1. Macedonian Pension System and Reforms Ms. Irena Risteska Head of Sector for Pension and Disability Insurance Sector Ministry of Labor and Social Policy

2. Ministry of Labor and Social Policy, Republic of Macedonia Area: 25,713 sq km Population (2002): 2,022,547 Source: State Statistical Office Introduction to Macedonia

3. Characteristics of the pension system before the reform PAYG, DB PAYG, DB Existing for over 50 years Existing for over 50 years Mandatory Mandatory Comprehensive, broad coverage 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) Increase of the retirement age (60/63 men; 55/60 women) Change in the calculation of the pension base Change in the calculation of the pension base Decrease of the replacement rate (85% 80%) Decrease of the replacement rate (85% 80%) Change of pension indexation method Change of pension indexation method Termination of early retirement provisions 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) (Actuarial projections for the next 100 years) Population aging Population aging Further decline in the ratio of contributors to pensioners 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) (Actuarial projections for the next 100 years) further increase in the ratio of expenditures for pension benefits payment to GDP further increase in the ratio of expenditures for pension benefits payment to GDP increase of the sustainable contribution rate 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 Ministry of Labor and Social Policy Pension and Disability Insurance Fund of Macedonia Pension and Disability Insurance Fund of Macedonia Pension Supervision Agency (MAPAS) Pension Supervision Agency (MAPAS) Pension Companies and Pension Funds – Mandatory Pension Companies and Pension Funds – Mandatory Custodian bank (National Bank of the Republic of Macedonia – transitory for second pillar; commercial bank for third pillar) 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 Solidarity PAYG system modified Mandatory fully funded system introduced in 2005/2006 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 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 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 2006 – Start of second pillar contributions flow January 2008 – Transfer process for members shall start January 2008 – Transfer process for members shall start Planned for early/mid 2008 Planned for early/mid 2008 Opening of the market, licensing of new Pension Companies allowed Opening of the market, licensing of new Pension Companies allowed Transfer of custodian role from Central bank to commercial banks Transfer of custodian role from Central bank to commercial banks Implementation of third pillar 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 Use of the privatization proceeds of public enterprises of public enterprises Fiscal contraction (tax financing) Fiscal contraction (tax financing) Ministry of Labor and Social Policy, Republic of Macedonia Transition costs (in million denars) 200620072008 1.325,131.877,002.310,00

18. Organizing the pension reform The Governments commitments for the pension reform The Governments commitments for the pension reform - Pension Reform Steering Committee - Actuarial Unit Concept development and proposal for the reform Concept development and proposal for the reform Presentation of the proposal, feed-back information and consensus building Presentation of the proposal, feed-back information and consensus building Work on the legislation Work on the legislation Adoption of laws Adoption of laws Implementation Implementation Ministry of Labor and Social Policy, Republic of Macedonia

19. Current Macedonian Pension System Mandatory rationalized PAYG system (first pillar) Mandatory rationalized PAYG system (first pillar) Mandatory fully funded system (second pillar) Mandatory fully funded system (second pillar) Voluntary fully funded system (third 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 Old age pension Disability pension Disability pension Survivors pension Survivors pension Minimal pension. Minimal pension. Ministry of Labor and Social Policy, Republic of Macedonia

22. Old age pension Conditions: Conditions: 64 years of age (man) i.e. 62 years of age (woman) and at least 15 years of service 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: 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: Conditions: - the deceased was pension beneficiary - the deceased had pension insurance for 5 years Entitled to survivors pension: 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. 73,6% are active individual farmers 26,4 are passive individual framers 2,3% of the contributors in Macedonia are individual farmers

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 : o o Reading of the input electronic fail o o Interactive input of data in the MPPP form (monthly form for contribution payments) o o First instance check of the correctives of the data o o Generation of output MPPP form in electronic form (fail) o o 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 m onthly declarations for 47.992 employers, for 416.172 contributors Average number of m onthly payments for 41.385 employers (86,2%), for 397.589 contributors (95,5%) Year 2007 Average number of m onthly declarations for 50.634 employers, for 423.856 contributors Average number of m onthly 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 Ministry of Labor and Social Policy, Republic of Macedonia PDIF MAPASNBRM/Custodian Pension Company MLSP Pension Fund Pension Company Pension Fund

50. Centralized payment of the contributions and record keeping Centralized payment of the contributions and record keeping 2 Pension Companies for managing one pension fund each 2 Pension Companies for managing one pension fund each Custodian Custodian Supervision and regulation Supervision and regulation (proactive supervision at the beginning) (proactive supervision at the beginning) Guarantees Guarantees Tax treatment: EET Tax treatment: EET Ministry of Labor and Social Policy, Republic of Macedonia Design of the Second Fully-Funded Pillar

51. Second pillar members Transition Rules Hired on or after January 1, 2003 must join reformed pension system (PAYG + fully funded) 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) 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 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 Total contribution rate: 21.2% of gross wage First pillar: 13.78% First pillar: 13.78% old age (30%), disability and survivors pension, and minimum guarantee Second pillar: 7.42 % Second pillar: 7.42 % old age pension Ministry of Labor and Social Policy, Republic of Macedonia

53. Second pillar statistics members Pension fond Voluntary members Mandatory membersTotal With contract Allocate d by MAPAS Temporar y allocated Total NPF 29.451 32.238 17.044 4.070 53.352 82.803 KB PRV 35.19533.06318.3244.83556.222 91.417 Total 64.64665.30135.3688.905109.574 174.220 Ministry of Labor and Social Policy, Republic of Macedonia

54. Thank you for your attention! Ministry of Labor and Social Policy, Republic of Macedonia