Budgetary aspects of the Macedonian Pension Reform

Zorica ApostolskaDirector, MAPAS

April 9, 2008 Bucharest

Agency for supervision of Fully Funded Pension Insurance (MAPAS)

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)

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.

PAYG DBFully funded DC

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 factorso Unfavorable economic and

labor market developments

o Contribution evasion Demographic factors

o Ageing of population

Decrease of the number of contributors

Increase of the number of pensioners

Expected insolvency of the Public Pension and Disability Insurance Fund

Actuarial projectionsPopulation 60+ / Population 18 - 59

0

200000

400000

600000

800000

1000000

1200000

1400000

2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100year

num

ber

0%

10%

20%

30%

40%

50%

60%

70%

prop

ortio

n population 18 - 59

population 60 +

proportion

Actuarial projections Ratio contributors / pensioners

0

100000

200000

300000

400000

500000

600000

700000

2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100year

num

ber

0.0

0.4

0.8

1.2

1.6

2.0

prop

ortio

n contributors

pensioners

proportion

Actuarial projections(Contributions – Pensions) / GDP

-8%

-5%

-2%

1%

4%

7%

10%

13%

16%

2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100year

perc

enta

ge

incomes

expenditures

surplus (deficit)

Parametric reforms of the Macedonian pension system

Features of the system that influence its flexibility

Retirement ageo Increase in the retirement ageo Age exclusive conditiono Termination of early retirement provisions

Decrease of the replacement rate Change of pension indexation method

Sustainable contribution rate and replacement rate

0%

10%

20%

30%

40%

50%

60%

70%

2001 2020 2040 2060 2080 2100

year

perc

ent

contribution rate replacement rate

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

For the system Solvent pension system

Increasing national savings

Strengthening the investment power

Economy growth Increasing the

Macedonian labor market efficiency

Design of the reformed pension system and its expected effects (cont.)

For the individual Greater security of the

pension

Risk diversification

Transparency of the operations

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

Transitional deficit (cont.)

-2.0%

-1.0%

0.0%

1.0%

2.0%

1998 2008 2018 2028 2038 2048

pessimisticbase caseoptimistic

How can we control the deficits? Measure the transitional deficit Set the maximum acceptable level of the deficit Design the system to fit that levelFirst 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

Transitional deficit (cont.)

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

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

Preparation and Implementation (cont.)

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