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

Comparison of NDC and Funded schemes

The schemes, based on the NDC, are distributive since the contributions of a year cover the benefits of the same year. However, under a stable condition (under a fixed tariff of pension contributions) the speed of the growth of contributions basis represents the tariff of the growth of the tax basis – amount of pension contributions. Therefore, if the government issue bonds with profitability equal to the growth of contributions amount, i.e. the speed of the growth of work productivity and speed of the increase of labor force, these bonds shall have the NDC profitability. In this sense the NDC system could be considered as a FDC system, based on the financing of bonds. Such interpretation of the NDC has something in common with the proposal of the Nobel laureate in the economic field James Buchanan1, who in 1968 proposed to change in USA the social tax on wage by the mandatory purchase of social insurance bonds by the individuals.

In the opinion of M.Gora and E.Palmer the FDC system shall differ from the NDC only by investing in shares: if the only kind of assets of the scheme with fixed assets are state bonds, it shall bring to the state distributive system. While if the profitability of state bonds is higher than “the economic”2 profitability tariff, for the pension payment the government should levy additional taxes.

Note. The emulating FDC system risks to be inefficient as result of the expenses for competition between the CPF, which they shall have over the usual administrative expenses, and the higher profitability of securities shall increase the state debt in future.

Thus, the schemes based on the NDC differ from the FDC schemes by the lack of funds, as well as that the profitability is determined not by the financial market, but by demographic (number of workers) and macroeconomic factors (speed of the wage growth, unemployment etc.).

Thus, from the economic point of view the NDC and FDC system differ first of all by the investment portfolio. The FDC system, investing only in state bonds, is an inefficient form of the NDC if the profitability of bonds is higher than the nominal tariff of the profitability of the schemes, based on the NDC, and the administration costs are higher than the costs for NDC administration.

* * *

The FDC pension system could be economically justified only if the profitability of investment of pension accumulations exceeds the wage growth rates. In other case, it is difficult to ensure the adequate replacement of pension earnings.

In the Republic of Moldova according to the Middle term forecast of expenditures, developed by the Ministry of Finance, quite high rates of wage growth are forecasted. Thus, if in 2005 the actual rates of the growth of this index constituted 7,9% that allowed to increase the average monthly wage by 19,6% compared to 2004, in 2006 it is expected its increase by 14,0%. The forecast supposes that later in 2007-2008 the rates of wage growth shall reduce slightly, though they shall remain quite high – up to 12,0% in 2007-2008 and 11,0% - in 2009. The phased salary reform (2006-2009) should contribute to the double increase of the rates of wage growth (from 7,0% in 2005 to 14,0% in 2006) and maintenance of the rates of the increase of this index at a quite high level in a middle-term perspective. As result of this reform the average monthly wage in the Republic of Moldova shall grow up by more than 70%.

Besides, the average wage in the Republic of Moldova is significantly lower than the average wage in developed countries. This discrepancy should be gradually reduced that supposes quite high rates of wage growth after 2009, i.e. in middle-term perspective. The projections carried out by the Independent Actuarial Information-analytical Center, based on the middle-term forecast of expenditures, developed by the Ministry of Finance of the Republic of Moldova, show that the real rates of wage growth in the nearest 10 years could constitute about 9,8%. It could not be expected such real profitability from any financial tools in which the pension accumulations shall be invested.

The successful realization of the FDC component of the pension system depends on the capacity of the financial market and securities market to take up the flow of pension accumulations and ensure to the participants of this pension system a reasonable income level, preferably not lower than the rates of wage growth.

For the achievement of these goals it is required the macroeconomic stability and reform of financial and securities market. It is also necessary the existence of a sufficient number of solid banks and licensed special depositaries. The strategy of state debt management is also required since the majority of investments at the initial stage of the introduction of the FDC component of the pension system shall be realized in state securities. The adequate financial infrastructure should be created.

Despite of the fact that Moldova has achieved a certain macroeconomic stability, its financial and securities markets are not enough developed. Therefore, the main requirements to the financial market for a successful introduction of the FDC pension component are difficult to be accomplished. In this relation it shall be difficult to guarantee the reasonable income from pension accumulations and ensure the efficient management of pension assets.

The development of the FDC pension system depends mainly on the assurance of its participants that their pension accumulations shall be adequately invested and shall be efficient. As it is known the non-state management companies administer more efficiently the pension assets, since the law envisages for them less conservative opportunities of investment of pension accumulations. However, the existing lack of confidence to non-state financial institutes could provoke the situation, occurred now in Russia, when the majority of participants of the FDC pension component of the Russian pension system do not use their right to the transfer of their savings to more efficient non-state management companies, but place them at the disposal of Vnesheconombank, representing a state management company. The annual profitability from pension accumulations of Vnesheconombank constituted in 2006 only 5,7% under the inflation of 10,9%. This means that the pension accumulations of the majority of participants of the FDC pension scheme did not give any reasonable income, but even decreased in value. Certainly, the unwillingness to transfer its pension savings to non-state management companies is related not only to the lack of confidence to the latest. The bad informing and simply the weak interest due to low level of pension insurance make the participants of the FDC pension system indifferent to the administration of their savings. The risk of bad management of the pension assets could lead to the decrease of the efficiency of the FDC pension system.

It is to take into consideration that the expenditures related to the implementation of the pension system reform and introduction of the FDC pension component shall require additional financial resources or allocation for this purpose of a part of financial means from the Pension Fund budget. In this relation it shall be necessary to increase the tariff for payers of insurance contributions and as result to increase the tax burden on them or divide the established current tariff of insurance contributions among the distributive and FDC components of the pension system. From the distributive part of the pension system it shall be excluded a part of means that shall brake its equilibrium and limit the possibilities of new initiatives for the increase of the level of pension insurance.

The introduction of the FDC pension component shall raise new requirements related to the administration of pension system. The tracking of the contributions of each worker, paid by him during his life into the pension system and income from accumulated contributions shall require from the National Social Insurance House the maintenance of quite more data on the length of service and wage of each worker for a longer period than under the old system. This shall require creating a precise, complex, national database in order to track the necessary information and status of the account of each worker. For this purpose it shall be necessary to develop an application, necessary for the correction of the existing system of current wage record in the NSIH, to eliminate the telecommunication and other barriers in such way that this system operate at national level. It is necessary to increase the capacity of the NSIH information system responsible for data processing and keeping.

Besides, the introduction of the FDC component shall require from the institutions, responsible for collection of contributions and payment of pensions, greater responsibility towards the participants of the pension system for their financial activity.

Established according to the theory the NDC pension has the capacity of long-term financial stability and requires small corrections. Compared to the FDC pension system it does not depend so much on the level of the development of financial and securities markets, and also on the efficiency of pension assets’ administration. Under the conditions of the developing economy and high rates of wage growth, it ensures a more adequate value of the replacement rate for the participants of this pension scheme, since the pension contributions accumulated on the individual accounts are indexed, as a rule, according to the rates of wage growth. However, it should be taken into consideration that the NDC pension system, as well as the FDC system, shall require a serious reorganization of the pension system administration, creation of a national database and establishment of the system for actuary support of the reform of Moldovan pension system.

1. Buchanan, J (1968), ‘Social insurance in a growing economy: a proposal for radical reform’, National Tax Journal, 21, December, 386-95.

2. The economic profitability tariff is the tariff, ensuring the growth of the contributions volume, i.e. the tariff equal to nominal NDC profitability. 

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