Macedonian Pension System and Reforms Ms. Irena Risteska Head of Sector for Pension and Disability Insurance Sector Ministry of Labor and Social Policy.

Macedonian Pension System Macedonian Pension System and Reformsand Reforms

Ms. Irena Risteska Head of Sector for Pension and Disability Insurance SectorMinistry of Labor and Social Policy

Ministry of Labor and Social Ministry of Labor and Social Policy, Republic of MacedoniaPolicy, Republic of Macedonia

Area: 25,713 sq kmArea: 25,713 sq kmPopulation (Population (20022002): 2,022,547): 2,022,547

Source: State Statistical OfficeSource: State Statistical Office

Introduction to MacedoniaIntroduction to Macedonia

Characteristics of the pension Characteristics of the pension system before the reformsystem before the reform

PAYG, DBPAYG, DB Existing for over 50 yearsExisting for over 50 years MandatoryMandatory Comprehensive, broad coverageComprehensive, broad coverage


Parametric changes of the Parametric changes of the PAYG system (1993 - 1997) PAYG system (1993 - 1997)

Increase of the retirement age (60/63 men; 55/60 Increase of the retirement age (60/63 men; 55/60

women)women) Change in the calculation of the pension baseChange in the calculation of the pension base

Decrease of the replacement rate (85% Decrease of the replacement rate (85% 80%)80%)

Change of pension indexation methodChange of pension indexation method

Termination of early retirement provisionsTermination of early retirement provisions


Parametric reforms Parametric reforms (1993 - 1997) - 1(1993 - 1997) - 1

Reasons for these reforms

High unemployment rate Declining ratio of contributors to pensioners (1993 2,4 : 1; 1999 1,6 : 1) Deficit of the State Pension Fund

Parametric reforms Parametric reforms (1993 - 1997) - 2(1993 - 1997) - 2

Rationalization of the PAYG system Increase in the retirement age Decrease of the replacement rate Change of pension indexation method Termination of early retirement provisions Change in the calculation of the pension

base

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

11

1. 1. Demographics Demographics

(Actuarial projections for the next 100 years)(Actuarial projections for the next 100 years)

Population agingPopulation aging Further decline in the ratio of contributors to Further decline in the ratio of contributors to

pensionerspensioners


Life expectancyLife expectancy


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

Population 60+ / Population Population 60+ / Population 18-5918-59


0

200000

400000

600000

800000

1000000

1200000

1400000

2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

year

nu

mb

er

0%

10%

20%

30%

40%

50%

60%

70%

pro

po

rtio

n population 18 - 59

population 60 +

proportion

Ratio contributors / pensionersRatio contributors / pensioners


0

100000

200000

300000

400000

500000

600000

700000

2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

year

nu

mb

er

0.0

0.4

0.8

1.2

1.6

2.0

pro

po

rtio

n

contributors

pensioners

proportion

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

2. 2. EconomicsEconomics

(Actuarial projections for the next 100 years)(Actuarial projections for the next 100 years)

further increase in the ratio of expenditures for further increase in the ratio of expenditures for

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


Possible solutionsPossible solutions

1. Increase in the contribution rate2. Reduction of benefits

3. Fiscal contraction4. Comprehensive reform of the pension system

and transition to a multi pillar funded system

Parametric changes Parametric changes of the PAYG systemof the PAYG system

Increase of the retirement age (64/62) Age exclusive condition with minimum service

requirement of 15 years

Decrease of the replacement rate (80% 72%)

Change of pension indexation method (50% CPI, 50% wage growth)

Ceiling on contributions

Pension system, key institutionsPension system, key institutions

Ministry of Labor and Social PolicyMinistry of Labor and Social Policy

Pension and Disability Insurance Fund of MacedoniaPension and Disability Insurance Fund of Macedonia

Pension Supervision Agency (MAPAS)Pension Supervision Agency (MAPAS)

Pension Companies and Pension Funds – MandatoryPension Companies and Pension Funds – Mandatory Custodian bank (National Bank of the Republic of Custodian bank (National Bank of the Republic of

Macedonia – transitory for second pillar; Macedonia – transitory for second pillar; commercial bank for third pillar)commercial bank for third pillar)


Pension reform summary 1Pension reform summary 1

Solidarity PAYG system modifiedSolidarity PAYG system modified Mandatory fully funded system introduced in Mandatory fully funded system introduced in

