Presentation of the Macedonian Pension

Reform

March 2004Zorica Apostolska

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Agenda Pension Reform Information Tender Process Pension Companies and Fund

Operations Financial Projections Timetable

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Pension Reform, System Structure Solidarity (first pillar): old-age,

disability and survivor insurance Mandatory accumulation system

(second pillar) Voluntary accumulation system

(third pillar): Will be developed in future

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Pension Reform, Key Institutions Ministry of Labor – Responsible to

government and Parliament for pension program

Pension and Disability Fund – Administers solidarity system. Collects contributions for both systems

Pension Supervision Agency – Regulates and supervises mandatory accumulation system

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Pension Reform, Who Will Enter New System? Mandatory: New labor force entrants on

or after January 1, 2003 Right to choose: All employed curent

contributrs Switching decision

Gradual switching, Law encourages those with short service

For voluntary switchers maximum of 5 years service under old system

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Pension Reform, Contributions Scheduled effective date for

splitting contributions for the 2nd pillar: June/ July 2005

Contributions to each pillar: Solidarity, 13% Accumulation system, 7%

Contribution collection process: PDF collects and allocates for both pillars

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Pension Reform, Expected Benefits Retirement ages: 64 men, 62 for women Solidarity benefit based on average net

wage and years of service Target replacement ratios for man with

40 or woman with 35 years of service Non-switchers: decreasing from 80% to 72%

(gradually in 40 years) of net salary Switchers: 30% from solidarity, plus benefit

from mandatory accumulation system (total of 70-80% of average net salary expected)

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Pension Reform, Tender Process In the Republic of Macedonia in the first 10

years will be granted two licenses to establish Pension Companies, selected on an international public tender

Bidder’s conference planned in Skopje in mid-May 2004

Tender scheduled for release at end of May 2004

Two-step decision process Pre-qualification Economic bid

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Pension Reform, Pension Companies Requirement for Pension Company

Founders (legal entities) Each Founder must have minimum paid-up

capital of 20 million Euros or more Must have been in existence for 3 or more years Must be solvent Experienced and competent management Minimum investment grade rating from

reputable agency (non-Macedonian companies only)

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Pension Reform, Pension Companies Shareholders – Domestic and

foreign legal entities that will meet the conditions

Legal entity can only be shareholder in one Pension Company

51% of share capital must be held by banks, insurance companies, or other financial institutions

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Pension Reform, Pension Companies Each Pension Company manages one Pension

Fund; Each member may choose only one Fund Share capital not less than 1.5 million Euros.

Additional 1 million Euro of share capital is required for every 100 million Euro increase in assets;

Own capital must always exceed 50% of share capital

Share transactions require Agency consent Pension Company can’t merge, separate, or

reorganize

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Pension Reform, Pension Company Finances Fees (Revenue)

Percent of contributions (determined through tender process)

Percent of assets (fixed at 0.05% per month) Fee for members who transfer (in limited

circumstances) Expenditures

Own operations Fees to PDF and Agency Custodian

Brokerage costs and fee as a percent of assets paid directly from Pension Fund

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Pension Reform, Investment Limits

Foreign investments (EU, Japan, USA)

20%

Securities guaranteed by GoM or NBM

80%

Macedonian bank deposits and securities

60%

Macedonian corporate bonds and paper

40%

Macedonian equities 30%

Macedonian mutual funds 20%

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Pension Reform, Investment Prohibitions

The Law prohibits investing in: shares, bonds and other securities that are either unlisted or not publicly traded; real estate etc.The Pension Company is not allowed to invest the Pension Fund assets in securities issued by any shareholder of the Pension Company; the Custodian of the Pension Fund; the Foreign Asset Manager and any person who is an Affiliated Person to approve loans and guarantees from the assets of the Pension Fund

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Pension Reform, Custodian The Custodian of the Pension Funds assets shall

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 of

the Law on Mandatory Fully Funded Pension Insurance

which should be adopted before the tender. Theprocedure is under way.

Financial Projections(65,000 Switchers, Medium economic growth)

Contributors

(thousands)

Contributions

(million Euro)

Total Assets(million

Euro)

2005 66,017 17.5 17.5

2006 76,783 21.4 36.5

2007 89,123 26.3 63.5

2008 102,587 31.9 98.2

2009 115,790 38.1 141.6

2010 131,135 45.2 195.5

2011 147,365 53.6 261.9

2012 164,662 63.2 343.3

2013 183,042 74.2 442.1

2014 202,274 86.5 561.3

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Financial Projections(100,000 Switchers, Medium economic growth)

Contributors

(thousands)

Contributions

(million Euro)

Total Assets(million

Euro)

2005 100,891 26.7 26.7

2006 115,657 32.3 55.3

2007 132,328 39.0 95.6

2008 150,082 46.7 146.6

2009 166,841 54.8 209.6

2010 186,090 64.1 286.8

2011 205,905 74.9 381.0

2012 226,614 87.0 494.9

2013 248,220 100.6 631.6

2014 270,333 115.7 794.7

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Expected Timetable

Event DateFinalize regulations April 2004

Bidders conference in Skopje

Mid-May 2004

Issue tender End of May 2004

Pre-qualification decision Mid-August 2004

Final license decision End of November/Early December 2004

Incorporate Pension Companies

January 2005

Begin marketing March 2005

Begin contributions June/July 2005