PENSION SYSTEM IN REPUBLIC OF MACEDONIA

Pension system, key institutions Ministry of Labor and Social Policy Pension and Disability Insurance Fund of Macedonia Agency for Supervision of Fully Funded Pension Insurance (MAPAS) Pension Companies and Pension Funds – Mandatory Custodian bank (National Bank of the Republic of Macedonia – transitory for second pillar; commercial bank for third pillar) 2

Pension reform summary 1 Solidarity PAYG system modified 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 September 2005 – Start of Membership Process 3

Pension reform summary 2 January 2006 – Start of second pillar contributions flow January 2008 – Transfer process for members shall start November 2008 Opening of the market, licensing of new Pension Companies allowed 2009 - Custodian role from Central bank to commercial banks - Implementation of third pillar 4

Recent Policy Developments 1. Law on Contributions from the Mandatory Social Insurance 2. Integrated collection of contributions in the Public Revenue Office 3. Implementation of gross wage 4. Reduction of the contribution rate and minimal base for contribution   Contribution Rate % 1st Pillar % 2nd Pillar % 2009 19 12,35 6,65 2010 17,5 11,38 6,13 2011 15 9,75 5,25

Current Macedonian Pension System Mandatory rationalized PAYG system (first pillar) Mandatory fully funded system (second pillar) Voluntary fully funded system (third pillar) 6

Who is insured in the pension system? mandatory workers self-employed workers individual farmers unemployed workers who receive benefits until employment

Pay As You Go-First Pillar Based on the DB principle – the pension is calculated on predefined formula Rights: Old age pension Disability pension Survivors pension Minimal pension   8

Old age pension Conditions: 64 years of age (man) i.e. 62 years of age (woman) and at least 15 years of service Year Old-age pensioner 2004 137.840 2005 142.827 2006 146.852 2007 150.075 2008 149.682 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. 9

Replacement Rate For contributors who have at least 15 years of social insurance, the replacement rate for full insurance service is 80% For contributors who have less then 15 years of social insurance, the replacement rate decreases in the following 40 years to 72% for full insurance service For contributors who will join the second pillar, the replacement rate for full insurance service is 30%

Disability pensioners Conditions: - general incapacity for work - professional incapacity for work (above 50 years of age for man and woman) Year Disability pensioners 2004 51.589 2005 50.180 2006 49.364 2007 48.054 2008 48.562 156 new disability pensioner per month in 2008 out of 5.793 submitted expert evidences. 11

Survivors pension Conditions: - the deceased was pension beneficiary - the deceased had pension insurance for 5 years Entitled to survivors pension: spouse, parents, children, family members and other members of the family Year Survivors pensioners 2004 70.646 2005 72.145 2006 73.465 2007 74.257 2008 75.037 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. 12

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 December 2008 was 82.110, which was 30% of the total number of pensioners in the country.

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 December was 784 which was 0,29% of the total number of pensioners.

Self-Employed and Individual Farmers Definition on Self-Employed: person who exerts economic activity or another professional and intellectual service from which income its realized Definition on Individual Farmer: person who is engaged solely in farmers profession and from which income is realized individual farmers do not have right to professional rehabilitation different contribution rate only for contributors in the first pillar

2,3% of the contributors in Macedonia are individual farmers 73,6% are active individual farmers 26,4 are passive individual framers

Structure of funded arrangements in Macedonian pension system Second Pillar - Mandatory Fully Funded Pension Insurance (operational since 2005) Third Pillar - Voluntary Fully Pension Insurance (planned to be operational in 2009)

Participation in the second pillar Mandatory: New labor force entrants on or after January 1, 2003 Voluntary: All current contributors employed before January 1, 2003

Second Pillar Membership Members select one Mandatory Pension Fund by signing Membership Contract with Pension Management Company by individual choice Selection period: Voluntary members (one time election, finished by end 2005) Mandatory members 3 months after employment PDIF assigns Fund using MAPAS algorithm Permanently assigned if don’t choose in 3-month period Member can transfer between Mandatory Pension Funds, subject to following rules: Transfers in first two years of membership subject to fee

Second pillar pension benefits Benefits from the second pillar DC old age pension (additional to PAYG DB pension benefit) Payment options Periodic withdrawals Annuity purchase Survivor and disability paid from first pillar. Second pillar account balance transferred to PDIF Minimum guarantee: in case first plus second pillar pension are lower than minimum PDIF pays additional amount up to minimum Separate law on benefit payouts to be written

Second Pillar Developments Two Pension Companies established with mixture of foreign and domestic capital 195,140 second pillar members (as of December 31, 2008): 66,300 voluntary members 128,840 mandatory members Net assets of mandatory Pension Funds around 5 billions of Denars or around 80 millions of Euros (as of December 31, 2008)

Third Pillar Developments Third pillar Law published in January 2008 Goals: - saving for better material security in old age through additional pension benefit or general pension benefit - preconditions for organizing and financing occupational pension schemes by employers or associations for their employees i.e. members, in line with the Directive of the European Parliament and Council Directive on the activities and supervision of institutions for occupational retirement provision 2003/41/EC.

Third pillar membership Anyone between 18 and 70 may participate Membership Individual signs standardized membership contract with a Pension Company Third party contracts allowed Employer/Association organizes and finances occupational scheme for its employees/members via Pension Companies Transfers between voluntary pension funds allowed

Third Pillar 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 Separate law on benefit payouts to be written 24

Thank you for the attention Natasa Markovska, MLSP www.mtsp.gov.mk Biljana Petroska, MAPAS www.mapas.gov.mk