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Legislation Publications Pension models About project Statistics
Legislation Publications Pension models About project Statistics

1. Introduction

2. Actuary expertise
2.1. Contents of the actuary expertise
2.2. Actuary control cycle
2.3. Actuary expertise tools

3. Basics of the pension legislation of the Republic of Moldova
3.1. General principles
3.2. Social insurance contributions and taxable basis
3.3. Pension types and conditions of their assignment
3.3.1. Old age pensions
3.3.2. Disability pensions
3.3.3. Survivors pensions
3.3.4. Pensions to some categories of citizens
3.3.5. Social pensions/benefits
3.3.6. Pensions paid from the state budget
3.4. Minimal pension and guaranteed minimum
3.5. Pension formulas
3.6. Pension indexation

4. Demographic situation in the Republic of Moldova
4.1. Dynamics of population number and sex/age structure
4.2. Birth rate
4.3. Mortality and life expectancy
4.4. Marriage and divorce rates
4.5. Population natality and reproduction
4.6. Demographic forecast

5. Current macroeconomic situation
5.1. Tendencies of population economic activity
5.2. Development of basic forecast

6. Background information on pension insurance
6.1. Number of pensioners
6.1.1. Analysis of the number of pensioners
6.1.2. Distribution of the number of pensioners by pension types
6.1.3. Sex/age number of pensioners
6.2. Pensioner’ standard of living
6.2.1. Average size of pensions
6.2.2. Compensation of lost wage
6.2.3. Gender differences in pension sizes

7. Modeling outputs

8. Outputs and perspectives of the development of pension system of the Republic of Moldova

9. Annex: Analysis of the risks of the Non-Financial Defined Contribution (NDC) and Financial Defined Contribution (FDC) pension systems
9.1. Principles of the design of NDC pension system
9.2. Principles of the design of FDC pension system
9.3. Experience of applying FDC schemes
9.4. Comparison of NDC and Funded schemes




Pension system of the Republic of Moldova: actuary expertise

Principles of the design of NDC pension system

The scheme of NDC accounts was created in the ‘90th of the last century. The first country, which applied in practice this scheme is Sweden, then Italy, Poland, Latvia, Russia, Kyrgyz Republic, Mongolia. Now several countries consider the possibility of using this scheme in their pension insurance systems as Austria, Spain, Czech Republic, Japan and others.

According to this scheme, each participant of the pension system is assigned a NDC account on which its contributions and the calculated conditional investment income are registered. M. Gora and E. Palmer, as authors of the Polish, Swedish and Latvian pension systems based on NDC scheme, identified the following main characteristics of the NDC scheme1:

  • Based on individual wages the contributions form conditional accumulations on individual accounts.
  • On the account at the end of the reported period the yield rate is added, which is based on the increase of the amount of paid pension contributions.
  • The accumulated amount is reorganized in a life pension at the retirement date.
  • The amount of pension (annuity) is calculated based on the conditional accumulated capital and residual life expectancy at the retirement date. The pension size is subject to indexation. A condition for the financial stability is that the used index must not exceed the speed of the increase of the amount of paid contributions.
  • Demographic reserves are created.

E. Palmer, considered the author of the current system of NDC accounts, formulated the following main goals of the pension reform, achieved by introducing the NDC2:

  • Equity in relation to people with different history of contributions.
  • Transparent redistribution.
  • Financial stability in the conditions of demographic and economic change.

The equity in relation to people with different history of contributions is achieved due to the fact that the pension size is determined by individual contributions of each pensioner, as well as by the expectancy of pension reception.

Note. The principle of equity in relation to people with different history of contributions is broken by the existing guarantee to minimal pension in the pension systems of Sweden, Poland and Latvia. The minimal pension can also be obtained by those, whose contributions were not enough for this pension and those who paid not much as their contributions were not enough for a minimal pension.

The transparency of redistribution in the NDC schemes is achieved by the fact that this redistribution is financed from the common budget resources or special funds, aimed for this purpose, but not at the account of contributions for a NDC pension. The NDC pension is an old-age pension. Other pension types, especially the disability pension paid up to the achievement of the established pension age, should be financed from special funds. Along with the transparency the division of redistributive tasks and old-age pension insurance allows to achieve the third goal – financial stability in the conditions of the demographic and economic change. The NDC pension, formed according to the theory, is characterized by long-term financial stability and requires only small corrections. For this purpose the Swedish legislation envisages the system of annual balancing of the NDC part of the pension.