2005/20062005/2006 April 2005 - Two licenses granted to Pension April 2005 - Two licenses granted to Pension

Companies with mixed capital (domestic and Companies with mixed capital (domestic and foreign) for managing one Pension Fund each foreign) for managing one Pension Fund each selected in international bidding processselected in international bidding process

September 2005 – Start of Membership ProcessSeptember 2005 – Start of Membership Process


Pension reform summary 2Pension reform summary 2

January 2006 – Start of second pillar contributions flowJanuary 2006 – Start of second pillar contributions flow January 2008 – Transfer process for members shall January 2008 – Transfer process for members shall

startstart Planned for early/mid 2008Planned for early/mid 2008

• Opening of the market, licensing of new Pension Opening of the market, licensing of new Pension Companies allowedCompanies allowed

• Transfer of custodian role from Central bank to Transfer of custodian role from Central bank to commercial bankscommercial banks

• Implementation of third pillarImplementation of third pillar


Financing of the Transition Financing of the Transition Costs Costs

Issuance of Government bonds Issuance of Government bonds (debt financing)(debt financing)

Use of the privatization proceeds Use of the privatization proceeds of public enterprisesof public enterprises

Fiscal contraction (tax financing)Fiscal contraction (tax financing)


Transition costs (in million denars)

2006 2007 2008

1.325,13 1.877,00 2.310,00

Organizing the pension reformOrganizing the pension reform

The Government’s commitments for the pension The Government’s commitments for the pension reformreform- Pension Reform Steering Committee- Pension Reform Steering Committee- Actuarial Unit- Actuarial Unit

Concept development and proposal for the reformConcept development and proposal for the reform

Presentation of the proposal, feed-back Presentation of the proposal, feed-back information and consensus buildinginformation and consensus building

Work on the legislationWork on the legislation

Adoption of lawsAdoption of laws

ImplementationImplementation


Current Macedonian Pension Current Macedonian Pension SystemSystem

Mandatory rationalized PAYG system (first pillar)Mandatory rationalized PAYG system (first pillar)

Mandatory fully funded system (second pillar)Mandatory fully funded system (second pillar)

Voluntary fully funded system (third pillar)Voluntary fully funded system (third pillar)


Who is insured in the pension Who is insured in the pension system?system?

mandatory workers self-employed workers individual farmers unemployed workers who receive benefits until

employment pensioner after re-employment

Pay As You Go-First PillarPay As You Go-First Pillar

Rights:Rights:

Old age pensionOld age pension Disability pensionDisability pension Survivors pensionSurvivors pension

Minimal pensionMinimal pension..


Old age pension Old age pension

Conditions:Conditions:

64 64 years of age years of age ((manman)) i.e.i.e. 62 62 years of years of age age ((womanwoman) ) and at least and at least 115 5 years of years of serviceservice


YearOld age

pensioners 2004 137.8402005 142.8272006 146.8522007 150.075

The most recent statistics show that the number of old age pensioners is/will not change drastically due to the last changes in the Law for Pension and Disability Insurance.

Disability pensionDisability pension


- general incapacity for work- general incapacity for work

- professional incapacity for work - professional incapacity for work (above 50 years of age for man and (above 50 years of age for man and woman)woman)


YearDisability

pensioners2004 51.5892005 50.1802006 49.3642007 48.054

The most recent statistics show that the number of disability pensioner continuously decreases in 2008.

120 new disability pensioner per month in the first three months of 2008 out of 1.587 submitted expert evidences.

Survivors pensionSurvivors pension


- the deceased was pension beneficiary - the deceased was pension beneficiary

- the deceased had pension insurance for 5 years - the deceased had pension insurance for 5 years

Entitled to survivors pension:Entitled to survivors pension:

- spouse - spouse - parents- parents

- children - children - family members - family members

- other members of the family- other members of the family


YearSurvivors

pensioners2004 70.6462005 72.1452006 73.4652007 74.257

The number of survivors pensioners will further increase as a result of the last changes in the Law for Pension and Disability Insurance which stipulates the conditions and entitled to survivors pension.

Minimal PensionMinimal Pension

Three groups of minimal pension Defined according to the average wage in the

country (41%, 38% and 35%)

The number of pensioners that received minimal pension in April 2008 was 81.916, which was 30% of the total number of pensioners in the country.

