2. Pension System Reform in the Republic of Macedonia Kiev, May 2004

3. Republic of Macedonia

4. Statistical Data (1999) Area: 25,713 sq km Population: 2,049,000

5. Motivation for a transition to a multi - pillar pension system -1 1. Demographics (Actuarial projections for the next 100 years) Population aging Further decline in the ratio of contributors to pensioners

6. Ratio contributors / pensioners

7. Motivation for a transition to a multi- pillar pension system -2 2. Economics (Actuarial projections for the next 100 years) further increase in the ratio of expenditures for pension benefits payment to GDP  increase of the sustainable contribution rate

8. Contributions - Pensions / GDP

9. Structure of the new system

10.  mandatory rationalized PAYG system (first pillar)  mandatory fully funded system (second pillar)  voluntary fully funded system (third pillar)

11. Contribuitons and benefits in the two-pillar system Total contribution rate: 20%  First pillar: 13% old age (30%), disability and survivors pension, and minimum guarantee  Second pillar: 7% old age pension

12. Who will be covered with the two-pillar system  Mandatory - new entrants into Labor Force (from 1 January 2003)  Voluntary - current contributors  1 year decision period  decision based on actuarial model for individual results

13. Comparison of Income - Expenditures

14. Financing of the Transition Costs  Issuance of Government bonds (debt financing)  Use of the privatization proceeds of public enterprises  Fiscal contraction (tax financing)

15. SECOND PILLAR DESIGN 1 Centralized contribution collection– PDF  Contribution payments and data  Division of contributions for the first and the second pillar  Transfer of second pillar contribution and data to the personal accounts of the pension funds’ members – 5 days after the contribution payment

16. SECOND PILLAR DESIGN 2 2 pension companies selected on an international tender (for a 10-year period)  Share capital – not less than 1,5 million EUR  Shareholders – domestic and foreign legal entities  51% of shareholders must be banks, insurance companies or other financial institutions

17. SECOND PILLAR DESIGN 3 Diversified investing  Min.80% in domestic investments bonds and other securities,deposits, certificates of deposits, shares, commercial notes (NBRM, RM, SEC)  Max.20% in foreign investments bonds, shares, participation units and other securities (EU, Japan and USA)

18. SECOND PILLAR DESIGN 4 The assets are kept by a Custodian  The Custodian of Pension Funds assets will be the National Bank of the Republic of Macedonia, as a transitional solution  Pension Companies and the Custodian shall sign an agreement for custody of assets Note: This transitional solution requires amendments to the Law on Mandatory Fully Funded Pension Insurance which should be adopted before the tender. The procedure is under way.

19. SECOND PILLAR DESIGN 5 Second pillar pension benefits  Part of the old age pension  purchasing an annuity payable for life  participation in a program for scheduled withdrawals

20. EXPECTED EFFECTS Advantages of the system  solvent pension system  increasing national savings  strengthening the investment power  economy growth  increasing the Macedonian labor market efficiency Advantages for the individuals  greater security  risks diversification  transparency of the operations

21. CONCLUSION  Building stable, safe and modern pension system  Gradual reform (from 25 to 50 years)  Balancing the interests of the future generations of with the interests of the current pensioners  Strategy for taking part in the European integration processes

22. Agency for Supervision of Fully Funded Pension Insurance-MAPAS

23. Duties and functions of MAPAS 1 Operate or procure the operation of the tender processes, grant, withdraw and cancel licenses for incorporation and approval for Pension Fund management Supervise the operation of Pension Companies, the Custodian and Foreign Assets Managers: -On site control of all documents and electronic record- keeping -Off site control of all documents and electronic record- keeping

24. Duties and functions of MAPAS 2 Approves all advertising materials of the Pension Companies for the purpose of fair and objective public informing Issues licenses for sales agents and maintains register of sales agents Builds public awareness

25. Duties and functions of MAPAS 3 Suggests penalties procedures Cooperates with local and international institutions Initiates passing of new and amendments to existing regulations

26. MAPAS- Reporting Publishes annual report on the fully funded pension insurance Submits annual report for its operation to the Government of RM which is also submitted to the Parliament for information