The Voluntary Fully Funded Pension Insurance Third Pillar in the Macedonian Pension System

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Business Environment Activity

• The Voluntary Fully Funded Pension Insurance
  (Third Pillar) in the Macedonian Pension System
• Skopje, November 6, 2008

2
Agenda

• Macedonian pension system and pension reform
  summary
• Key features of fully funded pension insurance
• Voluntary Pension System Philosophy and Design
• Potential Size of Voluntary Pension System
• Statistics

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Characteristics 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.

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Current Macedonian Pension System

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

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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
• Custodian bank (National Bank of the Republic of
  Macedonia transitory for second pillar
  commercial bank for third pillar)

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Second Pillar Organization Chart
MLSP
NBRM Custodian
PDIF
MAPAS
Pension Company
Pension Company
Pension Fund
Pension Fund
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Pension Companies operating in the second and/or
third pillar

• Three types of Pension Companies shall exist
• Mandatory Pension Company
• manage Mandatory Pension Funds only
• Voluntary Pension Company
• manage Voluntary Pension Funds only
• Joint Pension Companies
• manage Mandatory and Voluntary Pension Funds

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Pension reform summary

• Parametric reforms of solidarity PAYG system
• 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 Mandatory Pension Fund
  each selected in international bidding process
• September 2005 Start of Membership Process for
  Mandatory Pension Funds

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Pension reform summary (cont.)

• January 2006 Start of second pillar
  contributions flow
• January 2008 Start of transfer process for
  second pillar members
• Planned for end 2008/early 2009
• Opening of the market, licensing of new Pension
  Companies allowed
• Transfer of custodian role for second pillar from
  Central bank to commercial banks
• Implementation of third pillar

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Legal framework (1)

• Law on Pension and Disability Insurance (Official
  Gazette of the Republic of Macedonia No. 80/93,
  3/94, 14/95, 71/96, 32/97, 24/2000, 96/2000,
  50/2001,85/2003,50/2004 ,4/2005, 84/05 ,101/05,
  70/06 and 153/07)
• Law on Mandatory Fully Funded Pension Insurance
  (Official Gazette of the Republic of Macedonia
  No. 29/2002, 85/2003, 40/2004, 113/2005, 29/2007
  and 88/2008)
• Law on Voluntary Fully Funded Pension Insurance
  (Official Gazette of the Republic of Macedonia
  No. 7/2008)

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Legal framework (2)
Secondary regulation on second and third pillar
related to

• Licensing of Pension Companies and Detailed
  Requirements For Establishment Of Pension
  Companies
• Membership and Transfer
• Contribution payment
• Marketing and sales agents

• Fees
• Investment
• Valuation of pension fund assets
• Individual accounts
• Reporting
• Prevention of conflict of interest
• Supervision
• Etc.

• Published in the Official Gazette of the
  Republic of Macedonia and
• available at mapas.gov.mk

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Design of the Second Fully-Funded Pillar

• Centralized payment of the contributions and
  record keeping
• Pension Companies for managing one Mandatory
  Pension Fund each
• Custodian
• Supervision and regulation
• (proactive supervision at the beginning)
• Guarantees
• Tax treatment EET

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Second pillar members

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

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Contributions and benefits in the two-pillar
system

• First pillar 65 of total contribution ? old
  age (30), disability and survivors pension,
  and minimum guarantee
• Second pillar 35 of total contribution ? old
  age pension

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Future contribution rate changes
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Voluntary 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 accounts and occupational
  pension schemes
• More flexibility than second pillar
• Expand system over time
• MAPAS regulator and supervisor

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Voluntary fully funded pension pillar Primary
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

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Reasons to start Voluntary Pension Company in the
Republic of Macedonia

• Additional financial 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

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Voluntary fully funded pension pillar Design
features (1)

• Eligibility
• Occupational pension schemes
• Voluntary contributions
• Fees
• Benefits

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Voluntary fully funded pension pillar Design
features (2)

• Licensing requirements
• Custodian
• Investments
• Asset Valuation
• Marketing rules
• Reporting and disclosure
• Taxation

