PENSION REFORM TOOLS Mechanism of pension formation in Russia

Rationale of the Reform

At the beginning of 90-s it was evident that the working distributive system of pension payments based on the principle of solidarity of generations exhausted itself. The mechanism of the system is mostly rooted in the ratio of workers to nonworkers as with cutting down of the first or increasing of the second the pension diminishes.
Nowadays the total number of pensioners in Russia reaches about 43.7m people and the ratio of payers to the RF State Pension Fund and pensioners approximately constitutes 1.5:1 while the ratio should be much more higher for the efficient operation of the distributive system.
Apart from the pension system, pensioners are not satisfied with the size of pension. Personal work contribution of each pensioner does not tell upon the size of pension resulting in equal pension payments for best workers and those who gave a damn to the work.

The addition of two more effective systems based on contributions made by companies to the traditional system «solidarity of generations” is the core of the pension system reform designed to form pension insurance and pension accruals with further possibility to invest the assets into market instruments.

According to the Federal Act from 17.12.01, #173-FZ "On work pensions in the Russian federation" a pension consists of the three constituents:
• Basic pension;
• Insurance pension;
• Pension savings

Basic pension is state-financed pension payable by the government to people having 5-year or more working experience.

The basic pension under the current regulations is 600 rubles subject to regular revision by lawmakers together with the minimum salary.

To finance basic pension payment, companies pay 14% of labour compensation funds constituting 50% of the pension payment rate.

Insurance pension covers the whole working experience and depends on the amount of pension savings on your individual account. The account reflects liabilities by the government to pay pensions to people with the savings payable in cash on retirement of an individual and entitlement to pension. Before retirement, payments constituting insurance pension will be fixed as liabilities by the government on individual accounts of people insured. Current insurance payments are used to cover pensions payable to existing retireds.

The government spends 8-14% of labor compensation fund to cover the pension according to the age and job of an insured person.

Insurance pension will be calculated relevant to the following: pension savings on individual account are to be distributed in equal portions for the period of 19 as average life of a retired and with equal payments within the year.

Pension savings are pension money saved on your individual account. You have the right to transfer your pension money to any Management Company you choose.

Pension savings are the aggregate of pension payments and return on investment generated by the Management Company with whom you signed asset management agreement.

New Pension System Pros

1. The reformed pension system is oriented for detailed recording of your payments during each year and month of your working experience;
2. The liabilities by the government to an individual are legally fixed and binding for you to be entitled to pension payment subject to all revisions in effect during your working years.
3. Pension system transparency is enhanced due to the pension reform.
4. Pension savings constitute necessary pension resources given declining demographic pattern forecasts.