Title: The Voluntary Fully Funded Pension Insurance Third Pillar in the Macedonian Pension System
1- The Voluntary Fully Funded Pension Insurance
(Third Pillar) in the Macedonian Pension System - Skopje, July 1, 2008
2Agenda
- Pension reform summary
- Characteristics of fully funded pension insurance
- Voluntary Pension System Philosophy and Design
- Potential Size of Voluntary Pension System
3Characteristics of the pension system before the
reform
- PAYG, DB
- Existing for over 50 years
- Mandatory
- Comprehensive, broad coverage
- Types of benefits
- Old age
- Survivors
- Disability
- Min. guarantee
- Max.
4Current Macedonian Pension System
- Mandatory rationalized PAYG system (first pillar)
- Mandatory fully funded system (second pillar)
- Voluntary fully funded system (third pillar)
5Second Pillar Organization Chart
MLSP
NBRM Custodian
PDIF
MAPAS
Pension Company
Pension Company
Pension Fund
Pension Fund
6Pension reform summary
- Solidarity PAYG system modified
- Mandatory fully funded system introduced in
2005/2006 - April 2005 - Two licenses granted to Pension
Companies with mixed capital (domestic and
foreign) for managing one Pension Fund each
selected in international bidding process - September 2005 Start of Membership Process
6
7Pension reform summary (cont.)
- January 2006 Start of second pillar
contributions flow - January 2008 Start of transfer process for
members - Planned for 2008
- Opening of the market, licensing of new Pension
Companies allowed - Transfer of custodian role from Central bank to
commercial banks - Implementation of third pillar
8Reasons to start Voluntary Pension Company in the
Republic of Macedonia
- Additional service for firms already active in
Macedonia - Door-opener to sell other financial services
- Opportunity to gain experience and participate in
mandatory pension system as well
8
9Design of the Second Fully-Funded Pillar
Regulation based on a Draconian method
- Centralized payment of the contributions and
record keeping - 2 Pension Companies for managing one pension fund
each - Custodian
- Supervision and regulation
- (proactive supervision at the beginning)
- Guarantees
- Tax treatment EET
10Second pillar statistics members
11Second pillar statisticsValue of the Pension
Funds Net assets
12Second pillar statistics- Pension Funds
Investment portfolio (December 31, 2007)
13Voluntary fully funded pension pillar Philosophy
- Start simple
- Pension companies and pension funds only
- One pension company, one voluntary fund
- Custodian commercial bank
- Open licensing process
- Build from mandatory system model
- Allow individual and occupational pension savings
schemes - More flexibility than mandatory system
- Expand system over time
14Primary objective
- To provide higher income after retirement to the
insurers covered with the first and second pillar - To provide retirement benefits to persons not
covered with the mandatory pension insurance - To provide preconditions for organizing and
financing occupational plans -
15Eligibility
- Anyone 18 or older may participate
- (must start withdrawing at age 70)
- Membership
- Individual signs membership contract with a
Pension Company - Employer organizes and finances occupation scheme
for its employees via Pension Companies - Third party contributions are permitted
16Occupational pension schemes
- Sponsored by employer(s) or association
- Sponsor negotiates contract with Pension Company
- All contributions made by Sponsor
- Sponsor pays all administrative costs
- Choice of pension fund must be in best interests
of members - If no longer an employee, must transfer balance
to another occupational fund or an individual
account
16
17Fees
- Permitted fee types
- Percent of contributions (max 7)
- Percent of assets (max 0.15 monthly)
- Transfer fees permitted during first year of
participation - Fee must be same for everyone
- Exceptions
- Fees can decline as years of participation
increase or - Fees for occupational pension schemes might be
different
18Investments
- Primary principles Liquidity, safety and
diversification - Written investment policy statement required
- Foreign investments permitted in EU and OECD
countries - Maximum limits by asset class apply until EU
accession - Foreign investment limit much higher than
mandatory fully funded system (50)
19Pension Benefits
- Can begin up to 10 years prior to standard
retirement age in mandatory pension system - 52 women, 54 man
