1. PENSIONS IN CEF COUNTRIES AN OVERVIEW DUŠAN KIDRIČ UMAR/IMAD

2. Dušan KIDRIČ Transitions from one complex and federal state to single independent states (for some countries) –Not completed jet socialist to parliamentarian political system no market to market economy war to peace –Completed (?) public obligation to private responsibility for social security

3. Dušan KIDRIČ Implications touching pensions in transition countries Decrease in activityall Less insured personsall Increase of informal activity – employmentall Evasion of contribution paymentall Decline of revenues disposable all Increase of beneficiariesall Pension arrearssome Reduction of pension benefitsall Same pension providers (institutions) Mainly Unchanged way of operatingMainly Distrust in current pension systemsome

4. Dušan KIDRIČ Population, retirement

5. Dušan KIDRIČ Responses to the situation Pension reforms –New concepts Political and social discussion –Parametrical adjustments (tightenining) –New forms of pension provision and practice International assistance

6. Dušan KIDRIČ Political and social discussion on concepts New ones –Empowering –Individualization –Poverty alleviation –Actuarial fairness –(Pre)funding –Diversification Traditional ones –Redistribution –Solidarity –Earning based rights –Social justice –PAYG –Equalization

7. Dušan KIDRIČ Reforms adopted

8. Dušan KIDRIČ Parametric changes Rising statutory retirement age –Range 62 to 65 for men –Range 56 to 65 for women Reduction of yearly accrual rate –For 0 to 0,5 percentage points Enlarging qualifying period –Range from18 to 40 years Increase (reduction) of pensions when retired later (earlier) –From 0 (non existing) to 3,6% per additional (missing) year

9. Dušan KIDRIČ Parametric changes Capping the benefits and contributions –All possible combinations Invalidity adjustments –More severe conditions Indexation of benefits –Les generous, more complicated Opening the scale of total accrual rates –Yes and not Instruments for achieving actuarial neutrality –Not many (one certainly)

10. Dušan KIDRIČ Main data ALBBIHBGRHRVMKDMDAROM MNG *SRB*SVN gdp/capita in US$ 2.6772.3983.4428.4182.8336914.556 3.31317.030 population in thousands 3.1493.8437.6794.4422.0433.58121.624 7.5332.001 population/pensions5,847,553,384,267,595,854,800,005,994,10 life expectancy at birth W (years) 78,60 76,3079,0075,8871,7075,4775,0075,4081,30 legal retirement age W (at the end of transitory period)606560 625760 61 life expectancy at birth M (years) 72,1 69,172,071,463,868,271,070,074,1 legal retirement age W (at the end of transitory period)65 6365646265 63

11. Dušan KIDRIČ Two gender specific systems

12. Dušan KIDRIČ Legal retirement age and life expectancy

13. Dušan KIDRIČ Adjustment of benefits and indexation of pension base Variety of rules

14. Dušan KIDRIČ Level of benefits Generally very low –Less than 50% of average wage Minimum benefits (minimum pension, guaranteed pension) still lower –Around one third of average pension Distribution of pensions –Concentration on the lower classes

15. Dušan KIDRIČ Low coverage

16. Dušan KIDRIČ Fiscal elements current situation Less contribution revenues than obligations (except in case of FBiH) in pension systems –Need to budgetary transfer Contribution rates and contribution bases different from country to country and even in the same country ALBBIHBGRHRVMKDMDAROMMNG * SRB * SVN 24,0 % 23,0 % 20,0 % 21,2 % -29,0 % 21,6 % 22,0 % 24,4 %

17. Dušan KIDRIČ Some elements for assessing long term perspective Demography (Problems with population census) –Ageing Life expectancy will (with high probability) increase Fertility rates are low –Migration will cause shortage of labor supply Economic performance –Integration in a larger economic area Catching up the neighbors Foreign direct investment –Better utilization of domestic resources –Peace

18. Dušan KIDRIČ Some social phenomena to be taken into account Social stratification –Poverty Low pension benefits Low coverage –Enrichment In the privatization process New monopoles –Free movement of people Social cohesion and social in(ex)clusion –Older workers Heavy adaptability –Elderly people Alone and not enough support –From family –Systemic –Health services provision

19. Dušan KIDRIČ Fiscal elements long term perspective The contribution rates could hardly be increased –The share of contribution revenues will decline or in best option remain the same as it is now The amount and share of pension obligation will increase –Due to ageing of population –Due to non possible reduction of current level of pension benefits The difference between obligations (liabilities) and revenues (assets) will increase

20. Dušan KIDRIČ Pension reform (mainly financial) answers Introduction of explicit funding –Mandatory as a II. Pillar according to WB classification Croatia, Macedonia, Bulgaria, Romania, Kosovo, … –Voluntary All except BiH Introduction of a NDC for a first mandatory pillar –In consideration in many countries

21. Dušan KIDRIČ Explicit funding The chicken / egg phenomenon –Underdeveloped financial market New and not enough financially solid domestic intermediaries Lack of expertise Very few domestic financial instruments –Low premiums –High initial cost Bad country risk rating High fees and low return on available instruments –Regulatory and supervisory problems

22. Dušan KIDRIČ Members in the new pension schemes At the end of 2006 more than 5 millions persons are included in mandatory or voluntary (pre)funded pension schemes –Most of them in Bulgaria and Croatia –Macedonia –Slovenia in a voluntary (but mainly collective) pensions schemes In the 2006 and 2007 is expecting to start (or started yet) in many other countries

23. Dušan KIDRIČ Pension reform (less financial and more social ) answers Enlargement of state subsidies –For non insurance based benefits Maternity leave Military service Veterans … Introduction of a state (social) pension as a universal benefit in the old age – zero pillar –Redefinition and redesigning of existing minimum benefits in pension and social assistance systems Possible reduction of pension contribution as a part of labor cost

24. Dušan KIDRIČ Conclusions –Parametric reforms were introduced and the new parameters gave the possibility to master current fiscal problems Politically the reforms are always under revision; they are many signs that some parameters are not any more sympatric to politicians –To cope with long term fiscal sustainability, the reforms have to open new instruments to strengthen the individual responsibility and make clear consequences for individual decisions The pension providers have to supply better and accurate information of individual and common (societal) pension situation

25. Dušan KIDRIČ Conclusions –Mandatory redistributive part of the pension system has to rethink the “philosophical” bases of social insurance Is the limitation of solidarity exclusively on formally employed persons and on those with achieved (prescribed) work history still sufficient? Could be social cohesion and general taxes as revenue the rationale for enlarging the eligibility criteria –The new forms of calculating pension base seem to be more convenient to changed and changing world The NDC system is one of newly introduced type, which could serve also for financial literacy purposes in (pre)funded schemes

26. Dušan KIDRIČ Conclusions –Explicit funding (second and third pillar) have the same logic and limitations The length of saving period has to be as long as possible; in connection with social insurance part both are interested on prolongation of activity The premium or contributions have to be greater then currently are. The complementary nature of supplementary pension insurance will fulfill the expectations only with sufficient assets on individual accounts –The new pension providers must have in mind that fees and costs are essential for social acceptance of them If the sentence “Get reach – slowly” is valid for pension saving, the same must be observed from new financial intermediary