Macedonian Pension System

1
Macedonian Pension System and Reforms
Ms. Irena Risteska Head of Sector for Pension an
d Disability Insurance Sector Ministry of Labor a
nd Social Policy
2
Introduction to Macedonia

• Area 25,713 sq km
• Population (2002) 2,022,547
• Source State Statistical Office

Ministry of Labor and Social Policy, Republic of
Macedonia
3
Characteristics of the pension system before the
reform

• PAYG, DB
• Existing for over 50 years
• Mandatory
• Comprehensive, broad coverage

Ministry of Labor and Social Policy, Republic of
Macedonia
4
Parametric changes of the PAYG system (1993 -
1997)

• Increase of the retirement age (60/63 men 55/60
  women)
  
• Change in the calculation of the pension base
• Decrease of the replacement rate (85 ?80)
• Change of pension indexation method
• Termination of early retirement provisions

Ministry of Labor and Social Policy, Republic of
Macedonia
5
Parametric reforms (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

6
Parametric reforms (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

7
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
  

Ministry of Labor and Social Policy, Republic of
Macedonia
8
Life expectancy
Ministry of Labor and Social Policy, Republic of
Macedonia
9
Population 60 / Population 18-59
Ministry of Labor and Social Policy, Republic of
Macedonia
10
Ratio contributors / pensioners
Ministry of Labor and Social Policy, Republic of
Macedonia
11
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

Ministry of Labor and Social Policy, Republic of
Macedonia
12
Possible solutions

• 1. Increase in the contribution rate
• 2. Reduction of benefits
• 3. Fiscal contraction
• 4. Comprehensive reform of the pension system and
  transition to a multi pillar funded system
  

13
Parametric changes of 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

14
Pension system, key institutions

• Ministry of Labor and Social Policy
• Pension and Disability Insurance Fund of
  Macedonia
  
• Pension Supervision Agency (MAPAS)
• Pension Companies and Pension Funds Mandatory
• Custodian bank (National Bank of the Republic of
  Macedonia transitory for second pillar
  commercial bank for third pillar)
  

Ministry of Labor and Social Policy, Republic of
Macedonia
15
Pension reform summary 1

• 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

Ministry of Labor and Social Policy, Republic of
Macedonia
16
Pension reform summary 2

• January 2006 Start of second pillar
  contributions flow
  
• January 2008 Transfer process for members shall
  start
  
• Planned for early/mid 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

Ministry of Labor and Social Policy, Republic of
Macedonia
17
Financing of the Transition Costs

• Issuance of Government bonds
• (debt financing)
• Use of the privatization proceeds
• of public enterprises
• Fiscal contraction (tax financing)

Ministry of Labor and Social Policy, Republic of
Macedonia
18
Organizing the pension reform

• The Governments commitments for the pension
  reform
  
• - Pension Reform Steering Committee
• - Actuarial Unit
• Concept development and proposal for the reform
• Presentation of the proposal, feed-back
  information and consensus building
  
• Work on the legislation
• Adoption of laws
• Implementation

Ministry of Labor and Social Policy, Republic of
Macedonia
19
Current Macedonian Pension System

• Mandatory rationalized PAYG system (first
  pillar)
  
• Mandatory fully funded system (second pillar)
• Voluntary fully funded system (third pillar)

Ministry of Labor and Social Policy, Republic of
Macedonia
20
Who is insured in the pension system?

• mandatory
• workers
• self-employed workers
• individual farmers
• unemployed workers who receive benefits until
  employment
  
• pensioner after re-employment

21
Pay As You Go-First Pillar

• Rights
• Old age pension
• Disability pension
• Survivors pension
• Minimal pension.
•  

Ministry of Labor and Social Policy, Republic of
Macedonia
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Old age pension

• Conditions
• 64 years of age (man) i.e. 62 years of age
  (woman) and at least 15 years of service
  

Ministry of Labor and Social Policy, Republic of
Macedonia
23
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.
24
Disability pension

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

Ministry of Labor and Social Policy, Republic of
Macedonia
25
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.
26
Survivors pension

• Conditions
• - the deceased was pension beneficiary
• - the deceased had pension insurance for 5 years
  
  
• Entitled to survivors pension
• - spouse - parents
• - children - family members
• - other members of the family

Ministry of Labor and Social Policy, Republic of
Macedonia
27
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.
28
Minimal 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.
29
Maximum 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.
30
Individual Farmers and Self-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

31
2,3 of the contributors in Macedonia are
individual farmers

• 73,6 are active individual farmers
• 26,4 are passive individual framers

32
Early 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
33
Pension formula

• Calculation of pension
• Annual 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

34
Pension and Disability Insurance Fund First
Pillar
35
Objectives 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
  

36
Key role of PDIF in the new pension 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
  

37
Implemented legal changes-Continued

• 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)

38
Development of the client software

• This software provides
• Reading of the input electronic fail
• Interactive input of data in the MPPP form
  (monthly form for contribution payments)
  
• First instance check of the correctives of the
  data
  
• Generation of output MPPP form in electronic
  form (fail)
  
• Signing and encryption of the output fail with
  security code for identification of the employer
  
  

39
Onside 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

40
Benefits from the new contribution collection
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)

41

• 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

42
Structure of contributors
43
Results from the two year implementation of the
new way of contribution collection and the
behavior 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
  

44
Next steps (contribution collection of all social
contributions in unique procedure in 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
  

45
Expected benefits from the integrated
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
  

46
Second Pillar
47
The difference between the pillars

• 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

48
Agency for Supervision of Fully Funded 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

49
Second Pillar Organization Chart
MLSP
MAPAS
NBRM/Custodian
PDIF
Pension Company
Pension Company
Pension Fund
Pension Fund
Ministry of Labor and Social Policy, Republic of
Macedonia
50
Design of the Second Fully-Funded Pillar

• 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

Ministry of Labor and Social Policy, Republic of
Macedonia
51
Second pillar members

• Transition Rules
• Hired on or after January 1, 2003 must join
  reformed pension system (PAYG fully funded)
  
• Hired before January 1, 2003 had one-time option
  to join voluntary (up to December 31, 2005)
  
• Those joining reformed system had future
  solidarity benefits reduced
  

Ministry of Labor and Social Policy, Republic of
Macedonia
52
Contributions and benefits in the two-pillar
system

• Total contribution rate 21.2 of gross wage
• First pillar 13.78
• old age (30), disability and survivors
  pension, and minimum guarantee
  
• Second pillar 7.42
• old age pension

Ministry of Labor and Social Policy, Republic of
Macedonia
53
Second pillar statistics members
Ministry of Labor and Social Policy, Republic of
Macedonia
54

• Thank you for your attention!

Ministry of Labor and Social Policy, Republic of
Macedonia