Macedonia is one of Europe’s most impoverished countries, with deep-seated political problems stemming from the aftermath of Yugoslavia’s bloody disintegration. Nevertheless, it has prioritised the reform of its pensions system. “Macedonia has certainly been brave in implementing its pensions reforms,” observes Iain Batty, partner at CMS Cameron McKenna, the legal firm that has been advising the government since 1999.
The least economically advanced of the former Yugoslav republics, Macedonia has suffered since independence in 1991 from the UN sanctions against the remaining Yugoslavia (now Serbia and Montenegro), its main trading partner, a period of economic sanctions from Greece over the use of the name ‘Macedonia’, a mass influx of refugees in 1999 following NATO’s attack on neighbouring Kosovo, and ethnic Albanian insurgency in 2001. The most recent conflict stalled much legislation.
On top of this it has faced the same problems as other European countries over the short-term budget costs and long-term sustainability of its pension system. With unfavourable demographics and a high level of bankruptcies increasing the number of beneficiaries while shrinking the workforce, the country has made several adjustments to its state system over the years. These included several incremental rises of the retirement age, from 65 years for men and 62 for women, and extending the service years for calculating the pension base from the best 10 years to the entire working period starting from 1970. The ability to ‘buy’ extra working years was also eliminated. However, these measures in themselves would not have stopped the inevitable insolvency of the state pension fund in the long term. Faced with the prospects of either reducing existing pensions, which would possibly not provide sufficient income for retirees, or raising contributions and thus dampening economic growth, the government opted for a compulsory, privately funded system.
Macedonia’s multi-pillar pensions reform law was finally adopted in April 2002 and is set to start operating at the beginning of 2004. It shares many of the features of legislation elsewhere in the region. The law has provided for an independent pensions regulator, the Agency for Supervision of Fully Funded Pension Insurance (MAPAS), which was established in July 2002.
There is a compulsory element, in this case applicable to workers that enter the workforce on or after January 1, 2003. Other workers will have a year to decide whether they also wish to participate. That depends on the number of working years accrued and salaries, and are preparing a switching model to enable employees to decide whether a transfer is in their best interest.
The scheme is funded by diverting a portion -7% -of the 20% contribution of gross salary that currently funds the state pension. According to official sources, the Ministry of Finance and Pensions Team are currently analysing how to finance the initial shortfall in the state system, the so-called “transition cost,” including debt issuance, transfers from the budget, privatisation revenues or a combination of the three.

The main feature that distinguishes the Macedonian system from other central and east European systems is its initial restriction of the number of pensions providers to two, with provisions in the law against any subsequent merger of the two pensions companies. “Macedonia has imple-mented a system similar to Bolivia’s, where a limited number of providers will be selected by inter-national competitive tenders,” explains Batty. The country is small, with a population of just over 2m, an employed workforce of just 561,000 last year and annual per capita GDP of just $1,835 (E1,714). Unemploy-ment is running at around a third of the workforce.
Officials point out that because of the gradual nature of the reforms, the initially small number of workers obliged to join the system and the resulting small flow of assets, two funds were sufficient for the first 10 years of the system’s operations.
Nor realistically, could Macedonia currently expect a huge level of supplier interest, especially from foreign providers. Political and economic events deterred foreign investors, while the life insurance industry remains extremely underdeveloped even by central and east European standards, with less than 1% of the eligible population covered. The only company licensed to provide life insurance, QBE Macedonia, a subsidiary of the Australian insurer, has issued around 7,500 policies – essentially savings plans with a five to 20 year lifespan. Last years’ life premiums totalled around E1.8m.
In contrast the country has a large number of banks for its size but no recognised custodians, a crucial element in the pensions infrastructure. However, officials say that the banking system has about a year to prepare custodial provision.
The government also intends to work on developing and deepening the local capital markets. The investment regulations governing Macedonian second-pillar funds are similar to those found elsewhere in the region. Permitted investments include: interest-bearing deposits at banks licensed by the National Bank of the Republic of Macedonia; certificates of deposit, bonds and securities, including mortgage-backed securities, issued or guaranteed by such banks (maximum 60%); securities issued or guaranteed by the Republic of Macedonia and the National Bank of the Republic of Macedonia (maximum 80%); and shares (maximum 30%), bonds and other securities (maximum 40%) trading on organised securities markets controlled by the Securities and Exchanges Commission of the Republic of Macedonia. The notable feature is that the authorities have paid some attention to diversification of risk and unlike some other regional pension investment laws, the Macedonian funds will not be permitted to invest the full amount of their assets into government and central bank bonds and related investments.
Foreign investments are limited to 20%, and restricted to bonds, bills and other securities issued by the governments and central banks of EU member states, US and Japan. Funds may also invest securities issued by companies in these countries and trading on national exchanges, and units or shares in authorised mutual and investment funds. Prohibited investments include real estate, other physical, non-tradable assets, unlisted securities, derivatives, and securities issued by the shareholders of the pension fund, custodian or their affiliates. Although the 20% foreign investment may seem restrictive in the light of Macedonia’s existing capital markets, officials point out that there will be more than adequate domestic assets, certainly in the first year of the funds’ operations. In any case, most of the central and east European private pension funds have invested the larger part of their portfolios in their country’s government bond market, regardless of the foreign investment limit.