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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 FDC pension system

The mandatory FDC insurance has begun to be widely used in the countries of Latin America, beginning with Chili in 1981, then Argentina, Peru, Columbia, Mexico, Uruguay, Bolivia etc. The example of the countries from the Latin America was taken by several European and Asian countries: Bulgaria, Kazakhstan, Poland, Russia, Croatia, Hungary, Latvia and Lithuania. Thus, the experience of the FDC pension insurance is greater than of NDC.

The mandatory FDC pension insurance consists of two stages – accumulation and payments.

  • CPF deals with accumulations. The accumulation stage is organized according to the scheme of fixed contributions. However, in some countries guarantees to minimal accumulations/minimal income are established.
  • The payment of pensions (annuities) is the responsibility of insurance companies – any company dealing with life insurance or specialized annuity companies.

According to the rules of the scheme of mandatory FDC pension insurance, each participant of the pension system is assigned an individual accumulative account on which its contributions and investment income are registered. Compared to NDC the accumulation does not take place “conditionally”, but actually, therefore the workers’ contributions are invested by means of financial markets and are not used for payment of current pensions.

The FDC pension, based on individual accounts, is not characterized by deficit or proficit provided that:

  • at the stage of contributions accumulation the profitability, actually gained by the pension scheme, is added1;
  • the pension size is calculated at the retirement date based on the residual life expectancy of the pensioners;
  • at the payment stage the pension is indexed resulting from the actual income gained by the pension scheme.

Thus, under the accomplishment of all these conditions the FDC pension is characterized by long-term financial stability, meaning its capacity for accomplishment of its responsibilities without involving additional means or increase of contributions. Certainly, this does not mean the equality of summary annual contributions and payments. At the initial stage of system functioning the payments do not exist at all.

The main goals of the pension reform, achieved due to the introduction of mandatory FDC pension, have something in common with the goals of the NDC. These are the growth of the motivation for contributions payment, transparent redistribution, financial stability of the system in the conditions of demographic and economic changes.

Another advantage of the FDC pension system, in the opinion of its ideologists, is that the pension accumulations could stimulate the development of financial markets and contribute to the general economic development.

Risks related to investments profitability

The profitability of investments is a very important parameter, determining the efficiency of the introduction of the FDC pension. It is to be mentioned that from the point of view of pension system it is not important the nominal profitability, but the value of exceeding by the investments profitability of the level of wage growth.

Table a1
Increase of the wage and profitability of state bonds and shares in actual values (deducting inflation)2, 1953-199s5, %

 

Germany

Japan

Great Britain

USA

Wage

4.8

5.2

3.6

1.0

State bonds

3.9

3.8

1.0

2.3

Shares (quoted on the stock exchange)

10.1

10.8

10.8

9.8

The data from the Table a1 show the lack of direct dependence between the speed of the increase of wages and investment profitability. On the contrary, they demonstrate the statement, based on the theory of the curve of purchase capacity parity, that the real (as shares) investments have a close real profitability in a long-term perspective.

The investments profitability is a factor difficult to be forecasted. Along with macroeconomic indicators it shall also depend on the regulation of pension investments. The Table a2 presents the historical data on profitability of various types of investments.

Table  a2
Average profitability of various types of investments in Great Britain

Type of investment

1899-2000 (%annually)

1975-2000 (% annually)

1990-2000 (%annually)

Nominal

Actual

Nominal

Actual

Nominal

Actual

Shares

9.7

5.5

17.5

10.5

15.0

11.8

State bonds

5.1

1.1

13.1

6.4

12.6

9.4

Indexed state bonds

-

-

-

-

9.3

6.2

Bank deposits, promissory notes etc.

5.0

0.9

10.0

3.5

7.2

4.2

Inflation of retail prices

4.0

-

6.3

-

2.9

-

From the above-mentioned data it could be seen that the profitability of shares is higher than the profitability of other investments types. In this relation it is obviously to expect from the pension funds high investments in shares. However, the analysis of the actual investment experience in different countries does not confirm this3.

Table a3


Country

Investments in shares, %

Investments with fixed profitability, %

Great Britain

78

14

USA

62

27

Ireland

58

30

Australia

41

15

Belgium

40

46

Brazil

38

38

Peru

35

60

Canada

28

48

Chili

28

68

Sweden

28

62

Argentina

27

70

Denmark

27

63

Netherlands

26

63

Switzerland

14

69

France

14

38

Austria

13

71

Germany

8

74

Italy

8

63

Spain

5

76

From the Table a3 it is seen that in Great Britain, USA and Ireland the shares are actually the main (prevailing) type of assets, however in other countries they are not. It is also to be mentioned that in many developed countries of the continental Europe (Switzerland, France, Germany, Italy etc.) a quite modest share of assets are invested in shares. The main reasons of this situation are great fluctuations of prices to enterprises shares.

