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Challenges of the mandatory funded pension system in the Russian Federation, Volume 1
Author:Rudolph, Heinz P.; Holtzer, Peter; Country:Russian Federation;
Date Stored:2010/12/30Document Date:2010/12/01
Document Type:Policy Research Working PaperSubTopics:Financial Literacy; Access to Finance; Emerging Markets; Debt Markets; Pensions & Retirement Systems
Language:EnglishMajor Sector:Finance
Rel. Proj ID:RU-Financial Sector Technical Assistance To The Russian Federation -- -- P123029;Region:Europe and Central Asia
Report Number:WPS5514Sub Sectors:Non-compulsory pensions and insurance; Banking; Capital markets
Collection Title:Policy Research working paper ; no. WPS 5514Volume No: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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