Ben Aris in Moscow -

"Pensions is an idea whose time has come," says Oleg Jelezko, managing partner at Da Vinci Capital. "This year and next, the reforms will start in earnest and then it will grow much faster than people expect."

The Kremlin has balked at restarting pension reforms since it fluffed the first attempt in 2002. Russia has currently $38bn in private pensions savings, according to Renaissance Capital, or just 3% of GDP. By contrast, following Chile's pension reform (which Russia copied), that country had assets worth 65% of GDP at the end of the first decade. And with the gap between Russia's state pension funds obligations to the population and the amount of money it has under management already gobbling up a quarter of the federal budget, the need for reform is becoming pressing.

In January, Da Vinci launched a second financial institutions fund that is already investing into pension fund managers. The first highly successful financial institutions fund became the biggest private investor into Russia's RTS stock exchange and made a packet when the exchange was merged with Russia's other large exchange Micex last summer.

Now Da Vinci wants to plough some of that money back into a second fund that extends the logic of the first fund, and will invest in a more diverse set of assets that depend on the ongoing development and reform of Russia's capital markets. "We have a good team and we see a lot of niches. The crisis in 2008 hit the financial sector hard, but it was also the first sector to rebound and it turns out that it is quiet resilient to the volatility," says Jelezko.

Pillars

The valuations of assets involved in Russia's financial infrastructure are still very low and Jelezko predicts that investors in the new fund can look forward to tripling their investment in the next five years.

One of the most exciting opportunities is in the non-state pension funds. Typically, Russians don't think much about their retirement (and until recently the life expectancy of men at 56 was so short that few would actually reach the retirement age of 60). Indeed, a recent study found about 80% of Russians don't expect the government to provide them with any sort of liveable pension at all and intend to work until they die. But that is beginning to change. "Most people in Russia are ignorant about pensions, but they are starting to think," says Jelezko.

The fund has already bought into the non-state pension fund Electro Energetika, which holds the pensions for the utility firms like United Energy Systems, Rushydro, and used to handle the pensions for dairy and juice producer Wimm-Bill-Dann until it was bought by PepsiCo in December 2010. "This pension fund has been growing organically, distributing its products through banks. It has also been investing into IT, which remains an issue in Russia, and set up strong corporate governance rules. For instance, agents give the fund names, but they check to make sure every name is a real person and last year there was only 1% of fraudulent claims," says Jelezko.

Da Vinci has already tied up with some leading western pension companies that are interested in breaking into the Russian market, which have been sharing their risk and portfolio management systems. "The pension fund system correlates with GDP and the amount of disposable income people have - and both these are rising fast in Russia," says Jelezko. "We are betting that Russia's pension system will converge with Europe's and we believe the demographics will improve in Russia."

At the time of the fall of the Soviet Union, there were two workers to support each pensioner, but due to the collapse of birth rates during the chaos of the 1990s that ratio has almost reached one to one. More recently, birth rates began to recover in the summer of 2008 and there is currently a debate over where population numbers are headed.

The UN is pessimistic and predicts Russia is on course for a demographic disaster, whereas other economists - Da Vinici included - believe the situation is manageable. "We think that the population will go back to growth, as the birth rates are rising fast. We also have investments into retail and especially kids clothes where sales are booming," says Jelezko.

If there is a link between pensions and selling children's goods, then Da Vinici is onto a good thing, as in 2011 Russia overtook Germany to become Europe's biggest market for kids' products. "Demographic growth will drive the revenues of the pension business."

It seems that personal time horizons for Russians are starting to reach the 30-year mark, as the volume of mortgages is doubling every 18 months or so. And Jelezko argues this is now spilling over into pensions, which have largely been ignored until now; assets under management in pension funds are rising by 20-30% a year says Jelezko. "We can grow faster than the market, as we are more market orientated and so hope to take market share from the smaller companies," says Jelezko, who estimates Da Vinci's fund already controls 10% of the market.