The state pension funds have a more reserved attitude towards the use of shares. The research, carried out by the specialist of the Economic expert group E.L.Hotulaev4, who used the data on the structure of investment portfolios of the state pension funds from various countries, demonstrates that the majority of funds use as the main financial tool for investments the Government bonds and bank deposits. The average value for this tool according to the studied aggregate amount constituted 75%. On the second place are the loans, mortgage bonds on the security of property. They constitute in average about 14% in the structure of investment portfolios. Investments in property are on the third place – 8%. Investments in shares constitute only 3%, however, in the author’s opinion, and we cannon but agree with him, such insignificant share of the most profitable financial tool in the structure of investment portfolios of the state pension funds is related first of all to the rigid regulation of investments by the state. The detailed information on the structure of investment portfolios in various countries is presented in the Table a4.

Table a4
Comparative characteristics of the structure of investment portfolio in various countries

Country

Year

Government debt securities
Deposits

Loans Mortgage bonds on the security of real estate

Shares

Real estate
Other assets

Canada

1991

100

0

0

0

Egypt

1995

100

0

0

0

Pakistan

1981

100

0

0

0

Sri-Lance

1997

100

0

0

0

Switzerland

1997

100

0

0

0

USA

1997

100

0

0

0

Yemen

1996

100

0

0

0

Columbia

1982

100

0

0

0

India

1995

100

0

0

0

Venezuela

1981

100

0

0

0

Nigeria

1980

96

3

1

0

Senegal

1980

93

6

1

0

Jamaica

1987

91

9

0

0

Tanzania

1996

90

0

0

10

South Korea

1997

89

3

3

6

Rwanda

1980

82

4

5

8

Ethiopia

1996

80

0

0

20

Costa-Rica

1987

79

15

0

6

Burundi

1981

78

9

6

8

Peru

1988

76

7

0

17

Kenya

1994

73

0

11

16

Japan

1995

63

17

19

0

Malaysia

1996

63

21

15

1

Morocco

1994

58

32

7

3

Cameroon

1989

57

40

2

1

Maverick

1996

56

0

2

42

Jordan

1995

52

25

17

6

Philippines

1995

44

38

10

8

Tunisia

1990

43

30

0

27

Sweden

1996

42

40

0

18

Sudan

1982

26

58

0

16

Ecuador

1986

10

83

3

3

Average value

 

75

14

3

8

Source: Iglesias, Palacios (2000)

As show the research of the same author, the conservative investment portfolios of the state pension funds are characterized by low profitability, as a rule. From 22 state pension funds from different countries, studied by this author, only 10 had positive real profitability for the studied period. The level of this profitability was not very great: it varied between 0,8% to 5,4%. Only in two countries (South Korea and Malaysia) this profitability exceeded the actual profitability of bank deposits. Therefore, it should be considered right the conclusion of the author that under these conditions the investments of population in the State pension fund are less attractive than the deposits of credit entities. The data on the profitability of investment portfolios of state pension funds are presented in the Table a5.

Table a5
Profitability indicators of the investment portfolio of State pension funds and bank deposits

Country

Reported period

Actual profitability*, %

Actual profitability of bank deposits*, %

South Korea

1988-97

5.4

2.9

Malaysia

1958-96

3.2

3

Morocco

1985-96

2.3

2.5

Sweden

1961-95

2.1

0.9

USA

1955-96

3.4

1.7

Canada

1971-89

1.8

2.6

India

1977-97

1.6

1.3

Singapore

1961-95

1.5

1.1

Japan

1970-94

1.4

-1.6

Philippines

1978-91

0.8

-0.4

Sri-Lance

1960-97

-0.3

2.8

Kenya

1978-90

-3.9

-1.3

Jamaica

1979-86

-4.5

-4.3

Guatemala

1985-95

-4.9

-1.9

Costa Rica

1980-96

-5.0

-2.3

Egypt

1981-95

-9.1

-3.7

Ecuador

1980-87

-9.3

-5.6

Tanzania

1986-96

-11.2

н.д.

Venezuela

1079-89

-15.3

-8.6

Zambia

1980-91

-28.5

18.4

Uganda

1986-94

-33.1

-22.7

Peru

1981-87

-44.0

н.д.

Average**

 

-6.7

-2.6

* Cumulative value, % annually

 

 

 

** Simple (non-considered)

 

 

 

It is to be mentioned that the structure of the investment portfolio depends not only on the restrictions imposed by the state to the investment of pension accumulations, but also on the development of the securities market. If the capital market is not developed, that is specific for developing countries, the choice of financial tools is limited, and there is no possibility of efficient investments of funds in the country. The limitation of financial tools does not allow forming a profitable investment portfolio that lead to lost benefit and has a great social cost, because it reduces the future pension size.

