Table 1 Concentration in the <u>NPFs Industry</u>

||Second pillar|(110 funds)|Third pillar|(160 funds)|
|---|---|---|---|---|
||Members|Assets|Members|Assets|
|largest five|50%|52%|41%|77%|
|largest ten|68%|70%|56%|86%|
|Source FFMS|||||

**The NPF market is dominated by occupational pension funds.** Only two foreign financial institutions offer pension products to Russian companies. The rest of the NPFs are funds created by Russia’s largest companies or conglomerates. The market for Western pension funds has been mostly restricted to employees of multinational companies that operate in the Russian Federation. While the largest occupational pension fund has approximately 1.2 million contributors ( _Blagosostoyanie_ ), the largest pension fund managed by a Western company has only 17,000 contributors (Aviva). Since most of the corporations with sufficient scale to create a pension fund have already done it, there is limited room for new occupational NPFs. The largest occupational pension funds are expanding their services to smaller companies that do not have the critical mass to manage their own pension fund, but this market remains relatively small.

**Foreign companies with limited knowledge of the domestic market have a relative disadvantage compared with local ones in dealing with ambiguities in the Law.** Multiple interpretations of the Law and the lack of courts specialized in dealing with financial issues is likely to create adverse selection among pension fund companies. Only companies that are less risk averse will want to remain in the market. For example, the lack of clarity in the interpretation about the presence of guarantees in the pension system (see Section 5.1) has been a deterrent in bringing pension funds with international expertise into the local market. Other companies, such as ING, have left the market after compensating the pension funds for the losses incurred during the crisis.<sup>4</sup>

**While the large participation of contributors in the default option is seen by some analysts as one of the failures of the system, we see it as a source of strength.** It is difficult to expect active participation of contributors having regard to deficiencies in the financial literacy of individuals, limited dissemination of savings alternatives and a strong presence of a captured market for occupational pension funds. This situation is no different than that in Sweden, where despite the possibility of selecting from more than 700 pension portfolios offered by asset managers, more than 90 percent of the new entrants to the pension system do not make an active selection of a portfolio and therefore are allocated into the default option managed by the state (PPT). The overwhelming participation of individuals in the default option is an indication that individuals are unable to make a selection and therefore expect that somebody else does it for them. Therefore, the authorities need to make sure that the portfolio decisions taken in the default options are aligned with the long-term interests of the contributors.

> 4 In 2009, ING sold its Russian pension management operations to Aviva and had to cover the losses in the value of the fund incurred in 2008 due to the effects of the financial crisis. The government has not provided a clear interpretation of the scope of the guarantees.

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