Title: Onshore pension plans
1On-shore pension plans pros and cons
April 13, 2006 Moscow, Russian Federation
2General outlook
- Russia is currently undergoing a dramatic
transformation on the economic front,
particularly as far as the Financial Services
sector is concerned - The pension reform, as well as corporate
pensions, have specifically been singled out as
key areas of future development in order to
counter negative demographic trends - Russian companies are increasingly adopting
western remuneration practices, including
corporate pension plans
General outlook
- Strategy of Development of Financial Markets in
Russia for 2006-2008 is an example of the notable
change in rhetoric within the Russian government
on the issue of long-term savings - FSFM has pointed out the need for improvement in
the infrastructure of the market of collective
investments (UIFs, pension plans, etc) - Widening of the list of available asset classes
is expected by 2008 - Major amendments to tax legislation came into
force in 2005 further amendments to pension and
investment legislation are expected
Technical outlook
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3Outlook of EMEA Equity markets
Source Citigroup Investment Research
Source Citigroup Investment Research
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4Russian pension provider pros and cons
Benefits of an on-shore set up
Drawbacks of an on-shore set up
- Transparent tax and accounting treatment at the
time of making pension contributions and pension
benefit payment (!) - Fully accepted and supported by Russian
Authorities - Domestic pension fund takes care of all your
pension savings, not just a part related to a
corporate pension plan - Investing in Russia, an individual avoids foreign
exchange risk he/she does not understand and
cannot measure - Provision of better client servicing
- Easier exit options (funds can be quickly
withdrawn in case of emergency) - Most likely lower costs
- Currently rather limited investment possibilities
and protection mechanisms (the only working
financial mechanism is the method of dynamic
reallocation of assets, or CPPI). The situation
may however change over 1-3 year horizon - More tax incentives are needed, as they are the
main driver for pension plans worldwide
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5Synergy of an on-shore provider
During labor activity - corporate
After retirement - corporate
Age Gender Beginning of labor
activity Savings period Annual salary
Expected salary growth Percent of
pension contributions 6.5/1 (monthly)
25 years old female 2002 year 30 years 360.000
RUR 5
Pension amount Initial whole-life annuity
3.136.032 RUR 9.514 RUR
Twofold increase may be realized!
Individual pension plan
Individual pension plan
Same assumptions Percent of pension
contributions 3 (monthly)
Pension amount Initial whole-life annuity
1.254.413 RUR 3.805 RUR
Mandatory insurance (OPS)
Mandatory insurance (OPS)
Age Gender Beginning of labor
activity Savings period Annual salary
Expected salary growth
25 years old female 2002 year 30 years 360.000
RUR 5
Pension amount Initial whole-life annuity
1.560.999 RUR 6.846 RUR
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6Conclusions
- Russian Government is focused on the development
of the Russian financial markets - Provision of on-shore pension plans has bright
future due to more understanding of the local
markets, positive macroeconomic statistics and
ruble appreciation - Working financial tools are implemented with
regards to preservation of pension contributions - Please bear in mind the synergetic effect from
combining pension products - twofold increase is
possible! - Off-shore pension plans incur unquantifiable
risks and therefore loose attractiveness in the
current economic environment
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