Maximum PensionMaximum Pension

Entitled to maximum pension are only members in the first pillar.

maximum pension= average net wage * 2,7

The number of pensioners who received maximum pension in April was 968 which was 0,35% of the total number of pensioners.

Individual Farmers and Individual Farmers and Self-EmployedSelf-Employed

Definition : payers of income tax on farmers activities who are engaged solely in farmers profession (individual farmers)

individual farmers do not have right to professional incapacity for work different contribution rate

male female totalTotal 7961 1938 9899

Individual farmers

male female total male female total6043 1247 7290 1918 691 2609

Active individual farmers Passive individual farmers73,6% are active individual farmers 26,4 are passive individual framers

2,3% of the contributors in Macedonia are individual farmers

Early Retirement PensionEarly Retirement Pension

The retirement age for acquiring right to old age pension shall be decreased for contributors whose insurance service increases depending on the degree of service increase, for one year:

years of service

12 months of effective work are regarded as:

7 13 months of insurance service 6 14 months of insurance service5 15 months of insurance service4 16 months of insurance service

3,5 17 months of insurance service3 18 months of insurance service

Pension formulaPension formula Calculation of pensionAnnual wage=(monthly wage *12)Annual wage is valorized at level of the last

wage and divided with the number of service credit. This is pension base.

Replacement rate depends on the insurance period

pension = pension base * replacement rate

Pension and Pension and Disability Insurance Disability Insurance

Fund Fund

First PillarFirst Pillar

Objectives of the reformObjectives of the reform

To increase the contribution collection Improvement of the quality of the received data Reduction of the administration controls Detailed data per contributor Monthly calculations for salary and contribution Encrypted data with the objective to provide confidentiality of

the data Integration with the banking system Correct distribution of the individual accounts for the

members of the second pillar

Key role of PDIF in the new Key role of PDIF in the new pension systempension system

To collect data and contribution in unique procedure To control the data and contribution separately per

contributor Distribution of the contribution to the state pillar and

members of the private pension funds

Implemented legal changes-Implemented legal changes-ContinuedContinued

The contribution are paid in the banks (vie the payment operation institutions ) ( Article 183)

Interest from 0,3% (daily) for late payment (Article 184) The gross salary is base for calculation of the contribution

(Article 180) Mandatory minimum from 65% for calculation of the

contribution for pension insurance from the average net salary of the R. Macedonia (Article 180)

Limited contribution for members of the second pillar according the monthly gross calculation from three average net salaries of the RM (Article 180.a)

Development of the client softwareDevelopment of the client software

This software provides:o Reading of the input electronic failo Interactive input of data in the MPPP form (monthly

form for contribution payments)o First instance check of the correctives of the datao Generation of output MPPP form in electronic form

(fail)o Signing and encryption of the output fail with

security code for identification of the employer

Onside audit by the employerOnside audit by the employer

• According the Pension and Disability Insurance Law Article 185 a till i

• Complete automated process• Automated monitoring of unpaid contribution• Regular control every 60 days• The system determine employers and auditors for control• Each auditor has correct determined employer for audit,

commencing date of the audit and estimation for termination date

• Each activity of the auditor is registered in the system and is monitored from the head of the branch office and from the head office via application for the workflow

• Statistical reports

Benefits from the new contribution Benefits from the new contribution collection systemcollection system

Correct calculation for the base and the contribution Possibility for quick adjustment of the made errors Effective and on time control of the contribution Correct and on time distribution of the contribution Informing the contributors for the amount of paid contribution

and for the assets on the individual accounts in the second pillar

Automated generation of data for service credit and salary of the contributors ( M4 form)

2004 348.212 260.075 1,32005 348.500 265.152 1,32006 377.763 269.681 1,42007 424.338 272.386 1,6

Year Employees Pensionersemployees/pensioners

The ratio between the employees and the pensioners in 2007 and it is 1,6.

