Onshore pension plans

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On-shore pension plans pros and cons
April 13, 2006 Moscow, Russian Federation
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General outlook

• Russia is currently undergoing a dramatic
  transformation on the economic front,
  particularly as far as the Financial Services
  sector is concerned
• The pension reform, as well as corporate
  pensions, have specifically been singled out as
  key areas of future development in order to
  counter negative demographic trends
• Russian companies are increasingly adopting
  western remuneration practices, including
  corporate pension plans

General outlook

• Strategy of Development of Financial Markets in
  Russia for 2006-2008 is an example of the notable
  change in rhetoric within the Russian government
  on the issue of long-term savings
• FSFM has pointed out the need for improvement in
  the infrastructure of the market of collective
  investments (UIFs, pension plans, etc)
• Widening of the list of available asset classes
  is expected by 2008
• Major amendments to tax legislation came into
  force in 2005 further amendments to pension and
  investment legislation are expected

Technical outlook
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Outlook of EMEA Equity markets
Source Citigroup Investment Research
Source Citigroup Investment Research
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Russian pension provider pros and cons
Benefits of an on-shore set up
Drawbacks of an on-shore set up

• Transparent tax and accounting treatment at the
  time of making pension contributions and pension
  benefit payment (!)
• Fully accepted and supported by Russian
  Authorities
• Domestic pension fund takes care of all your
  pension savings, not just a part related to a
  corporate pension plan
• Investing in Russia, an individual avoids foreign
  exchange risk he/she does not understand and
  cannot measure
• Provision of better client servicing
• Easier exit options (funds can be quickly
  withdrawn in case of emergency)
• Most likely lower costs

• Currently rather limited investment possibilities
  and protection mechanisms (the only working
  financial mechanism is the method of dynamic
  reallocation of assets, or CPPI). The situation
  may however change over 1-3 year horizon
• More tax incentives are needed, as they are the
  main driver for pension plans worldwide

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Synergy of an on-shore provider
During labor activity - corporate
After retirement - corporate
Age Gender Beginning of labor
activity Savings period Annual salary
Expected salary growth Percent of
pension contributions 6.5/1 (monthly)
25 years old female 2002 year 30 years 360.000
RUR 5
Pension amount Initial whole-life annuity
3.136.032 RUR 9.514 RUR
Twofold increase may be realized!
Individual pension plan
Individual pension plan
Same assumptions Percent of pension
contributions 3 (monthly)
Pension amount Initial whole-life annuity
1.254.413 RUR 3.805 RUR
Mandatory insurance (OPS)
Mandatory insurance (OPS)
Age Gender Beginning of labor
activity Savings period Annual salary
Expected salary growth
25 years old female 2002 year 30 years 360.000
RUR 5
Pension amount Initial whole-life annuity

1.560.999 RUR 6.846 RUR
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Conclusions

• Russian Government is focused on the development
  of the Russian financial markets
• Provision of on-shore pension plans has bright
  future due to more understanding of the local
  markets, positive macroeconomic statistics and
  ruble appreciation
• Working financial tools are implemented with
  regards to preservation of pension contributions
• Please bear in mind the synergetic effect from
  combining pension products - twofold increase is
  possible!
• Off-shore pension plans incur unquantifiable
  risks and therefore loose attractiveness in the
  current economic environment

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