Pension System Reform in the Republic of Macedonia

Kiev, May 2004

Republic of Macedonia

Statistical Data (1999)

• Area: 25,713 sq km

• Population: 2,049,000

Motivation for a transition to a multi - pillar pension system -1

1. Demographics

(Actuarial projections for the next 100 years)

• Population aging

• Further decline in the ratio of contributors to pensioners

Ratio contributors / pensioners

0

100000

200000

300000

400000

500000

600000

700000

2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

year

number

0.0

0.4

0.8

1.2

1.6

2.0

proportion contributors

pensioners

proportion

Motivation for a transition to a multi- pillar pension system -2

2. Economics

(Actuarial projections for the next 100 years)

• further increase in the ratio of expenditures

for pension benefits payment to GDP increase of the sustainable contribution rate

Contributions - Pensions / GDP

-8%

-5%

-2%

1%

4%

7%

10%

13%

16%

2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

year

percentage

incomes

expenditures

surplus (deficit)

Structure of the new system

Structure of the new system

mandatory rationalized PAYG system (first pillar)

mandatory fully funded system (second pillar)

voluntary fully funded system (third pillar)

Contribuitons and benefits in the two-pillar system

Total contribution rate: 20%

First pillar: 13%

old age (30%), disability and survivors pension, and minimum guarantee

Second pillar: 7%

old age pension

Who will be covered with the two-pillar system

Mandatory - new entrants into Labor Force

(from 1 January 2003)

Voluntary - current contributors 1 year decision period decision based on actuarial model

for individual results

Comparison of Income - Expenditures

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

not reformed reformed-basic

Financing of the Transition Costs

Issuance of Government bonds (debt financing)

Use of the privatization proceeds of public enterprises

Fiscal contraction (tax financing)

SECOND PILLAR DESIGN 1

Centralized contribution collection– PDF Contribution payments and data

Division of contributions for the first and the second pillar

Transfer of second pillar contribution and data to the personal accounts of the pension funds’ members – 5 days after the contribution payment

SECOND PILLAR DESIGN 2

2 pension companies selected on an international tender (for a 10-year period)

Share capital – not less than 1,5 million EUR

Shareholders – domestic and foreign legal entities

51% of shareholders must be banks, insurance companies or other financial institutions

SECOND PILLAR DESIGN 3

Diversified investing

Min.80% in domestic investments bonds and other securities,deposits, certificates of deposits, shares, commercial notes (NBRM, RM, SEC)

Max.20% in foreign investments bonds, shares, participation units and other securities (EU, Japan and USA)

SECOND PILLAR DESIGN 4The assets are kept by a Custodian

The Custodian of Pension Funds assets will be the National Bank of the Republic of Macedonia, as a transitional solution

Pension Companies and the Custodian shall sign an agreement for custody of assets

Note: This transitional solution requires amendments to the Law on Mandatory Fully Funded Pension Insurance which should be adopted before the tender. The procedure is under way.

SECOND PILLAR DESIGN 5

Second pillar pension benefits

Part of the old age pension

purchasing an annuity payable for life

participation in a program for scheduled withdrawals

EXPECTED EFFECTS

Advantages of the system

solvent pension system increasing national savings

strengthening the investment power

economy growth increasing the Macedonian

labor market efficiency

Advantages for the individuals

greater security

risks diversification

transparency of the

operations

CONCLUSION

Building stable, safe and modern pension system

Gradual reform (from 25 to 50 years) Balancing the interests of the future

generations of with the interests of the current pensioners

Strategy for taking part in the European integration processes

Agency for Supervision of Fully Funded Pension Insurance-MAPAS

Duties and functions of MAPAS 1

• Operate or procure the operation of the tender processes, grant, withdraw and cancel licenses for incorporation and approval for Pension Fund management

• Supervise the operation of Pension Companies, the Custodian and Foreign Assets Managers: - On site control of all documents and electronic record-

keeping

- Off site control of all documents and electronic record-keeping

Duties and functions of MAPAS 2

• Approves all advertising materials of the Pension Companies for the purpose of fair and objective public informing

• Issues licenses for sales agents and maintains register of sales agents

• Builds public awareness

Duties and functions of MAPAS 3

• Suggests penalties procedures

• Cooperates with local and international institutions

• Initiates passing of new and amendments to existing regulations

MAPAS- Reporting

• Publishes annual report on the fully funded pension insurance

• Submits annual report for its operation to the Government of RM which is also submitted to the Parliament for information