Inefficiency of pension investment regulation: Case of Russia

Abstract

Inflation risks are one of the major factors faced by funded pension systems. Investment risks affect such key parameters of pension systems as the amount of pension contributions and payments. In order to limit the exposure of pension systems to such risks, governments have introduced instrumental and geographical restrictions on pension investments. These measures are particularly popular in developing countries. This article discusses the efficiency of pension investment regulation in Russia and demonstrates the inadequacy of the current regulatory measures. The authors show that the negative investment results of pension market players were caused by inefficient government regulation. They also show that pension market players should be given more freedom in their investments and that instrumental and geographical restrictions should be removed. It was proposed to diversify investment portfolios into stocks traded on the leading stock markets, which would allow to increase investment returns and maintain the risk at the current level. Thus, it would be reasonable to invest 76% of funds into foreign assets, which will increase pension benefits and the replacement rate by 2.54 times. If we keep the geographical barriers but lift the restrictions on equity investments, the growth will be by 1.34 times. © The author(s) 2017.