It is no secret that Russia’s pension system needs an overhaul. It is also no secret that pension reform is on the government’s agenda. But what form will such a reform take, and how will it be implemented? Opinions on the issue are divided.

“The general direction of the retirement reform planned to begin operating by January 2003 is very simple,” stated Alexander Pochinok, the minister of Labor and Social Defense at the AmCham luncheon devoted to the changes in the Labor Code. “It is to make a slow transition from a system in which the working pay for the retired to a system in which everyone earns their own pension.”

According to the new plan, there will be a basic payment equal to the minimum wage for every person, even those who haven’t even worked. The other part of the pensionary tax will be used for individualized payments divided between an insurance account and a savings account. Since the elderly don’t have time to save, their pension would be greatly budgeted by the state, while younger people would pay a greater percentage of their income to the savings retirement fund. “In the period between 2028-2034 the number of work people will be equal to the number of pensioners,” Pochinok said, “so the task is to accumulate a certain amount of savings by that time.”

Olga Knysh, HR director at Oracle Corp, agreed that the projected pension program would be a good solution for Russia: “I have studied foreign pension systems, and can affirm that the pension system currently functioning in Russia has brought much stronger economies to an impasse… I agree that a private-savings pension system is the best program to be used here, as long as workers indeed are allowed to select their own retirement plan and choose between state and non-state funds, maybe even foreign funds.”

Starting Jan. 1, 2004, it is projected that everyone will be able to choose between the state and non-state pension funds, given the pros and cons of each. Non-state funds will be checked on a weekly basis, but still the higher return they give correlates a higher level of risk.

With a free choice between funds, even if one chooses non-state ones, it will still be guaranteed that people won’t go bankrupt. “We will conduct an audit of the funds every week just to make sure that these assets didn't sink anywhere or lose their value. We are thinking of serious systems of fund auditing. We do it all to calm people,” Pochinok explains.” As we all know, we live in a country in which people have often lost money in all kinds of financial machinations. So, we must provide citizens with an absolute guarantee that the system is immaculate and audited and nothing can happen to it.”

Among the practical regulations the State enforces to control this risk, Pochinok named changing the tax code, struggling for market purity [getting rid of the weaker funds] and allowing funds more freedom in investing in foreign financial institutions.

To purify the market, the government has already performed some closures of those pension funds, which, though not breaking the rules, were just weak and could collapse. “In order to avoid problems connected with pyramids and bankruptcies, we pushed out of the market those that aroused even a little of our suspicion,” Pochinok stated.

The minister concluded that, although the savings-retirement-program draft is still in the process of amendment and will most likely undergo major changes, there are strings to be pulled: “What eases my mind is that there will be a very strong insurance lobby and it will be lobbying for the non-state retirement-savings funds in particular, so I think that the result will be positive,” he said.

As the government is pushing the issue on the agenda, many people say Russian society is slowly coming to realize the necessity of insurance and private retirement programs.

Galina Melnikova, director for HR consulting services at Ernst & Young, said on the subject of this alleged trend that: “It is just right that people should get insurance, including life insurance, so that their heirs will not be left one day with no one to provide for them. This way, people will feel more socially protected”, she concluded, “And it’s a pity that our parents didn't have this opportunity.”

On the subject of whether Russian mentality is ready to accept these sorts of programs, Melnikova said, “What we [Russians, working at well-paying companies] don’t like is to have 30$ monthly retirement. That's why we are concerned with these issues and work on them.”

An alternative to the foreign retirement funds, suggested during the AmCham meeting, is the possibility of investing capital in financial instruments, such as the shares of foreign companies.

Pochinok disapproved of this kind of investment as lacking security. “Investing money into shares is not a system of providing retirement providing,” he explained. “Direct investment into shares is a very risky enterprise. I would not recommend it as a means for accumulating retirement money.”

“Of course, the retirement fund has a right to invest money into shares, but everyone should know what the makeup of the portfolio is,” the minister stressed.

One of the most highly debatable issues, according to Pochinok, is whether to tax the money going to the pension funds. “Opinion in the government is divided,” Pochinok confessed.

“We'll see what the deputies decide. On our side, we will do everything we can so that they support the draft. I hold the position that that the money going into the retirement fund should not be taxed.”

Melnikova said she sees the retirement programs as a means of competing for good employees, but she agrees that the employer should be given some tax breaks. “A private pension plan can be an excellent instrument to motivate and retain employees and inject additional investment into the economy. This can be done by a retirement program in which, for example, an employee makes contributions to his pension plan in addition to that made by the employer,” she said.

“Of course, this would become more attractive if the employer's contribution were not subjected to social taxes. The state would benefit from this as well because the funds contributed into the non-governmental pension plans will be invested in the Russian economy.”

Considering all these controversies, change is not expected to be completed soon.

The prospected transition period to a completely new retirement system is 27 years. “If you think, that 27 years away is not in your life time,” Pochinok smiled, “let me assure you that you might be wrong, for life expectancy is increasing.”

While still debated by the government, the draft finds different reflections in the minds of people whom the laws will directly effect.

Andrei Popov, a 41-year-old interpreter at Arthur D. Little, said he regards changes with skepticism: “If I were to choose to whom to entrust money — state funds, non-state funds or myself — I would choose myself… Yes, I would trust in state funds more, but I will always count only on myself… I don’t think people here start thinking of retirement till 40. To me, this a part of Russian mentality.”

Theoretically, with the new plan, employers will tend not to conceal profits. Melnikova said she believes that with the proposed pension plan things will change for the better. “Employees would be interested in showing their real incomes, as their pension would depend upon it. Actually, this will drive up competition between companies. Employees would tend to choose employers whose policy is transparency in all payments, which in its turn will urge companies to do it the right way to retain key talent.”

One issue remains untouched that could actually bring the program to nothing. “There is a severe concern that the inflation may have a great effect,” Melnikova stated. ”That's why the savings should be converted into currency (USD, Euros, etc) or the interest made progressive to cover inflation.”

The proposed changes in the retirement system of Russia are one of the burning concerns, coming alongside the draft version of the new Labor Code. There are a number of debatable issues and proposed solutions, which shall not be settled though, until the backbone strategy is first outlined in the projected system of laws.