Agency for the Supervision of Fully Funded Pension Insurance (MAPAS)

Agency for the Supervision of Fully Funded Pension Insurance (MAPAS)

Preparing the Financial Market

for an Aging Population

- The case of Macedonia

Zorica Apostolska, DirectorAgency for Supervision of Fully Funded

Pension Insurance - MAPAS

Bled, June 2007

Reasons for pension reform

Demographics & Economics

Population aging

Decline in the ratio of contributors to pensioners

Increase in the ratio of pension

expenditures to GDP

Expected long-term insolvency

of pension system

63

66

69

72

75

78

81

1994

-199

620

0120

0520

1020

1520

2020

2520

3020

3520

40

year

year

s

w omen

men

Life expectancy

Preparation and Implementation Strategy

Government commitment to Pension Reform

• Pension Steering Committee Established• Actuarial Unit Established• Comparative analysis prepared

Development of a concept, discussion and legislation adoption Ministers Council

• Makes key policy and political decisions

• Chaired by Minister of Labor

• Controls overall pension reform implementation strategy

Working Group

• All major institutions represented

• Meets weekly

• Manages overall implementation project

USAID and World Bank assisting

Structure of the reformed pension system

mandatory rationalized PAYG system (first pillar)

mandatory fully funded system (second pillar)

voluntary fully funded system (third pillar)

Main characteristics of the reformed pension system

Who will be covered with the new system

Mandatory - all employees hired after January 1,2003

Voluntary - all employees hired before January 1,2003

Contributions and benefits in the two-pillar system

Total contribution rate: 21.2% of gross wage

First pillar: 13.78%

old age, disability and survivors pension, and minimum guarantee

Second pillar: 7.42 %

old age pension

Second Pillar Organization Chart

PDIF MAPASNBRM

Custodian

Pension Company

MLSP

Pension Funds

Pension Company

Pension Funds

Second pillar start and implementation (1)

International public tender for issuing licenses to establish two Pension Companies for managing one Pension Fund each

Two licenses granted for period of 10 years

April 2005 - Licenses granted to Pension Companies with mixed capital (domestic and foreign)

September 2005 – Start of Membership Process ► Around 130.000 members so far

January 2006 – Start of second pillar contributions flow► Approximately 1.3 billions of Denars (around 20 millions of

Euros) paid during 2006

Second pillar start and implementation (2)

Pension Funds Investment portfolio (December 31, 2006)

Short term Securities od

Domestic Issuers

6,9%

Deposits16,9%

Shares of domestic issuers

3,8%

Receivables0,0%

Cash0,0%

Bonds of Domestic Issuers72,4%

Third pillar in the Pension System

Third Pillar - Voluntary Fully Funded Pension Insurance• Higher income after retirement to the insurers covered with the first and

second pillar

• Retirement benefits to persons not covered with the mandatory pension insurance

• preconditions for financing occupational plans

Steering Committee established to develop the Design for the Third Pillar

Wight Paper and Comparative analyzes prepared The Design for the Third Pillar approved by the

Government Law adoption - by the end of 2007 Institutional infrastructure establishment - April 2008 Start of operations - mid 2008

Preparing the Financial and Capital markets (1)

Conditions in Macedonia Transition, continuous macroeconomic stabilization

measures and structural reforms - price and trade stabilization, Denar stability, privatization, legal reforms, financial sector reform, privatization of banks, corporate finance

SEC - 1992, Stock Exchange – 1995, Central Securities Depositary - 2002

Agenda for accession to EU – additional incentive to processes

Pension Reform – fundamental component of structural reforms

Preparing the Financial and Capital markets (2)

Obstacles Size and ways of financing transition costs

• Issuing public debt

• Budget (taxes)

• Privatization of state owned enterprises

Low scope - small country, low number of contributors and assets in fully funded pension insurance at start

Underdeveloped and in-depth financial and capital market, absorbing power of the market, not enough instruments existing

Absence of custodian function at commercial banks

Preparing the Financial and Capital markets (3)

Pension Funds Financial Markets

What comes first?

Competitive and liquid markets

Minimum investment instruments

Legislation and regulation

New assets on the market

Incentive for new instruments

Preparing the Financial and Capital markets (4)

Ways to overcome obstacles Foreign and domestic experts prepared assessment of

fiscal, financial and macroeconomic aspects of different pension reform options and analysis of capital markets

Action plan developed for legal and institutional changes in pension regulation and financial and capital market

Second pillar portfolios at start largely concentrated in government debt and bank deposits, experience shows

Working group (Ministry of Finance and Central Bank of Republic of Macedonia) – Strategy for Development of Government Securities Market (September 2003)• One of its objectives: Creating financial instruments adequate to

the needs of institutions to emerge from pension system reform

• Another objective: Financing transitional deficit

Preparing the Financial and Capital markets (5)

Ways to overcome obstacles (cont.) Start of second pillar contributions flow connected by Law

with issuance of first continuous issuance of government bonds

(Issuance: 24 November 2005, Start of contributions: January 1, 2006)

More instruments available now: T-bills (3,6 and 12 months), government bonds (2, 3 and 5 year)

Transitional provision for start of the system, maximum investment limit:• 100% in Government debt securities (80% regular)• 100%, than 80%, than 60% in bank deposits (60% regular)

Central Bank – Custodian for the first 5 years of the system (transitory provision)

Preparing the Financial and Capital markets (6)

Expected effects of the reformed pension system Better stability and solvency of pension system in general Increased savings Strengthening the investment power Development of financial and capital markets

• Will boost the demand for larger amounts, longer term and broader varieties of financial instruments

• Will motivate new financial services

• Will enhance and upgrade regulation and supervision

Development of insurance market via annuity payments Economy growth

Future challenges

Improved contribution collection and evasion elimination, increase of employment rate

Appearance of new instruments (corporate bonds, mortgage backed securities, etc.)

Start of investment abroad

Custodian function at commercial banks

Start of third pillar operations

Start of payments of pension benefits from second pillar

Thank you

for your attention!

www.mapas.gov.mk