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Eligibility

• Anyone 18 or older may participate
• (must start withdrawing at age 70)
• Membership
• Individual signs standardized membership contract
  with a Pension Company
• Employer/Association organizes and finances
  occupational scheme for its employees/members via
  Pension Companies
• Transfers between voluntary pension funds allowed

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Occupational 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 account or a voluntary
  individual account

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Voluntary contributions

• Paid by member
• Paid by employer
• Paid by third party
• Based on
• a voluntary membership contract or
• contract between Pension Company and Occupation
  Scheme Sponsor
• Frequency and amount of payment not restricted

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Fees

• Permitted fee types
• Percent of contributions (max 7)
• Percent of assets (max 0.15 monthly)
• Transfer fees (permitted during first year of
  participation, for membership longer than one
  year- free transfer)
• Fee must be same for everyone
• Exceptions
• Fees can decline as years of participation
  increase or
• Fees for occupational pension schemes might be
  different

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Pension Benefits

• Can begin up to 10 years prior to standard
  retirement age in mandatory pension system
• 52 women, 54 man (currently)
• Permitted payment options
• Lump-sum
• Periodic withdrawals
• Annuity purchase
• Combination of above
• Mandatory lump-sum for small account balances

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Licensing requirements (1)

• Pension companies and pension funds must be
  licensed
• 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)

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Licensing requirements (2)

• The Pension Company can be established by one or
  group of legal entities
• Same legal entity can only be a founder of one
  Mandatory Pension Company
• Same legal entity can only be a founder of one
  Voluntary Pension Company
• Same legal entity can only be a founder of one
  Joint Pension Company

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Licensing 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
• Founders owning 51 of the Mandatory or Joint
  Pension Companys share capital must have minimum
  investment grade level rating

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Licensing 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

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Licensing 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.

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Licensing 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

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Licensing requirements (7)

• Pension companies must show
• Financial strength
• Experience in financial sector
• Experienced and ethical management team
• Credible business plan
• Proper investment policy

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Licensing requirements (8) Licensing
Documentation

• Requests for license and approval (s) to manage a
  Pension Fund (s)
• Information about all founders
• Financial information
• Management information
• Information about experience in asset management,
  especially in pension fund management and
  experience in Macedonia and other small markets
  and emerging economies
• Etc.

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Licensing requirements (9) Licensing
Documentation (cont.)

• Pension Company draft by-laws
• Pension Fund (s) draft by-laws
• Draft contract with Custodian (s)
• Information on personnel (experience and
  qualifications)
• Management and Supervisory Board candidates
• Director
• Senior managers responsible for asset management,
  legal, marketing, internal audit, and record
  keeping

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Licensing requirements (10) Licensing
Documentation (cont.)

• Plan for establishment of Pension Company and
  Pension Fund (s) and organizational structure
• Staffing
• Sales and marketing
• Members protection and compliance resolution
• Pension Fund investment policy
• Internal and external audit
• IT systems, Record keeping and accounting
  software
• Back-up and security procedures
• Pension Company Business Plan
• Financial projections
• Fees

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Licensing requirements (11) Establishment of
Pension Companies

• MAPAS shall make its decision whether to grant a
  license within 60 days
• If necessary, additional documents will be
  requested and sources will be checked
• Pension Company should be established under Trade
  Law and the Law on Mandatory or Voluntary Fully
  Funded Pension Insurance within 90 days after
  receiving the approval

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Licensing requirements (12) Pension Companies,
Shares

• Ordinary shares only
• All shareholders have equal rights
• Additional share capital is required for increase
  in pension fund assets
• Share capital must always exceed 50 of founding
  capital
• Pension Company share transactions require MAPAS
  consent

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Custodian

• Single custodian for all assets
• Macedonian banking license and custodian license
• Minimum capital (9 million of Euros)
• Not affiliated to the Pension Company
• 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

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Investments (1)

• Primary principles Liquidity, safety and
  diversification
• Permitted and prohibited investments
• Diversification requirements
• Safety (rating) requirements
• Liquid investments (regularly traded securities)
• Recognized exchanges
• Conflict of interest prevention rules (Pension
  Companies may not invest Fund assets in
  securities issued by Pension Company shareholder,
  affiliated persons, etc.)
• Foreign investments permitted in EU and OECD
  countries within limit much higher than in
  mandatory fully funded system (50)

