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Challenges of the mandatory funded pension system in the Russian Federation

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  • Rudolph, Heinz P.
  • Holtzer, Peter

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.

Suggested Citation

  • Rudolph, Heinz P. & Holtzer, Peter, 2010. "Challenges of the mandatory funded pension system in the Russian Federation," Policy Research Working Paper Series 5514, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5514
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    References listed on IDEAS

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    1. Solange Berstein Jáuregui & Carolina Cabrita Felix, 2007. "Los determinantes de la elección de AFP en Chile: nueva evidencia a partir de datos individuales," Estudios de Economia, University of Chile, Department of Economics, vol. 34(1 Year 20), pages 53-72, June.
    2. 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.
    3. 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, November.
    4. 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.
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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.

    More about this item

    Keywords

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

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