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Challenges of the mandatory funded pension system in the Russian Federation

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  • Rudolph, Heinz P.
  • Holtzer, Peter
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    Abstract

    The overwhelming number of contributors that have been allocated into the default option is one of the main characteristics of the Russian second pillar. This finding confirms that the level of financial literacy for most of the participants is not sufficient to make informed portfolio selections. The authors argue that the current system is perfectly consistent with a solid second pillar, but the authorities should focus their attention in the strategic asset allocation of pension funds. Since in the short and medium term it is unlikely to see improvements in financial literacy of individuals that may overcome the complexity of these decisions, the authorities can play an important role in designing default investment portfolios that can be aligned with expected replacement rates for the contributors. The current investment regulation of the default option induces investment in inefficient portfolios that are unlikely to bring returns above inflation, and probably will result in very low replacement rates for contributors. Further liberalization of the investments of the pension portfolio; improvements in the governance and supervision of the pension system; and greater certainty about the ownership of the funds are necessary steps to complete the pension reform launched in 2002.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5514.

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    Date of creation: 01 Dec 2010
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    Handle: RePEc:wbk:wbrwps:5514

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    Keywords: Debt Markets; Financial Literacy; Emerging Markets; Pensions&Retirement Systems; Access to Finance;

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    1. Solange Berstein & Carolina Cabrita, 2006. "Los Determinantes de la Elección de AFP en Chile: Nueva Evidencia a Partir de Datos Individuales," Working Papers 19, Superintendencia de Pensiones, revised Jul 2007.
    2. Richard Hinz & Heinz P. Rudolph & Pablo Antolin & Juan Yermo, 2010. "Evaluating the Financial Performance of Pension Funds," World Bank Publications, The World Bank, number 2405.
    3. Pablo Castañeda & Heinz Rudolph, 2010. "Portfolio Choice, Minimum Return Guarantees, and Competition in DC Pension Systems," Working Papers 39, Superintendencia de Pensiones, revised Feb 2010.
    4. Vittas, Dimitri & Impavido, Gregorio & O'Connor, Ronan, 2008. "Upgrading the investment policy framework of public pension funds," Policy Research Working Paper Series 4499, The World Bank.
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    Cited by:
    1. World Bank, 2011. "Croatia : Policy Options for Further Pension System Reform," World Bank Other Operational Studies 12892, The World Bank.

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