In this relation it is interesting the experience of Russia, which implemented the FDC component of the mandatory pension system. The Russian history of the investment of pension accumulations is quite short-lived. The federal law no.111-FL on the investment of funds for financing of the FDC part of the working pensions in Russian Federation was adopted on July 24, 2002. According to the legislation Vnesheconombank and private management companies have the right to deal with the investment of pension accumulations. It is to be mentioned that only 6,7% of all pension accumulations are managed by private management companies, the rest is managed by Vnesheconombank, since the majority of insured persons did not show any initiative related to the selection of the investment portfolio.

Vnesheconombank, as a state management company, is limited in selecting the investment tools. The bank has the right to use only the state securities that is reflected on its profitability outputs. The private management companies have a free choice that allows to some of them have a quite high profitability. The data on the profitability of investments of Vnesheconombank and ten well known management companies are presented in the Table a6.

Table a6
Results of the management of pension accumulations

Management companies

Annual profitability, %

2004

2005

2006

Vnesheconombank

7.33

12.07

5.67

UNIVER Management

-1.75

36.76

39.17

Gold trust

-0.17

29.61

17.86

UralSib - Capital Management

0.27

35.3

33.87

UralSib

0.64

36.16

31.45

Trust Capital

2.12

26.49

35.74

Pallada Assets Management

3.91

21.52

16.75

Alfa-Capital

4.31

11.69

18.24

Aton-Management

4.48

20.69

19.80

Troika Dialog

-4.1

51.72

31.81

Region assets Management

3.03

15.16

11.96

 

 

 

 

Source : http://www.npfunds.ru/
Examining the first results of the administration of pension accumulations it could be pointed out to the instability of the behavior of the investment profitability index. This is specific for both state and private management companies.

As it was above-mentioned the investment profitability is an index, which is difficult to be forecasted and is subjected to serious fluctuations. In order to evaluate the influence of the change of this index on the amount of FDC pension in perspective, the retrospective analysis of the dynamics of its development was carried out. It is known that in a long-term perspective the average level of actual full profitability of shares (dividends plus growth of the cost) is rather similar in different countries5, therefore, in order to have an idea on the possible influence of the instability of investment income on the size of FDC pension, the foreign data could also be used. In this case the data of USA (from 1871 to 1995) and Canada (from 1924 to 2000) were used6.

It is to be mentioned that the average geometric values of the profitability of American and Canadian shares for the above-mentioned periods were close to 7% (6,9% for American shares and 7,1% for Canadian).

The high level of the dispersion of possible values of the size of FDC pension is determined by the variability of investment profitability. The Picture a1 presents the full7 actual profitability of shares and long-term (15 years) bonds. On the picture it is seen that the full actual annual profitability of investments varies widely: from –40% to +54% for shares and from –18% to +35% for bonds.

Picture a1. Full actual profitability of shares and bonds, %

The fluctuations of the average profitability for long periods are also considerable. For example, the Picture a2 presents the average profitability of investment in USA shares for various (20-40 years) periods – the abscissa axis shows the year of completion of the corresponding accumulation period, which corresponds to the year of retirement of the next cohort of workers. It is seen that the fluctuations of the average profitability are great – for the USA shares even for a period of 40 years of accumulation the average profitability varies from 3.8% to 9.4%.

Picture a2. Average profitability of shares for accumulation periods of 20, 30 and 40 years8, %.

Thus, it is not doubtful that the profitability of shares is considerably higher than the profitability of other investments, however, the cost of shares is subjected to serious fluctuations. The Picture a3 presents the data on the decrease of the index of shares on the New-York stock exchange, occurred after the oil crisis, related to the creation of OPEC. As it could be seen from the graph the level of the index (in actual costs!) was recovered only after 12 years!


Picture a3

Examining the influence of the investments profitability on the efficiency of the FDC components of the pension system, it should be taken into consideration that the investments profitability at the accumulation stage and at the stage of pension payment could be different. This is related to the differences in the regulation of pension accumulations at these stages, as well as to the fact that different financial institutes could deal with pension accumulations and payment. For example, the CPF could deal with accumulations, while insurance companies – with pension payment9.  

The insufficiently studied issue remains the issue of the influence of the fluctuations of profitability and economic crisis on the size of accumulations to the mandatory FDC pension system. Below you will find the brief results of the imitation example, describing the influence of the fluctuations of profitability and crisis periods on the size of individual FDC pension. Under the conditions of the example it is envisaged that the basis for the calculation of FDC pension contributions is the salary in the Republic of Moldova. The fluctuations of investment profitability are forecasted using the historical data on USA shares’ profitability. The calculations were carried out by means of a specially developed individual stochastic model, based on the methodology of stochastic profitability modeling and crisis modeling, developed by the Independent Actuarial Information- Analytical Center 10.

