The billions of rubles in Russia's pension fund sit around and earn nothing, much like the pensioners the money goes to. But officials hope to get some of the pension money back to work with a program that will go into effect in 2002.

The prospect has sparked the interest of several Western and Russian asset-management companies that are hoping to win the right to invest the money, which will start off at $1 billion the first year but is expected to increase substantially as investments pay off and contributions grow.

Currently, Russian companies pay 28 percent of a worker's salary to the governmental pension fund, and the money earns no interest. Starting in 2002, firms will contribute 26 percent of salaries to the regular fund, but the final 2 percent will go into new "accumulative accounts" designated specifically to each worker. The amount will gradually increase to 8-10 percent by 2010.

Investments will begin immediately on the money in the first year as funds accumulate, officials said. They estimate that, considering some $14 billion a year goes into the pension fund, the new accounts will get about $1 billion in the first year. A spokesman for Russia's Pension Fund said that a total of 269.1 billion rubles (nearly $10 billion) had been collected through September 2000, surpassing the target of 227.2 billion.

Officials hope the fund will grow through investments in stock and bond markets, most likely in low-risk companies such as energy or telecommunications firms. Current legislation forbids asset-management companies from investing pension money in foreign stock exchanges – a limitation many hope will be lifted when the State Duma lower house of parliament approves final legislation for the specifics of the pension scheme.

Mikhail Dmitriyev, first deputy economics minister, told The Russia Journal that a tender will be announced by the end of 2001, seeking companies interested in the contract to manage the funds. He said government and pension-fund officials are currently working on specifics of the program that they will present to the Duma for final approval.

• Final criteria

Whatever the final criteria, Dmitriyev said the winner or winners of the tender would have to have a "transparent" accounting procedure and a "good reputation." Foreign companies with registered branches in Russia would be welcome to participate, he said.

"We suggest that the government should only insist on Russian residence of the managing organizations and should have no objection to foreign capital participation in the companies," said Dmitriyev, who would not mention the names of any companies that might compete in the tender.

Dmitriyev acknowledged that the accumulative funds would be riskier than the current, non-earning money, but he expressed confidence that the program could be run efficiently. "The government would require management companies to create very diversified portfolios in order to ensure that the investments would be safe," he said. He added that as the fund grows, the increasing investments would have a positive effect overall on the Russian economy.

Firms mentioned by industry observers as candidates to manage the system include Pallada Asset Management (PAM), Pioneer First, NIKoil Investment Co. and Troika Dialog Management Co.

PAM spokesman Vadim Soskov confirmed that "Pallada would certainly join the contest." Currently, PAM – the Russian branch of U.S. State Street Global Advisers, which manages more than $700 billion U.S. non-state pension funds – works with 12 private Russian pension funds. Soskov said the company plans to intensify activities in Russia.

"Pallada understands that the accumulative pension fund money will increase each year," he said. "It could be very profitable for Pallada to operate this fund."

• Reducing the risk

However, Soskov said that Pallada is hoping that final legislation will allow asset-management companies to invest pension funds in Western stock markets, reducing the risk of economic shocks possible in Russian exchanges. "No one can guarantee there won't be another governmental default [as in 1998] in Russia," he said. "So, Pallada hopes the government will allow pension money operators to invest 15-20 percent of the funds into low-risk Western indexes."

Pallada forecast that under current economic conditions, invested pension funds would bring a rate of return of about 6-10 percent a year.

Pioneer First investment-fund management company officials preferred not to comment on the prospects of joining the tender competition. Pioneer chief Maria Churaeva said the company would not make a decision until legislation is finalized.

Some experts said many companies would not be interested in managing the pension funds because of the fear of government interference. Yevgeny Yakushev, acting director of Nikoil Investment, said that "if the government strictly supervises the investment process, management companies might experience losses due to pressures from some ministries or governmental institutions that have their own varied interests."

He said NIKoil would watch the regulation process before deciding whether to compete in the tender.

In general, though, Yakushev said the government should encourage creation of more private pension funds rather than increasing the scope of state pension funds.

• ‘Basic pension needs'

"The government should provide its citizens with basic pension needs, but it would be better to have a system in which private companies have their own pension plans to give to employees," said Yakushev, who noted that in Russia there are just 300 private pension funds operating. With more private funds, he said, "market forces" would help improve the system and increase benefits.

Sergei Kabalkin, head of the Interros-Dostoinstvo private pension fund, agreed that a non-state pension system would be better for Russia, adding that he and others in the industry cannot understand why the government continues to push the state-run system.

"The government says we [private pension operators] are not transparent and trustworthy," he said. "But from the very outset [1992], there have not been any scandals with non-state pension funds."