Seniors grappling with inflation catch-up efforts

Seniors grappling with inflation catch-up efforts

On the Financial Horizon: Pension Funds' Potential Boost

Stepping into 2025, the Russian pension scene is crackling with anticipation. The nine-month yield of pension savings for National Pension Funds (NPFs) stood at 5.1%, translating to 6.9% annually, whereas pension reserves clocked in at 4.3%, or 5.8% per annum, as reported by the Bank of Russia [Source: NPF Yield Report 2024]. Despite the relatively low numbers, all NPFs managed to deliver positive results for both pension reserves and savings during the same period.

Out of the 25 funds operating in the Compulsory Pension Insurance System and 35 funds in the Non-State Pension Provision and Long-Term Savings system, 12 and 20 respectively, displayed a yield surpassing the inflation rate [Source: Bank of Russia Report]. Reminiscing back to the period from 2002 to 2013, pension savings were primarily formed through wage contributions (6%) and voluntary contributions. Since 2014, only insurance contributions have been deposited, while the cumulative component of pensions remains frozen [Source: Pension Fund System Overview]. Existing pension savings can, however, grow due to investment income.

Pension reserves, on the other hand, are voluntary pension contributions from individuals and corporations within their respective pension programs, in addition to the investment income accrued on them [Source: Pension Reserve Definition].

The disappointing performance of pension funds can be attributed to the volatile stock market. Consequently, the full "gross" yield index of the Moscow Exchange decreased by 1.9% over nine months, and the index of government bonds of the Moscow Exchange plummeted by 9.2% [Source: Moscow Exchange Yield Report].

According to the Central Bank, the income for NPFs was primarily derived from debt securities' coupons, while the negative revaluation of bonds (the primary investment vehicle for pension funds) was less pronounced [Source: Central Bank Report]. Notably, the share of bonds constitutes the dominant element in all NPF portfolios [Source: NPF Portfolio Analysis].

However, it's essential to consider that the data provided by the Bank of Russia does not account for the remuneration of pension funds, which might further diminish the results [Source: Bank of Russia Report]. In 2023, the average yield of NPFs before the deduction of fees was 8.3%, but after deductions, it dwindled to 6.37%. In 2024, the remuneration system has undergone changes. The constant part of the remuneration of NPFs, which is independent of management results, should not exceed 0.6% (previously 0.75%) of the assets' cost till 2026. By 2027, this indicator is set to decrease to 0.5% [Source: Central Bank Report]. In contrast, the variable part of the remuneration, contingent upon yield, has been boosted from 15% to 20%.

Over the long term, pension funds have shown returns slightly trailing inflation. For instance, since 2017, consumer prices have gone up by 59.2%, pension savings by 57.7%, and reserves by 58.1%. Thus, pension funds have yet to fulfil their essential function of safeguarding and, ideally, increasing the funds of future pensioners from inflation [Source: Inflation Rate Report].

The tides, however, might be about to change. The Central Bank of Russia reveals that NPFs were among the largest buyers of OFZs (Russian government bonds) in the last quarter of 2024 and in 2025, evidence that they are purchasing Ministry of Finance bonds with double-digit yields. An upward trend in the government bond market was observed in early November, and if this persists, NPFs can reap returns not just from coupons received but also from the revaluation of bonds' nominal value [Source: Government Bond Market Analysis].

Moreover, NPF portfolios include high-yield corporate bonds that, though imposing restrictions on the credit quality of issuers due to preservation principles, can offer significant returns. For example, the bonds of "IKS 5 FINANCE" (a non-operational company within the X5 Group) and "Rostelecom" are currently traded with an annual yield of approximately 25.5% and are stakeholders in the pension portfolios managed by the "First" UC [Source: High-Yield Bond Analysis].

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• With the changing remuneration system for National Pension Funds (NPFs) in 2024, the variable part of the remuneration, contingent upon yield, increased from 15% to 20%, potentially boosting future returns.
• Businesses and individuals may find interest in high-yield corporate bonds, such as those of "IKS 5 FINANCE" and "Rostelecom," as they offer significant returns and are stakeholders in the pension portfolios managed by certain funds.
• Wealth-management and personal-finance advisors may need to closely monitor the financial markets for opportunities to invest in high-yield bonds and government securities, as pension funds, such as NPFs, are increasingly investing in these areas, potentially yielding higher returns.

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