Agency for the Supervision of Fully Funded Pension Insurance (MAPAS) Preparing the Financial Market for an Aging Population - The case of Macedonia Zorica Apostolska, Director Agency 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 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 PDIFMAPAS NBRM 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 Licenses granted to Pension Companies with mixed capital (domestic and foreign)  September 2005 – Start of Membership Process ► Around 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)

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 , Stock Exchange – 1995, Central Securities Depositary  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 FundsFinancial 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!