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PENSIONS IN CEF COUNTRIES AN OVERVIEW DUAN KIDRI UMAR/IMAD

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Duan KIDRI Transitions from one complex and federal state to single independent states (for some countries) Not completed jet socialist to parliamentarian political system no market to market economy war to peace Completed (?) public obligation to private responsibility for social security

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Duan KIDRI Implications touching pensions in transition countries Decrease in activityall Less insured personsall Increase of informal activity employmentall Evasion of contribution paymentall Decline of revenues disposable all Increase of beneficiariesall Pension arrearssome Reduction of pension benefitsall Same pension providers (institutions) Mainly Unchanged way of operatingMainly Distrust in current pension systemsome

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Duan KIDRI Population, retirement

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Duan KIDRI Responses to the situation Pension reforms New concepts Political and social discussion Parametrical adjustments (tightenining) New forms of pension provision and practice International assistance

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Duan KIDRI Political and social discussion on concepts New ones Empowering Individualization Poverty alleviation Actuarial fairness (Pre)funding Diversification Traditional ones Redistribution Solidarity Earning based rights Social justice PAYG Equalization

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Duan KIDRI Reforms adopted

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Duan KIDRI Parametric changes Rising statutory retirement age Range 62 to 65 for men Range 56 to 65 for women Reduction of yearly accrual rate For 0 to 0,5 percentage points Enlarging qualifying period Range from18 to 40 years Increase (reduction) of pensions when retired later (earlier) From 0 (non existing) to 3,6% per additional (missing) year

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Duan KIDRI Parametric changes Capping the benefits and contributions All possible combinations Invalidity adjustments More severe conditions Indexation of benefits Les generous, more complicated Opening the scale of total accrual rates Yes and not Instruments for achieving actuarial neutrality Not many (one certainly)

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Duan KIDRI Main data ALBBIHBGRHRVMKDMDAROM MNG *SRB*SVN gdp/capita in US$ 2.6772.3983.4428.4182.8336914.556 3.31317.030 population in thousands 3.1493.8437.6794.4422.0433.58121.624 7.5332.001 population/pensions5,847,553,384,267,595,854,800,005,994,10 life expectancy at birth W (years) 78,60 76,3079,0075,8871,7075,4775,0075,4081,30 legal retirement age W (at the end of transitory period)606560 625760 61 life expectancy at birth M (years) 72,1 69,172,071,463,868,271,070,074,1 legal retirement age W (at the end of transitory period)65 6365646265 63

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Duan KIDRI Two gender specific systems

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Duan KIDRI Legal retirement age and life expectancy

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Duan KIDRI Adjustment of benefits and indexation of pension base Variety of rules

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Duan KIDRI Level of benefits Generally very low Less than 50% of average wage Minimum benefits (minimum pension, guaranteed pension) still lower Around one third of average pension Distribution of pensions Concentration on the lower classes

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Duan KIDRI Low coverage

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Duan KIDRI Fiscal elements current situation Less contribution revenues than obligations (except in case of FBiH) in pension systems Need to budgetary transfer Contribution rates and contribution bases different from country to country and even in the same country ALBBIHBGRHRVMKDMDAROMMNG * SRB * SVN 24,0 % 23,0 % 20,0 % 21,2 % -29,0 % 21,6 % 22,0 % 24,4 %

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Duan KIDRI Some elements for assessing long term perspective Demography (Problems with population census) Ageing Life expectancy will (with high probability) increase Fertility rates are low Migration will cause shortage of labor supply Economic performance Integration in a larger economic area Catching up the neighbors Foreign direct investment Better utilization of domestic resources Peace

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Duan KIDRI Some social phenomena to be taken into account Social stratification Poverty Low pension benefits Low coverage Enrichment In the privatization process New monopoles Free movement of people Social cohesion and social in(ex)clusion Older workers Heavy adaptability Elderly people Alone and not enough support From family Systemic Health services provision

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Duan KIDRI Fiscal elements long term perspective The contribution rates could hardly be increased The share of contribution revenues will decline or in best option remain the same as it is now The amount and share of pension obligation will increase Due to ageing of population Due to non possible reduction of current level of pension benefits The difference between obligations (liabilities) and revenues (assets) will increase

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Duan KIDRI Pension reform (mainly financial) answers Introduction of explicit funding Mandatory as a II. Pillar according to WB classification Croatia, Macedonia, Bulgaria, Romania, Kosovo, Voluntary All except BiH Introduction of a NDC for a first mandatory pillar In consideration in many countries

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Duan KIDRI Explicit funding The chicken / egg phenomenon Underdeveloped financial market New and not enough financially solid domestic intermediaries Lack of expertise Very few domestic financial instruments Low premiums High initial cost Bad country risk rating High fees and low return on available instruments Regulatory and supervisory problems

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Duan KIDRI Members in the new pension schemes At the end of 2006 more than 5 millions persons are included in mandatory or voluntary (pre)funded pension schemes Most of them in Bulgaria and Croatia Macedonia Slovenia in a voluntary (but mainly collective) pensions schemes In the 2006 and 2007 is expecting to start (or started yet) in many other countries

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Duan KIDRI Pension reform (less financial and more social ) answers Enlargement of state subsidies For non insurance based benefits Maternity leave Military service Veterans Introduction of a state (social) pension as a universal benefit in the old age zero pillar Redefinition and redesigning of existing minimum benefits in pension and social assistance systems Possible reduction of pension contribution as a part of labor cost

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Duan KIDRI Conclusions Parametric reforms were introduced and the new parameters gave the possibility to master current fiscal problems Politically the reforms are always under revision; they are many signs that some parameters are not any more sympatric to politicians To cope with long term fiscal sustainability, the reforms have to open new instruments to strengthen the individual responsibility and make clear consequences for individual decisions The pension providers have to supply better and accurate information of individual and common (societal) pension situation

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Duan KIDRI Conclusions Mandatory redistributive part of the pension system has to rethink the philosophical bases of social insurance Is the limitation of solidarity exclusively on formally employed persons and on those with achieved (prescribed) work history still sufficient? Could be social cohesion and general taxes as revenue the rationale for enlarging the eligibility criteria The new forms of calculating pension base seem to be more convenient to changed and changing world The NDC system is one of newly introduced type, which could serve also for financial literacy purposes in (pre)funded schemes

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Duan KIDRI Conclusions Explicit funding (second and third pillar) have the same logic and limitations The length of saving period has to be as long as possible; in connection with social insurance part both are interested on prolongation of activity The premium or contributions have to be greater then currently are. The complementary nature of supplementary pension insurance will fulfill the expectations only with sufficient assets on individual accounts The new pension providers must have in mind that fees and costs are essential for social acceptance of them If the sentence Get reach slowly is valid for pension saving, the same must be observed from new financial intermediary