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Challenges of the mandatory funded pension system in the Russian Federation
Author:Rudolph, Heinz P.; Holtzer, Peter; Collection Title:Policy Research working paper ; no. WPS 5514
Country:Russian Federation; Date Stored:2010/12/30
Document Date:2010/12/01Document Type:Policy Research Working Paper
SubTopics:Financial Literacy; Access to Finance; Emerging Markets; Debt Markets; Pensions & Retirement SystemsLanguage:English
Major Sector:FinanceRel. Proj ID:RU-Financial Sector Technical Assistance To The Russian Federation -- -- P123029;
Region:Europe and Central AsiaReport Number:WPS5514
Sub Sectors:Non-compulsory pensions and insurance; Banking; Capital marketsVolume No:1 of 1

Summary: The overwhelming number of contributors that have been allocated into the default option is one of the main characteristics of the Russian second pillar. This finding confirms that the level of financial literacy for most of the participants is not sufficient to make informed portfolio selections. The authors argue that the current system is perfectly consistent with a solid second pillar, but the authorities should focus their attention in the strategic asset allocation of pension funds. Since in the short and medium term it is unlikely to see improvements in financial literacy of individuals that may overcome the complexity of these decisions, the authorities can play an important role in designing default investment portfolios that can be aligned with expected replacement rates for the contributors. The current investment regulation of the default option induces investment in inefficient portfolios that are unlikely to bring returns above inflation, and probably will result in very low replacement rates for contributors. Further liberalization of the investments of the pension portfolio; improvements in the governance and supervision of the pension system; and greater certainty about the ownership of the funds are necessary steps to complete the pension reform launched in 2002.

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