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New CB Regulations May Force NPFs Off Market

20.03.2014 00:05 / RBC - daily

Almost half of non-state pension funds could be forced off the market in the process of establishing a system of mandatory pension savings guarantees. According to CB requirements, to be eligible, NPFs must comply with new capital adequacy ratios. RBC data shows that 8 out of 20 major NPFs, accounting for over 40% of all pension savings, fail to comply with the Bank of Russia requirements. Non-compliant funds will have to return pension savings to the Russian Pension Fund.

The Bank of Russia has posted on its website the draft of its NPF guarantee system compliance regulation. According to the draft, the regulator will examine funds and pick the ones that can handle pension savings. The final version of the regulation is due 1 April 2014. CB’s Collective Investment Department Director Anna Matkova says ,market participants have not responded with any substantial objections to the draft so far.

The draft de facto introduces three mandatory requirements for NPFs. First, each fund must disclose its structure and shareholders, its specialized depositary and asset manager requirements. Second, the fund has to have a risk management system in place. Third, capital adequacy ratio for NPFs is a minimum of 1,01, or RUB 130mn. (the formula is in the draft). Earlier, the 24 May 2011 FFMS Regulation set the capital adequacy ratio for NPFs at RUB 80mn.

“The requirements are rather loyal and will allow most NPFs to join the guarantee system”, said Anna Matkova at last week’s 5th Russian Pension Congress.

The capital adequacy ratio may prevent small funds from staying in business. Several small NPFs told RBC that they are already searching for investors and are contemplating mergers with other funds. In any case, estimates show that in order to join the guarantee system, some Top 20 NPFs will also have to boost capital (these account for 85% of the entire NPF savings).

RBC data shows that the six funds that have accumulated 33% of the total pension savings in the market and 39% of insurance holders, fall short of both indicators – the percentage and the actual amount.

Almost all Top 20 non-state pension funds declined comment when asked whether they had carried out their own assessments and if they will increase capital. Sberbank’s NPF stated that preliminary evaluation has been done and charter capital has been assessed. “The Board will pass the final decision on charter capital in end-March 2014”, said Sberbank NPF President Galina Morozova. StalFond NPF President Andrey Nikitchenko said “currently there is no need for capital increase”. Other Top 20 funds declined comment.

The draft proposes harsh limits, says Expert RA Corporate Ratings Director Pavel Mitrofanov. “The RUB 130mn capital limit alone is enough to make half the market increase charter capital, otherwise they are denied access the guarantee system”. In his opinion, if the capital adequacy ratio passes, the NPF market investment appeal will suffer a huge blow: not all investors are ready for further spending in the already risky pension savings business. Mitrofanov says the market will benefit from a gradual transition to new requirements. “For instance, we could first introduce the capital adequacy ratio and leave the minimum unchanged, and increase it later”, he added.

Ekaterina Metelitsa

Non-state Pension Funds industry reformProject Group №1