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Onshore pension plans

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FSFM has pointed out the need for improvement in the infrastructure of the ... Please bear in mind the synergetic effect from combining pension products ... – PowerPoint PPT presentation

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Title: Onshore pension plans


1
On-shore pension plans pros and cons
April 13, 2006 Moscow, Russian Federation
2
General 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
1
3
Outlook of EMEA Equity markets
Source Citigroup Investment Research
Source Citigroup Investment Research
2
4
Russian 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    withdrawn in case of emergency)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

3
5
Synergy 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
4
6
Conclusions
  • 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

5
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