The Picture 4a presents the dynamics of the size of pension accumulations with 5% one-sided trusting intervals for the man, entered into the FDC system at the age of 20 with the salary equal to average salary in the country and being retired at the age of 62. The calculation was carried out by supposing that the average size of investment income and its average quadratic deviation constitute 5% and, correspondingly, 0,171 (the values of these parameters correspond to the historical data, specific for USA in non-crisis periods). As it could be seen on the picture the dispersion of the possible sizes of accumulations and correspondingly of pensions is quite considerable.

The Pictures a4 b - a4 c show the influence of the economic crisis and the date of its beginning (in relation to the retirement date) on the size of pension accumulations. For comparison of results the calculations were carried out using the same values of the parameters as in the previous example. The model of the economic crisis identical to that occurred in USA in the period of the great depression was carried out (the average profitability value in the crisis period constituted 16,9%). Two variants of crisis beginning were examined: 5 years (Picture a4 b) and 15 years (Picture a4 c) before the participant retirement. For comparison this set of graphs includes the modeling outputs, when the accumulation period was not characterized by economic crisis (Picture a4 a).


a

b

c

Picture a4

The modeling outputs correspond to the intuitive idea of the negative influence of the economic crisis on the FDC pension systems and particularly on the size of pension accumulations. The most unfavorable output is when the crisis occurs in pre-pension years. In this case the participants could lose more than 50% of their pension accumulations.

Issue of concealed pension debt

The concealed pension debts represent the costs of accumulated rights of the pensioners and workers in the old pension system. Under the transition of the country with considerable pension debts from the distributive system to the multi-level system, including the FDC component, the part of contributions are often targeted to individual accounts. Due to this a deficit of system financing in the transition period is created: the remained accumulations in the distributive system are not sufficient to cover the payments to current pensioners. For the elimination of this deficit it is necessary to find other financing sources to cover the deficit or reduce the size of pension payments.

In the first case the sources from general taxes could be used. While the reduction of payments could be carried out by increasing the pension age, reduction of the attractiveness of pre-term retirement, toughening of the criteria for disability pension assignment, change of the rules of pension indexation and calculation.


1. This statement implies that the profitability is determined considering the costs for scheme functioning.

2. L. Thompson. Older and wiser – the economics of pension reform, Washington, D.C. The Urban Institute Press, 1998.

3. Srinivas, P.S., Whitehouse, E.R. and Yermo, J. (2000), ‘Regulating private pension funds’ structure, performance and investments: cross-country evidence’ Pension Reform Primer series, Social Protection Discussion Paper, World Bank (Internet:www.worldbank.org).

4. Е.Л. Хотулаев «Регулирование деятельности государственных накопительных пенсионных систем»

5. Смотри, например, статью Thompson, L. Older and Wiser – The Economics of Pension Reform, Washington, D.C., 1998. (The Urban Institute Press).

6. The data on the profitability of American shares and bonds are based on the following works:
Sylla, Rychard, Jack W. Wilson, Charles P. Jones (1990) «Financial Markets Panics and Volatility in the Long Run, 1830-1988.” Crashes and Panics: The Lessons from History, Eugene W. White (ed.) New York: Dow Jones Irwin Press.
Sylla, Rychard, Jack W. Wilson, Charles P. Jones (1994) «US Financial Markets and Long Term Economic Growth, 1790-1989.” Economic Development in Historical Perspective, Thomas Weiss and Donald Schaefer (eds.) Stanford University Press.
Wilson, Jack W. and Charles P. Jones (1987a) “Stocks, Bonds, Paper and Inflation: 1870-1985.” The Journal of Portfolio Management, Vol. 14, No 1.
Wilson, Jack W. and Charles P. Jones (1987b) “A comparison of Annual Common Stock Returns: 1871-1925 with 1925-1985.” The Journal of Business, Vol. 60, No 2.
Wilson, Jack W. and Charles P. Jones (1997) “Long term and Risks for Bonds”. The Journal of Portfolio Management, Vol. 14, No 1.
The data on the wage in the American industrial sector are provided by M.Alier and D.Vittas.
The Canadian data – Web-site of the Canadian Actuary Institute: www.actuaries.ca.

7. It takes into account both the change of the cost of securities and dividends and coupon payments.

8. In ten-year periods of accumulations even negative average sizes of profitability took place.

9. See, for example, the article on the Polish pension system. A. Chlon, M. Gora, M. Rutkowski. Shaping Pension Reform in Poland: Security through Diversity. Social protection discussion paper No. 9923. 1999. World Bank web-site.  

10.This model was developed in the framework of the applied economic research "Creation of the system for actuary support of the pension system reform” at the request of the Ministry of Economic Development and Trade of the Russian Federation.


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