N.Rudykh,
head, department of ratings, non-state pension funds
rudyh@raexpert.ru

P.Samiev,
director, department of ratings of financial institutions
psamiev@raexpert.ru

Non-state pension funds: despite crisis

Brief

In 2007 non-state pension funds (NSPF) dramatically sped up their operations at the retail market. Within 9 months of 2007 a number of the insured for mandatory pension insurance (MPI) in NSPF increased by 2.08 times (or by 977.9 thousand persons), and a number of those insured for non-state retirement insurance (NSRI) - by 1.03 (or by 203.8 thousand persons). In NSRI area 2007 was a break year for majority of NSPF. They sped up their activity at the retail market in 2007.

In search of retail clients NSPF have to be competitive. Credibility rating should make a difference. In 2007 NSPF community initiated the idea of individual NSPF credibility rating, but participated in setting criteria for appraisal of funds. Expert RA developed methodology of appraising NSPF. The first ratings would be assigned in 2008.

A number of those who “kept silent” notably decreased. 1.48 mln applications were made in 2007 to move from the Pension Fund of Russia to NSPF (91.8% of total amount of applications). The dynamics were caused by a number of events. The state took interest in the pension system problems and put forward certain legislative initiatives. Besides, during the pension reform implementation NSPF accumulated significant experience of operating at the MPI market and adjusted sales technologies.

Many funds showed yield just above inflation. Still, the NSPF yield in 2007 looked more attractive comparing with asset management companies’ yield in a number of open mutual investment funds. It may be explained by conservative investments – a limiting factor at the accelerated market, supporting portfolio yield under the conditions of financial instability. NSPF reserves (together with closed mutual investment funds), in particular, contributed to the stable asset management market development in 2007. At the first quarter of 2008 the segments were main drivers and stabilizers of the Russian collective investments’ market.

Approaching retail

Diagram 1.The MPI market dynamics

Almost all NSPF took active steps at the retail market. One may expect many more clients for NSPF than in the previous year. It is true both about MPI and VPI.

The VPI dynamics by October 1, 2007 were quite impressive. According to official data, pension accumulations increased by 15.6 mln rubles or by 156.42% within 9 months of 2007.

Pension accumulations give chance to retail-targeted NSPF. “Retail” funds may take the upper hand over large companies’ funds. Besides, by attracting clients through MPI, NSPF may expect citizens to place their accumulations through NSRI as well.

Therefore indicators may grow in the additional retirement insurance segment, too. It will not be as impressive as at the MPI market due to almost completely exhausted clientele in large corporations.

According to expert assessments and summary results of certain funds, increased number of individuals and enterprises in NSPF programs will be at least 15-20%.

Credibility rating - the main selection criterion

Diagram 2.Main dynamics of NSRI

Any fund novice at the retail market is immediately hit by competitive struggle. Scarce clients are mistrustful and not ready to give their money to NSPF. They have poor knowledge of pension system and poor understanding of NSPF and its functions.

Therefore the retail market operations differ a lot from corporate operations. To attract potential clients, funds lead active information and education campaigns in mass media, improving operative technologies and expanding branches.

But this is not enough. A fund should differ from its rivals. The main selection criterion for a client is the fund credibility – hard to be appraised by a non-professional. Credibility ratings may be of help for NSPF.

Rating is needed as an instrument reflecting all areas of NSPF activity. All the market players are in agreement on this. Therefore in 2007 Expert RA together with National Association of Non-State Pension Funds (NANSPF) began to develop NSPF appraisal methodology. The first NSPF ratings would be assigned in 2008.

Changed approach to rating is the basis of new methodology (Expert RA started with distant NSPF ratings in 2004). Presently rating is completely individual - a fund itself initiates the credibility appraisal and is directly involved in the process. Main elements of analysis of NSPF credibility, developed by Expert RA, are enumerated in Addendum.

