifted to citizens. The funds hope that amendments to the Tax Code will be adopted, which will remove the funded portion of the pension from taxation. “For now, the situation is such that the funds will be forced to pay taxes, thereby reducing the amount of the funded portion of each citizen’s pension by 24%,” says Galina Morozova, President of the Sberbank NPF. At the same time, the annual income from investing the remaining funds of the NPF is unlikely to compensate for the costs of paying taxes, believes Sergey Erlik, General Director of the NPF LUKOIL-Garant.

But that's not all - income from investing the funded portion of the pension in the NPF is also taxed at a rate of 24%, adds Irina Plytkevich. While under voluntary pension provision agreements, NPFs pay this tax only on that part of the investment income that exceeds the refinancing rate. There are no such tax breaks for the pension reform yet, Morozova complains.

Now it is clear why experts do not recommend that citizens transfer their pension savings to NPFs. Until the issue of preferential taxation of the funded portion of the pension in NPFs is resolved, transferring money to them is at least economically inexpedient, says Dmitry Molchanov, an expert at the Economic Expert Group. By transferring money to an NPF now, a person essentially takes on all possible risks of the pension reform, agrees Polina Kryuchkova, program director of the International Confederation of Consumer Societies (ConfOP).

How not to lose your pension