The move, which was announced yesterday, marks the second consecutive year when individuals will not see their funded pension contributions transferred by the state to their individual accounts held with private pension funds. Previously, the government referred to the retention of the funded pensions within the state pension system as an exceptional step. The individual funded pension accounts were introduced by the state in 2002.

The government’s announcement sets a long-term negative tone for the development of the life insurance market in Russia. Insurers would argue that private life insurance contracts could provide a higher predictability of pension plans. Nevertheless, Fitch believes that potential life policyholders in an immature market like Russia are highly sensitive to the consistency of regulatory changes and level of long-term public confidence.

The government attacked the quality of management at private pension funds as one of the reasons triggering the move, although a proactive tightening of the supervision could have helped to raise the governance standards in the industry. This attack risks eroding confidence in the life insurance industry.

The Russian life insurance sector is developing, with only RUB85bn premiums (around EUR1.76bn) written in 2013, and is 11x smaller than the local non-life segment. The compound average growth rate of 52% for life premiums in 2009-2013 was achieved mainly through payment protection insurance (PPI) sold as a semi-compulsory attachment to consumer loans. According to Fitch’s assessment, PPI may account for at least half of life premiums written in 2013.