Placing stakes on those “keeping silent”

Diagram 3.The asset management market, volume of attracted funds, 2007

Those undecided about their pension accumulations are going down in numbers. The reason is the state attention to the pension system problems. Next to pension accumulation potential voluntary savings of citizens are also under consideration.

In 2007 the State Duma approved of an amendment to the Tax Code, according to which anybody who voluntarily transfers money from his salary to NSPF (within 100 thousand rubles), gets tax deduction 13%. The law “On co-financing voluntary pension accumulations of citizens” passed the first reading.

As a result of all the activity people made a massive transfer of their accumulations to NSPF. The Pension Fund of Russia made the corresponding information public. According to the data, by January 1, 2008 about 1.5 mln people transferred their pension accumulations from the state management company – Vnesheconombank (VEB) – to private structures. The result beats previous achievements of the pension reform: in 2006 the figure amounted to 1 mln people, in 2005 – 0.7 mln people, in 2004 – 0.26 mln people. 91.8% of applications contained a request to transfer their pension money from the Pension Fund of Russia to some non-state pension fund.

2008 will see the consistent growth of agreements on mandatory pension insurance with NSPF. The MPI market, being covered by at most 10%, holds significant potential for NSPF.

Good yield is not bad

The next 2007 trend at the NSPF market related to reduced yield against the stock market crisis. And yield influences decisions to transfer pension accumulations from the Pension Fund of Russia to NSPF. But the issue should not be considered as negative for the following reason.

2007 results of private companies managing pension accumulations were published in February: VEB yield achieved 5.98% and was the 11-th in the list. The leader (AGANA) showed pension money yield of 7.32%. Consequently, not a single management company bypassed inflation level (11.9%).

The information on yield of investing pension money and placing pension reserves to NSPF in 2007 was not yet made public. Certain information may be found in NSPF press-releases and on their sites (see table 3).

The table data investment yield is notably higher than in case of pension accumulations left by citizens in the Pension Fund of Russia. Besides, the data look more attractive comparing with yield of the majority of management companies (average pension accumulation increment among private management companies is 4.38%). Here is the alternative investment data for comparison: mixed mutual funds averaged 6.6%, Sberbank deposits might give you 8%.

Thus, NSPF depositors may easily increase in numbers. It should be noted that pension funds constitute “long” money to be working for many years. Therefore management success of pension resources should be benchmarked against protection of the client’s money from inflation and stable investment yield for several years.

NSPF – market stability

NSPF are considered to be large investors all over the world, providing the “longest” financial means to national economies. The state may prioritize the pension resources in line with the country’s economic development by properly placing pension reserves and accumulations.

Management of NSPF reserves and accumulations is closely controlled; the money is not to be turned at the speculation market. NSPF priority is to preserve accumulations, therefore management companies involved in investing pension accumulations and reserves are not in for risky experiments.

As a result the asset management market is presently favorable. Its quantity indicators have gone up (by 80%, volume – 1.8 trln rubles), and the structure proved to be successful for the 2007 crisis. A big share of the collective investment market was covered by closed mutual funds, and NSPF reserves and accumulations – to secure the market stability.

Addendum

NSPF analysis main areas

Fund size
Volume indicators and related risks are appraised.

Fund geography
Geographic diversification and presence at the promising regional markets.

Fund clientele
Clientele size and structure, clients’ loyalty, client-fund relationship.

Fund investment strategy
Investment portfolio structure, yield placement and cooperation with management companies.

Fund professionalism and business potential
Fund history, main market events and their impact. Non-state pension payment, employees’ professionalism.

Table 1. The largest NSPF by pension accumulation volumes, October 1, 2007
Table 2. The largest NSPF by pension reserve volumes, October 1, 2007
Table 3. NSPF yield from investing pension accumulations and placing pension reserves in 2007, annual %
Table 4. The largest management companies by NSPF reserves in management, end of 2007
Table 5. The largest management companies by NSPF in management, end of 2007