- Permitted payment options
- Lump-sum
- Periodic withdrawals
- Annuity purchase
- Combination of above
- Mandatory lump-sum for small account balances
20Taxation
- EET structure
- Individual granted Personal Income Tax Return on
contributions to Voluntary Pension Fund (up to 6
average net wages) - Sponsor gets personal income tax exempt for
contributions to occupational pension schemes (up
to 6 average net wages)
21Voluntary fully funded pension pillar System
safety
- MAPAS
- Licensing requirements
- Investment rules and regulations
- Asset segregation
- Custodian
- Marketing rules
- Reporting and disclosure
22MAPAS
- Supervises and controls mandatory and voluntary
fully funded pension system - Licenses pension companies and pension funds
- Issues regulations
- Controls marketing practices
- Conduct off-site and on-site audits
- Regularly gathers and analyzes data
- Takes legal or regulatory actions, as appropriate
23Licensing requirements (1)
- Pension companies and pension funds must be
licensed - Pension companies must show
- Financial strength
- Experience in financial sector
- Experienced and ethical management team
- Credible business plan
- Proper investment policy
24Licensing requirements (2)
- Three types of Pension Companies shall exist
- Mandatory Pension Company (share capital not
less than 1,5 million EUR) - Voluntary Pension Company (share capital not
less than 0,5 million EUR) - Joint Pension Companies (share capital not less
than 1,8 million EUR)
24
25Licensing requirements (3)
- Same criteria for founders of Mandatory Pension
Company and for founders of Joint Pension
Company - Domestic or foreign legal entity
- 20 mil. Euros
- Minimum investment grade level rating in case of
a foreign company
25
26Licensing requirements (4)
- Different criteria for founders of Voluntary
Pension Company - Founders owning 51 of the Pension Companys
share capital may be a financial institution with
own capital - 9 mil. Euros if bank
- 3 mil. Euros if insurance company
- 0.5 mil. Euros if company for management of
investment funds - 1 mil. Euros if foreign Pension Management
Company - 5 mil. Euros if other financial institution
26
27Licensing requirements (5)
- Other criteria for founders
- Have been registered and existing for a minimum
of three years - Continuous solvent existence in continuity,
whether in the Republic of Macedonia or abroad - Permanent management team comprised of competent,
expert and experienced persons.
27
28Licensing requirements (6)
- A founder of a Voluntary Pension Company owning
51 or more of the share capital may be a legal
entity that owns more than 50 of the management
shares of a financial institution satisfying all
previous criteria. - A founder of a Voluntary Pension Company owning
less than 51 of the share capital may be a legal
entity satisfying all previous criteria expect
the ones related to capital
28
29Investment rules and regulations
- Act in best interests of members
- Required investment policy statement
- Permitted and prohibited investments
- Diversification requirements
- Safety (rating) requirements
- Liquid investments (regularly traded securities)
- Recognized exchanges
- Conflict of interest prevention rules
30Custodian
- Single custodian for all assets
- Macedonian banking license and custodian license
- Meet minimum capital and independence
requirements - Sub-custodians for foreign assets
- Primary functions
- Hold assets on behalf of members
- Settlement of all trades
- Supervise sub-custodians
- Ensure compliance with pension law
31Marketing rules
- General rules
- No gifts to induce membership
- No misleading information
- No performance predictions
- Contracts signed by sales agent
- Sales agent requirements
- Examinations (proper knowledge)
- Ethical standards
- Licensing
- Registry of active agents
- No use of associates for marketing
- Advance MAPAS approval of all marketing materials
and advertisements
32Reporting and disclosure
- Individual account statements
- Annual reports
- Investment policy statement
- Periodic reporting to regulator (many items on
daily basis) - Standardized rate of return calculations and
presentation
33Voluntary fully funded pension pillar Expected
size of market(base case scenario)
33
34Expected size of market(optimistic scenario)
34
35Expected size of market(pessimistic scenario)
35
36 Thank you for your attentionmtsp.gov.mkmapa
s.gov.mk