Instruments of pension funds are being altered
The Skinny on Q2'24 Pension Savings:
The expansion of pension savings (PS) in non-profit organizations (NPOs) slowed to a crawl at 0.2%, totaling 3.3 trillion rubles. The Social Fund of Russia's PS increased by 0.4%, albeit less than Q1's 1.3%, reaching 2.4 trillion rubles. The only growth observed was in the pension reserves of NPOs, which swelled by 2.3%, compared to 1.6% in Q1, to 1.9 trillion rubles. In Q2'24, the total portfolio of pension funds saw a slowdown at 0.8%, from 1.0% in Q1, with a portfolio volume of 7.7 trillion rubles.
The number of individuals forming savings in NPOs dipped by 62.1 thousand to just under 36.1 million people. Compared to Q2'23, the decrease in the number of insured persons in NPOs gained momentum at 6.7%.
Originally, some folks formed their pension savings from 2002-2013, courtesy of a portion of insurance contributions (6% of salary) and voluntary contributions to their personal account. Since 2014, the cumulative part of the pension has been frozen, with all insurance contributions representing only the insurance part. Any growth in already-formed pension savings is facilitated through investment returns.
Pension reserves represent voluntary contributions from legal and physical entities within individual and corporate pension programs, as well as investment income earned on them. The growth of pension reserves was fueled by the influx of funds into the system of voluntary pension provision and the Long-Term Savings Program (LSP). Approximately 386.8 thousand participants joined the LSP, launched on January 1, 2024, in Q2'24, contributing 11.3 billion rubles in premiums. By the end of June 2024, their number surged to 656.4 thousand.
Experts predict that NPOs will rally more than 18.5 billion rubles from the populace and at least another 2.2 billion rubles in co-financing from the state by year’s end under this program.
The core of the Personal Pension Capitalization (PPC) lies in citizens electing to transfer their funds, including frozen pension savings, to Non-State Pension Funds (NSPFs) for at least 15 years. These funds invest the money to generate income. The state chips in on these investments for 10 years, up to a maximum of 36,000 rubles per person per year. The co-financing amount varies depending on the citizens' income. If the monthly salary is below 80,000 rubles, the state matches the contribution. For those with incomes between 80,000 and 150,000 rubles, the state contributes 50 kopecks for each invested ruble. For the rest, the co-financing ratio is 1:4.
However, managing pension funds' results have been less than impressive. As of the II quarter of 2024, the gross weighted average yield of NSPF pension investments was 3.4% per annum, and for insurance companies, it was 3.1% per annum. These figures were lower than the inflation rate of 8.6% for the same period, according to the Bank of Russia. Despite this shortfall, these numbers won't affect pensioners' payouts.
The decrease in yield was due to the deterioration of the Russian bond market and the contraction of the Russian stock market from quarter to quarter, following a rapid growth in the previous quarter. The income of NSPFs was primarily generated from coupon payments on bonds.
It's worth mentioning that the Moscow Exchange Index plummeted by 5.35%, and the Moscow Exchange Government Bonds Index plunged by 7.45%. The drop in OFZ prices was due to market expectations of further increases in the key rate. However, investors, including NSPFs, will receive the yield under which the Russian Ministry of Finance's obligations were purchased.
The shares of OFZs in NSPF portfolios remained almost unchanged: 43.9% for pension savings and 26.4% for pension reserves. In total, NSPFs hold 9.5% of the internal state debt.
The Central Bank has noted a seventh consecutive quarterly decrease in the share of corporate bonds in NSPF portfolios. For Pension Savings of NSPFs, this share declined by 1.8 percentage points to 36.6%, and for Pension Reserves, it decreased by 1 percentage point to 37.2%. The decrease in the share of investments in these instruments was due to their negative revaluation and low spread of their yield over OFZs, which reduces their attractiveness for investments, as explained by the regulator.
Meanwhile, the share of assets placed in money market instruments has surgeDramatically. In April - June 2024, the share of claims under repo deals in the portfolio of NP NFP increased by 3 pp, to 7.2%, and in the portfolio of PR - by 2.5 pp, to 6.7%.
"This indicates the funds' preference to hold off during a period of heightened volatility in liquid instruments, whose yields rise during monetary policy tightening. The yield of money market instruments may be at the same level, or even higher, than deposit rates, while their liquidity is higher than that of deposits, as they can be sold at any moment without losing accumulated yield," the CB explains.
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#Pension Funds#NPF#Bank of Russia
Behind the Scenes:
Economic factors like interest rates, inflation, and market performance heavily affect pension savings growth. Factors like investment strategies, regulatory changes, organizational policies, and market performance exert influence on pension savings trends. Investment returns, funding decisions, and interest rate cycles significantly impact pension savings trends.
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In the financial landscape, business entities, such as Non-Profit Organizations (NPOs), are significantly influenced by factors like investment returns, regulatory changes, and market performance when it comes to pension savings. For instance, the growth in already-formed pension savings is facilitated through investment returns.
Moreover, the growth of pension reserves, which constitute voluntary contributions from individuals and corporations, is driven by the influx of funds into the system of voluntary pension provision and plans like the Long-Term Savings Program (LSP). These investments, initially held in Non-State Pension Funds (NSPFs), are used to generate income, with the state offering co-financing for at least 15 years.