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Investments (2)

• Pension Company should
• Have written investment policy statement
• Act in best interests of members
• Assure using fair prices for purchases and sales
• Assure protection of the members interest
• Assure that investments are properly classified
  by asset classes
• Assure that limits contained in Fully Funded Law
  and MAPAS regulations are met
• Assure that violations of the limits are
  corrected in the statutory time period

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Asset Valuation

• Pension Company must value assets, calculate net
  value of assets, and calculate unit values daily
• Must follow International Accounting Standards
• Fair value equals market value for foreign
  securities
• Special rules for determining fair value for
  securities if not regularly traded

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Marketing rules

• General rules
• No gifts to induce membership
• No misleading or inaccurate information
• No performance predictions
• Contracts signed by licensed sales agents
• Sales agent requirements
• Examinations (proper knowledge)
• Licensing
• Registry of active agents
• No use of associates for marketing
• Advance MAPAS approval of all marketing materials
  and advertisements

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Reporting and disclosure

• Individual account statements (once a year)
• Annual reports
• Investment policy statement
• Periodic reporting to regulator (many items on
  daily basis)
• Standardized rate of return calculations and
  presentation

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Taxation

• EET structure
• Individual granted Personal Income Tax Return on
  contributions to Voluntary Pension Fund (annually
  up to 6 average net wages)
• Sponsor gets personal income tax exempt for
  contributions to occupational pension schemes
  (annually up to 6 average net wages per member)

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Voluntary fully funded pension pillar Expected
size of market(base case scenario)
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Voluntary fully funded pension pillar Expected
size of market(optimistic scenario)
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Voluntary fully funded pension pillar Expected
size of market(pessimistic scenario)
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Second pillar statistics Members
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Second pillar statistics Members age structure
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Second pillar statisticsValue of the Pension
Funds Net assets (September 30, 2008)
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Second pillar statisticsPension Funds Investment
portfolio (September 30, 2008)
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Statistics (1)

• Area 25,713 sq km
• Population (2002) 2,022,547
• GDP(2006) 4,892 mil. US
• GDP per capita (2006) 2,398 mil. US
• Increase in GDP (4.2008 / 4.2007) 6.5
• Retail prices (2006 / 2005) 103.9
• Consumer price index (2006 / 2005) 103.2
• Source State Statistical Office (stat.gov.mk)

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Statistics (2)

• Labor force (2008) 917,566
• Number of employed persons according LFS (2008)
  607,125
• Unemployment rate, ILO definition (2.2008) 33,8
  
• Average net paid wage per employee (7.2008)
• 15,808 Denars (app. 258 Euros)
• Average gross wage per employee (7.2008)
• 25,739 Denars (app. 421 Euros)
• Source State Statistical Office (stat.gov.mk)

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Statistics (3)

• Population structure (2002)

Life expectancy and average age of
population(2002)
Source State Statistical Office
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Statistics (4)

• First pillar Statistics (2007)
• Registered Payers (Employers) 61,105
• Contributors 424,338
• Contributors with paid contributions 392,914
• Contributors structure
• up to 40 years of age 49.2
• 41-50 29.3
• 51 21.4
• Pensioners 272,386

Source Pension and Disability Insurance Fund of
Macedonia
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Statistics (5)

• Top 10 biggest companies in Macedonia

Source Euro Business Center - Skopje, 2007
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Statistics (6)

• Top 10 most successful companies in Macedonia

Source Euro Business Center - Skopje, 2007
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Statistics (7)

• Biggest companies in Macedonia territorial
  distribution (out of 200 biggest)

Source Euro Business Center - Skopje, 2007
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Statistics (8)
Most successful companies in Macedonia
territorial distribution (out of 200 biggest)
Source Euro Business Center - Skopje, 2007
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Thank you for your attentionmtsp.gov.mkmapas
.gov.mkmojapenzija.com.mk
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Questions and Discussion