Macedonia was one of the latest countries in Eastern Europe to restructure its pension system, having implemented a major reform in 2005. 

Following a model endorsed by the World Bank in many countries in the region, Macedonia adopted a three-pillar system. 

The system consists of a mandatory, fully funded second pillar, which received first contributions in 2006, and a voluntary third pillar, which began in 2009.

Employees contribute 6% of gross wages to second-pillar funds, out of a total pension contribution of 18%. 

At the moment, only two pension companies are operating in the country: KB First Pension Company and NLB Nov Penziski Fond, winner of the 2014 IPE Award for Best Pension Fund in Central & Eastern Europe. 

KB First Pension Company is a joint venture between Slovenia’s Prva Grupo and local Macedonian-owned bank Komercijalna Banka. NLB Nov Penziski fond is a subsidiary of Slovenia’s NLB Group. 

The market is open to the entry of new providers as long as they meet certain capital prerequisites. 

KB First Pension Company manages around €277m of assets on behalf of 200,000 members. Since it begun its investment operations in 2006, the fund has recorded a nominal annual return of 5.59%.  

NLB Nov Penziski Fond had assets under management of €235m and 175,000 members at the end of September last year. In real terms, the fund returned 2.63% from its inception in 2006, versus a 5.35% nominal rate of return.  

Ten years since it was implemented, the reform is seen as a success, but the pension funds are engaged in an on-going dialogue with the government to improve the system.

Davor Vukadinovic, president of the management board of NLB Nov Penziski Fond, believes the Macedonian pension system is a “living organism” in continuous development. 

He says: “The Macedonian pension system, like any modern pension system, needs continuous adaptations and fine tuning in order to meet the contemporary trends that exist in today’s Europe. We are trying to take an active and constructive role in the path of such dynamics.”

Similarly to other countries that have a young system, the diversification of investments is among the priorities for pension funds. 

Janko Trenkoski, general manager of KB First Pension Company, says the asset allocation of his fund is affected by a “strict regulatory environment.” Among the most restrictive measures, funds cannot invest more than 30% in equities. There are also significant limitations to international equity and credit investments. 

Trenkoski also says that one of the most important issues facing the system is the potential impact of credit risk and concentration risk coming from the pension funds’ large allocation to domestic government securities.

Vukadinovic agrees that there is a growing need for “a broader liberalisation of the investment horizon.” He sees a need to allow funds to invest in emerging markets and alternative assets, in order to meet their target returns more efficiently.  

He adds: “We understand the initial caution of the regulator in the initial stage of the introduction of the mandatory pension system when banning the use of derivatives, but today there is no modern risk management without the use of derivative instruments for risk-hedging purposes.”

Trenkoski argues that more diversification should also be offered to individual members, saying that Macedonia should introduce lifecycle options as part of mandatory funds. He says that the ‘multi-fund’ reform has stalled due to other government priorities, but that it is time to bring it back to the discussion table.  

Vlado Georgiev, head of institutional control sector at MAPAS, Macedonia’s pension regulator, says the agency has prepared a project on this theme and is waiting for action from the government.

Georgiev explains that although it would be desirable to implement a lifecycle fund structure, the design of such system needs to take into account the demographics of current members. 

He adds: “Currently, because most members of the system are young, they should be in a more ‘aggressive’ fund. If we design a system comprising an aggressive, a balanced and a conservative fund, we would not have enough assets in the latter two funds.” 

That would raise some cost issues, as well as the question of how to ensure members make the right choice. 

Although the system is going through an accumulation phase, and major outflows are not expected until 2030, the issue of how pensions should be paid to members is also under discussion.  

Georgiev says that according to the current regulation, retirees can choose between drawdown, annuities or a combination of the two. However, there is a shared effort with the insurance supervisor to improve regulation of the annuity market, which is currently very limited. 

Vukadinovic explains that the process of payment of pension benefits from the fully funded system is relatively new, and that “it contains questions that are not described or suitably formulated in the legal framework”.

Georgiev says MAPAS is also focusing on risk, having implemented bylaws requiring pension funds to build intrernal risk-management capacity. The supervisor advises on what areas they should be focusing on, without giving binding instructions.

But, more importantly, pension funds are looking forward to new investment opportunities. The government is trying to maintain positive economic growth levels by attracting foreign direct investment, and the pension funds will be hoping that higher levels of foreign investment in the country may lead to new projects that they can invest in.

Trenkoski says: “Given our rate of growth in assets, in a few years we will be able to make significant investment in infrastructure. We are pushing the government to allow us to invest in infrastructure projects, so that the regulation will be ready when we are.”