Investing the Balance of the Pension Fund of the Russian Federation

Abstract

This article looks at various ways of investing the money of the Pension Fund of the Russian Federation in Russian financial assets (bank deposits, government and corporate securities) and surveys world experience in investing pension funds' resources.<BR></BR> A common rule of thumb for sound investment is a preference for investing in market-based government securities. However, investments in large companies with a high rating, mutual funds, real estate, and other high-yield assets are also widely used in countries with a reliable and well-established financial system and prudential oversight.<BR></BR> The portfolios of U.S. pension funds consist primarily of securities: bonds (government, corporate, and mortgage bonds) and stocks. The yield for corporate pension plans in the United States is somewhat higher than that of state and municipal pension plans, which is due to the higher portion of stocks in the portfolios of corporate pension funds (and the higher level of risk).<BR></BR> The social security fund in the United States (Old Age and Survivors' Insurance Fund; OASIF), which pays out pensions, was created in 1935. OASIF is presently experiencing financial difficulties and makes payments from its current receipts, rather than from accumulated income, which means that it is essentially a distribution fund. The balance in OASIF is invested in low-yield U.S. government bonds.<BR></BR> Particularly in developing countries, pension funds are under strict government control. There are five main types of restrictions on investments:<BR></BR> on assets (a ceiling on certain types of assets in a fund's portfolio);<BR></BR> on risk (the greatest acceptable risk associated with a security);<BR></BR> on concentration of ownership (a ceiling on the portion of an individual company's total amount of shares that a fund may own);<BR></BR> on the issuers (a ceiling on the portion of individual companies'assets in a fund's portfolio); and<BR></BR> on securities (a ceiling on individual types of securities).<BR></BR> Moreover, most countries permit a pension fund to invest in only those securities for which the risk has been evaluated (for example, BBB in Chile). In addition to these rules, restrictions are frequently placed on the concentration of assets. Countries with pension funds that have been operating for a long time usually set a limit on the minimum investments in government bonds (15-50 percent of all assets) or on the maximum investments in stocks (20-30 percent). Most countries set limits (16 percent on the average for developed countries) on pension funds'investments in foreign securities.