However, the long-term financial stability of the NDC pension does not mean the annual balance of contributions and payments. From year to year as result of demographic fluctuations the proficit or deficit of pension contributions could take place. The necessity of creation of demographic reserves is related to this.

Let’s examine again the issue of long-term stability – accomplishment of duties – of the NCD pension and consider the issues, related to the:

  • Not-working periods – leave for taking care of a child, military service, disease, unemployment etc.
  • Guarantee to minimal pension
  • Disability
  • Death of the insured person before the achievement of the retirement age.

In order that the non-working periods contribute to the NDC old age pension, the pension contributions should be paid for these periods. Therefore, during non-working periods the law should envisage pension payments to be paid from the state budget or special funds.

The guarantee to the minimal pension means the payment of the difference between the gained pension, calculated based on paid pension contributions and investment income, and minimal guaranteed pension size. To pay this difference from the NDC pension system funds, the required means had to be taken from other pensioners, since there are no other means. Therefore, the extra charge to the minimal pension size should be financed from other sources – state budget or special funds.

Upon determination of the disability until the achievement of the retirement age, the pension is paid up to the achievement of the retirement age. The size of conditional accumulations can be very small and the NDC pension calculated on its basis shall be very small. Where to take means for pension payment? The answer is the same – from the state budget or specialized funds. More than that the person can recover and the disability group shall be taken. If during the incapacity period the contributions were not paid to the NDC system, the NDC pension shall be very small. Therefore, the disability period could be considered as “non-working period” and stipulate the payment of pension contributions from the state budget or specialized funds.

Examples of inheriting the conditional capital in case of the death of the insured person until the achievement of the retirement age are not known, however, in principle, this does not contradict anything. Therefore, the wife could inherit the conditional accumulations of the husband.

Actuary risk of incorrect determination of the NDC parameters

Despite the fact that NDC is a quite transparent system, characterized by an obvious relation between the contributions and payments, the exact determination of the parameters of its functioning is a difficult actuary task. This is related first of all to the following moments:

  • The implementation of the NDC requires the evaluation of the initial conditional capital: pension rights, gained in the old system. The size of the initial conditional capital should reflect the difference in the history of payers’ contributions and should be determined based on the wage and length of service for the period before the reform. In practice, the evaluation of the initial capital is a quite difficult task, since the mistakes in the evaluation of this parameter could not be evident at once and break the financial stability of the pension system in a middle and long-term perspectives. So, in the experts’ opinion, one of the reasons of long-term deficit of NDC in Russia is the super-evaluation of the initial conditional capital.
  • A great influence on the stability of the system has the formula of pension and conditional accumulations’ indexation. Any deviation from the classic indexation scheme, such as additional indexation or change of the indexation scheme, should be carefully examined. Particularly in Russia, the indexation formula takes into account not only the increase of the contributions basis in the NDC, but also the change of the number of pensioners. What influence shall have on the stability of the system this correction under changing demography, the time shall show.
  • It is necessary that the NDC do not cover the unusual risks, for example, disability risk, as it is characteristic for Russian NDC. For the insurance of the disability risk, it is necessary to use other schemes, which should envisage transfers to the NDC for disabled person during disability periods. This allows the disabled person in case of rehabilitation to receive a NDC pension in an acceptable amount. The detailed description of the schemes to be used for the insurance of the disability risk is not the purpose of this work.
  • The long-term financial stability of the NDC does not mean the annual balance of contributions and payments. To smooth the influence of demographic fluctuations, the demographic reserves are created. The evaluation of the amount of these reserves is not a simple task, since it is related to the forecast of uncertainties of future development of demographic situation.

1. Marek Gora and Edward Palmer. Shifting Perspectives in Pensions.  It is not published. On the web-site of the World Bank the perfected version of the article was placed under the same name; this text was not included in this version.

2. Palmer, E. (2000), ‘The Swedish pension reform model: Framework and issues’, World Bank Pension Primer, Washington D.C.


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