This improvement is result of: improvement of the contribution collection in the Pension and Disability Insurance Fund decrease of unemployment rate

Structure of contributorsStructure of contributors

21,4%

29,3%

49,2%

Above 50 years of age

41-50 years of age

Less then 40 years of age

Results from the two year implementation of the Results from the two year implementation of the new way of contribution collection and the new way of contribution collection and the

behavior of employersbehavior of employers Year 2006• Average number of monthly declarations for 47.992 employers, for

416.172 contributors• Average number of monthly payments for 41.385 employers (86,2%),

for 397.589 contributors (95,5%) Year 2007• Average number of monthly declarations for 50.634 employers, for

423.856 contributors• Average number of monthly payments for 42.488 employers (83,9%), for

399.007 contributors (94,1%) Year 2008 • January, February and March 2008 compared with the same period 2007,

the contribution collection is increased for more than 20%

Next steps Next steps ((contribution collection of all contribution collection of all social contributions in unique procedure in social contributions in unique procedure in

PDIF)PDIF)

Integrated contribution collection of all social contribution (pension, health and employment)

Integrated procedures for control of all social contribution Integrated enforced payment Possibility for integrated contribution collection of personal

income tax from salary

Expected benefits from the Expected benefits from the integrated contribution collectionintegrated contribution collection

Complete contribution collection from salary Providing unique data base One monthly declaration for calculation of salary and

contribution (decrease of administrational costs of the employers)

Unique control of the data and contribution Simplifying the procedures for determination of rights from

social insurance

Second PillarSecond Pillar

The difference between the The difference between the pillarspillars

First pillar – Solidarity Fund - Pay as you go: the contributions of the current generations of workers are used to finance the pensions of the current generations of pensioners

Second and third pillar - fully funded: contributions and incomes are accumulated on individual accounts and then these savings are used to finance the pension

Agency for Supervision of Fully Agency for Supervision of Fully Funded Pension InsuranceFunded Pension Insurance

The licenses with the mandatory fully funded pension insurance were granted to two pension companies on April 4, 2005. The two pension companies manage one pension fund each and their approvals for pension fund management are granted for a 10 year period. The two pension companies are:

Akcionersko drustvo za upravuvanje so penziski fondovi NOV PENZISKI FOND Skopje, which manages NOV PENZISKI FOND – Otvoren penziski fond KB Prvo drustvo za upravuvanje so penziski fondovi AD Skopje, which manages KB Prv otvoren penziski fond - Skopje

Second Pillar Organization Second Pillar Organization ChartChart


PDIF MAPAS NBRM/Custodian

Pension Company

MLSP

Pension Fund

Pension Company

Pension Fund

Centralized payment of the contributions and Centralized payment of the contributions and record keepingrecord keeping

2 Pension Companies for managing one pension 2 Pension Companies for managing one pension fund each fund each

Custodian Custodian Supervision and regulationSupervision and regulation

(proactive supervision at the beginning) (proactive supervision at the beginning) GuaranteesGuarantees Tax treatment: EETTax treatment: EET


Design of the Second Fully-Design of the Second Fully-Funded PillarFunded Pillar

Second pillar membersSecond pillar members

Transition RulesTransition Rules Hired on or after January 1, 2003 must join Hired on or after January 1, 2003 must join

reformed pension system (PAYG + fully funded)reformed pension system (PAYG + fully funded) Hired before January 1, 2003 had one-time option Hired before January 1, 2003 had one-time option

to join voluntary (up to December 31, 2005)to join voluntary (up to December 31, 2005) Those joining reformed system had future Those joining reformed system had future

solidarity benefits reducedsolidarity benefits reduced


Contributions and benefits in Contributions and benefits in the two-pillar systemthe two-pillar system

Total contribution rate: 21.2% of gross wageTotal contribution rate: 21.2% of gross wage

First pillar: 13.78%First pillar: 13.78%

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

Second pillar: 7.42 %Second pillar: 7.42 %

old age pensionold age pension


Second pillar statistics Second pillar statistics membersmembers

Pension fond

Voluntary members

Mandatory members Total

With contract

Allocated by MAPAS

Temporary allocated

Total

NPF 29.451

32.238

17.044

4.070

53.352 82.803

KB PRV 35.195

33.063 18.324 4.835 56.222 91.417

Total 64.646

65.301 35.368 8.905 109.574

174.22

0


Thank you for your Thank you for your attention!attention!


Macedonian Pension System and Reforms Ms. Irena Risteska Head of Sector for Pension and Disability Insurance Sector Ministry of Labor and Social Policy.

Documents

social policy slide

pension base slide

republic of macedonia

macedonian pension system

pension base change

state pension fund slide

payg system increase

pension base decrease