Any intention to “reverse” or “nationalise” the second pillar would not be a simple process! A single European example — and a bad one at that, Hungary’s — is not sufficient justification for us to take the same course of action. The gross salary system establishes an absolute right of ownership over the personal contributions that an employer pays on behalf of an employee as part of their gross salary. Any systemic or structural change would require the personal consent — certified or notarised — of every individual who holds a personal account in the second pillar. Since the issue is as complex as it is sensitive — involving the personal funds of around 700,000 insured persons — far more specific and in-depth analyses are required, along with projections based on verified methods used by investment funds. For this reason, one month ago we began preparing a detailed analysis to shed light on both the strengths and shortcomings of the management of pension accounts in the second pillar. The study will be made public soon, after which it will be up to the pensioners themselves to decide!
By Academician Abdylmenaf Bexheti
The economy has always been, and continues to remain, a cyclical phenomenon, marked by constant fluctuations and periodic rises and falls across different regions of the world. In truth, such fluctuations were once neither as frequent nor as global in their impact. Over the past three decades, globalisation has transformed the regional economic architecture, increasingly spreading both its positive and negative effects across the globe. Throughout the 20th century, crises with a broader geographical impact were less frequent — occurring, on average, once every 25 to 30 years. In contrast, in recent decades even regional crises have rapidly developed into global ones. The only difference lies in the duration and intensity of their amplitudes.
In addition to shaking the capital and real estate markets, the global financial crisis of 2007–2009 also exposed the challenges surrounding the (un)sustainability of pension funds. Western countries, or economically developed OECD member states, had begun reforming their pension systems earlier, creating more options for pension contributors — from the basic and traditional “PAYG — Pay As You Go” system to mandatory and voluntary funded pension pillars.
Since that global crisis, we have lived almost continuously through one crisis after another. The COVID-19 pandemic that began in Wuhan in the Far East quickly engulfed the entire globe, all the way to the Far West! The world has not found peace since then. Crises resulting from regional wars continue to this day, exerting an ever-greater influence on the entire global economy. Regional conflicts and wars have existed almost continuously over the past 50 years, but it is only in the last two decades that they have acquired a global character through their economic impact.
Consequently, all economic fluctuations have a continuous impact on social insurance funds — pensions, healthcare and others. Yet the greatest influence on their instability comes from structural factors: on the one hand, demographic factors — increasing life expectancy, declining birth rates and the emigration of young and working-age people — and, on the other, economic factors — the permanent decline in the ratio of employees to pensioners, as well as radical changes in the labour market driven by exponential technological developments!
All these circumstances, therefore, create challenges and, at times, problems for the sustainability of pension funds everywhere — and, naturally, in our country as well! Debates on this issue are therefore legitimate, although in our case they have come rather late. On this occasion, I would like to recall that nearly two decades ago I raised concerns about this matter — not to say that I sounded the alarm, but at the very least I issued a timely “early warning”.
In 2008, during a debate on fiscal policy with the then finance minister — the current governor, T. Slavevski — and the prime minister’s financial adviser, the distinguished Professor M. Petkovski, held at the Stone Bridge Hotel in Skopje, I warned of the need to preserve “fiscal space”. I cautioned that the instability of our social funds, particularly the pension insurance fund, would generate fiscal pressure even greater than that caused by the global crisis.
At the time, our public debt stood at only around 25% of GDP — approximately 2.5 times lower than it is today! Hence, as Professor Avinash Dixit of Princeton University in the United States says, “in good times, one should save and create fiscal space for bad times”! And that is not all. Dixit also warns that “for politicians, good times create the illusion that bad times will never come — at least not while they are in government”!
This is precisely what is happening to us: since 2009, every prime minister has believed that they have had, or continue to have, a more difficult time than all those who came before them! Judging by the direction in which the parameters are moving, unless the European integration process is opened and accelerated as soon as possible, even more difficult times will follow.
And not only from an economic perspective!
Our pension system has three pillars, as established by the 2006 pension reform and defined by the Law on Pension and Disability Insurance and the Law on Mandatory Fully Funded Pension Insurance.
Under these laws, the first pillar continues to operate on the principle of solidarity, following the PAYG model. The second pillar is a mandatory system financed through individual capitalisation, under which approximately one-third of the pension contribution rate of every insured person or employee — 6% — is deposited, according to the employee’s and employer’s choice, into a personal account managed by one of the three companies operating within the second pillar: KB AD, the first company; NLB Fund, later renamed Sava AD; and, since 2019, the third company, Triglav. All these joint-stock companies are licensed and supervised by the Agency for Supervision of Fully Funded Pension Insurance, or MAPAS.
