Agency for supervision of Fully Funded
Pension Insurance (MAPAS)
Budgetary aspects
of the Macedonian
Pension Reform
Zorica Apostolska
Director, MAPAS
April 9, 2008 Bucharest
Agenda
 Pension system design and Macedonian Case
 Actuarial projections in Macedonia
 Parametric reforms of PAYG system in Macedonia
 Reformed pension system design and its expected
effects
 Transitional deficit
 Preparation and implementation
 Future Challenges
Pension system design and Macedonian
Case
 No two pension systems are the same
 General categories (by method of financing)
PAYG
Fully funded
DB
DC
 Another features of pension systems:
 Who is covered
 Covered risks
 Contribution rate
 Replacement rate
 Design depends on many “external” factors: economy, political,
sociological and cultural environment, etc.
Pension system design and Macedonian
Case
(cont.)
 Macedonian pension system before the reform
System features
 PAYG, DB
 More tan 50 years of
existence
 Mandatory
 High level of coverage
Types of pension benefits
(risks covered)
• old age
• survivors
• disability
• minimum pension
guarantee
Pension system designs and Macedonian
Case
(cont.)
 Macedonian pension system problems
 Economic factors
o Unfavorable economic and
labor market
developments
o Contribution evasion
 Demographic factors
 Decrease of the number
of contributors
 Increase of the number
of pensioners
o Ageing of population
Expected insolvency of the Public
Pension and Disability Insurance Fund
1400000
70%
1200000
60%
1000000
50%
800000
40%
600000
30%
400000
20%
200000
10%
0
0%
2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
year
proportion
number
Actuarial projections
Population 60+ / Population 18 - 59
population 18 - 59
population 60 +
proportion
Actuarial projections
Ratio contributors / pensioners
700000
2.0
600000
1.6
1.2
400000
300000
0.8
200000
0.4
100000
0
0.0
2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
year
proportion
number
500000
contributors
pensioners
proportion
Actuarial projections
(Contributions – Pensions) / GDP
16%
13%
percentage
10%
7%
incomes
4%
expenditures
surplus (deficit)
1%
-2%
-5%
-8%
2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
year
Parametric reforms of the Macedonian
pension system
 Features of the system that influence its flexibility
 Retirement age
o Increase in the retirement age
o Age exclusive condition
o Termination of early retirement provisions
 Decrease of the replacement rate
 Change of pension indexation method
Sustainable contribution rate and
replacement rate
70%
60%
percent
50%
40%
30%
20%
10%
0%
2001
2020
2040
2060
2080
2100
year
contribution rate
replacement rate
Design of the reformed pension system
and its expected effects
 Mandatory pension and disability insurance
based on generational solidarity (first pillar)
 Mandatory fully funded pension insurance
(second pillar)
 Voluntary fully funded pension insurance
(third pillar)
Design of the reformed pension system
and its expected effects
(cont.)
 For the system
 Solvent pension system
 Increasing national
savings
 Strengthening the
investment power
 Economy growth
 Increasing the
Macedonian labor
market efficiency
 For the individual
 Greater security of the
pension
 Risk diversification
 Transparency of the
operations
Transitional deficit
 What is transitional deficit?
 Part of the contributions that flow to the second pillar (outflow from the first
pillar)
 How can we measure the deficit?
 Number of switchers
 Size of second pillar contributions
 How can we finance this deficit?
 Issuance of Government bonds (debt financing)
 Use of the privatization proceeds of public enterprises
 Fiscal contraction (tax financing)
 Combination
Transitional deficit
(cont.)
Transitional deficit
(cont.)
 How can we control the deficits?
 Measure the transitional deficit
 Set the maximum acceptable level of the deficit
 Design the system to fit that level
First pillar parametrical reforms help financing transitional deficit
 Macedonian case
 35% of pension contributions go to the second pillar
 Mandatory entrance only for new labor force entrants
(employed after January 1, 2003)
 Voluntary entrance for current works
 Only 5 to 7 years accrued right for switchers recognized
Preparation and Implementation
 Government commitment to Pension Reform
• Pension Steering Committee Established
• Actuarial Unit Established
• Comparative analysis prepared
 Development of a concept, discussion and legislation adoption
 Public informative and educational campaign
 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
Preparation and Implementation (cont.)
Obstacles
 Size and ways of financing transition costs
 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
Preparation and Implementation (cont.)
 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
 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
Preparation and Implementation (cont.)
 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)
 Central Bank – Custodian for the first 5 years of the
system (transitory provision)
 Regular actuarial projections prepared on annual basis
 PDIF balance and transitional deficit submitted to the
Ministry of Finance
Future challenges
 Improved contribution collection and evasion
elimination, increase of employment rate
 Regular recalculation of the transitional deficit
 Appearance of new instruments (corporate
bonds, mortgage backed securities, etc.)
 Custodian function at commercial banks
 Start of third pillar operations
 Start of payments of pension benefits from
second pillar
Thank you
for you attention!
www.mapas.gov.mk