The first pillar has a high annual and structural deficit of around 37%, which is financed each year through transfers from the state budget and represents a considerable financial burden. Yet it is also debatable how genuinely solidarity-based this arrangement is, since it is financed through taxes paid by all citizens — taxes that are compulsory by definition! And the imposition of taxes is not, in principle, an act of solidarity!
Over this entire period — nearly two decades — the second pillar has accumulated around €3.4 billion, of which approximately one-third, or €1 billion, consists of capital gains or returns from the capital investments made by the joint-stock companies managing these portfolios.
Expressions of dissatisfaction with the second pillar’s low returns, or the “disappointment” of its first pensioners — whose number remains very small, merely in the hundreds, and who have only just begun receiving benefits from the second pillar — are legitimate for several reasons. What is not legitimate, however, is the appetite to “return” the system to a single pillar, much less a short-term preference for using the funds accumulated in the second pillar!
Any intention to “reverse” or “nationalise” the second pillar would not be a simple process! A single European example — and a bad one at that, Hungary’s — is not sufficient justification for us to take the same course of action. The gross salary system establishes an absolute right of ownership over the personal contributions that an employer pays on behalf of an employee as part of their gross salary. Any systemic or structural change would require the personal consent — certified or notarised — of every individual who holds a personal account in the second pillar.
Criticism of the returns generated by the companies managing second-pillar funds may be justified from the perspective of reducing costs and, consequently, the margins or commissions that the insurance companies charge as compensation, currently amounting to 1.8%. This is particularly relevant following the voluntary reduction of the fee charged by MAPAS, the second pillar’s regulatory and supervisory agency, from 0.8% to 0.6%, demonstrating dedicated prudence towards insured persons.
The first two companies, KB and Sava, have followed remarkably similar trends from 2015 to the present and hold approximately comparable numbers of insured members: the former has more than 280,000, while the latter has around 265,000. Meanwhile, the third company, Triglav, which entered the market in 2019, has approximately 75,000 members.
At the same time, throughout the entire ten-year period from 2015 to 2025, the two companies have displayed very similar trends and structures in the financial investment portfolios they manage — an indicator that also reflects their caution and consideration of risk when investing.
International experience and evidence concerning these funds, whether from EU or OECD countries, demonstrate the care taken in distributing portfolios across different investment categories — from the safest and least risky instruments, such as government or central bank securities, to higher-risk assets, including shares traded on domestic and international capital markets.
In this regard, three portfolio structures are recommended, depending on the age of insured persons and the length of time remaining until their retirement. The funds or assets of those aged between 25 and 35, who have a longer period before retirement, are generally recommended for investment in higher-risk capital markets and, accordingly, in assets offering potentially higher returns — such as shares on international or local markets, precious metals and similar instruments.
The funds of middle-aged insured persons, between 35 and 50, are invested in a combined structure — half in higher-risk instruments and half in safer ones. The funds of those approaching retirement, aged over 55, are recommended for investment in safer instruments, where the level of risk is considerably lower, precisely because of the shorter period remaining before retirement.
Taking these experiences into account, in the case of our country’s second pillar — whose operating period is still relatively short, at less than two decades, and where a considerable proportion of insured persons are approaching retirement, with around five years remaining — the companies are both constrained and cautious about where and how to invest.
When we add the successive crises that have persisted since 2019 and remain ongoing, it becomes evident that there has been no investment environment offering higher yields or returns with moderate risk. On the contrary, the risk has been relatively high!
Our calculations show that the average rate of return exceeds 4%. Under the current circumstances, this should not be underestimated, particularly when viewed against our long-term average economic growth rate of only 2.2%, and even more so when compared with the rates of return generated by investment funds in developed OECD member countries!
Since the issue is as complex as it is sensitive — involving the personal funds of around 700,000 insured persons — far more specific and in-depth analyses are required, along with projections based on verified methods used by investment funds. These range from the so-called Dynamic Pension Fund Optimisation Model, or DPFOM, to “Monte Carlo” scenarios.
For this reason, one month ago, under my mentorship and coordination, we began working jointly on such an analysis with a colleague specialising in this field from the Faculty of Business and Economics at South East European University, Sh. Alija; the head of MAPAS, R. Bajrami; and colleagues from the MVDS Institute, including S. Shabani, a specialist in calculations and algorithms.
We already have the preliminary results and are now in the final phase of verifying the calculations. I believe that by the middle of this month we will submit the analysis to the relevant authorities and make it available to the wider public.
The aim is for science, too, to make a direct contribution by informing all these holders — the owners — of second-pillar pension accounts as objectively as possible about the position of their funds, as well as the challenges and prospects ahead.
Then they can decide for themselves!