Montenegro The Ministry of Health, Labor and Social Welfare

1. MontenegroThe Ministry of Health, Labor and Social Welfare Presentation of Montenegro Pension System DEPUTY MINISTER Mileva Todorović Zagreb, March 9, 2009

2. Montenegro • New European state after referendum as of May 21, 2006 • Land area:13,812 km2 • Population: 626,841 • Capital city: Podgorica • National currency:Euro • GDP per capita: 2,790 EUR • Ethnic composition:Montenegrins 43% Serbs 32% Bosnians 8% Albanians 5% Muslims 4% Other8% • Religion:Orthodox Christian 70% Islamic 21% Catholic Christian 4% Other 5%

3. 1. Pension system in Montenegro The pension system of Montenegro until 2003 was in fact a system based on generational solidarity with defined benefits, which shown the basic weaknesses characteristic for this system, in the first instance, nonresistance on trend of aging population and fiscal unsustainability in a long time. Therefore, in 2003, Montenegro initiated the reform of the pension system. Agenda of Economic Reforms, for 2003-2007 determined the concept of pension reform like the multi pillar pension system, which is supported by the World Bank.

4. 2. Different components/pillars of pension insurance Adoption of the Law on Pension and Disability Insurance in September 2003 and its implementation from 1 January 2004, made the first step towards financial sustainability of the system and completed the first phase of pension reform. Mentioned Law determined that pension and disability insurance in Montenegro contains: • mandatory pension and disability insurance based on “generational solidarity”, • mandatory pension and disability insurance based on individual capitalized savings, and • voluntary pension insurance based on individual capitalized savings. In accordance with this orientations and in cooperation with the World Bank pension reform has continued in the direction of applying multipillar model of the pension system, ie. introducing II and III pillar pension insurance.

5. 3. Repartition (PAYGO) or capitalization (funded) financing system; in case of funded: defined benefit or defined contribution? In Montenegro in force is reformed system of pension insurance based on intergenerational solidarity pay-as-you-go (PAYG). With reform of compulsory pension insurance based on intergenerational solidarity, was introduce stricter conditions for the realization of the rights and was made a parametric reform of PAYG system. The general trend in these changes is the reduction of the role of the principle of solidarity in favor of the principle of contribution. The aim was to ensure stable financing of the pension insurance system, as well as to narrow the space for abuse of that came because of too liberal conditions for acquiring rights from the insurance.

6. Continuation: Also, was predicted the possibility of introducing compulsory pension insurance based on the individual capitalized savings, after evaluation of the financial impact of major political decisions during the introduction of II Pillar. Pensions from the first pillar is determined by the principle of defined benefits, while, in the case of introducing II Pillar will be determined on the principle of defined contributions.

7. 4. Situation PAYG schemes. Actual and foreseeable problems Current system of pension funding (generational solidarity), which is applied in Montenegro almost half century is result of a high social awareness of society, but for future generations of pensioners is insufficient, because it provides only the basic level of social security. Key determinants in the functioning of the pension system are the demographic trends and levels of economic development. On the other hand, this system which was built in the appropriate proportion of number of employees and pensioners is inefficient and financially unsustainable, because it relies only on the current payment of contributions from the insured. The mentioned weaknesses of generational solidarity (ongoing funding) forced the country to join the reforming traditional approaches in this area in order to customize the new demographic circumstances and to avoid possible larger disturbances of the system in the future. To resolving identified problems and bringing the pension system to the level of financial sustainability, the Law on pension and disability insurance was adopted which is carried out restructuring of the compulsory insurance on the basis of current funding (generational solidarity or the first pillar) with gradual increase age retirement, change in pension formula, increasing the number of years included in the calculation of pensions, the application of a new method of indexation of pensions and other reform measures.

8. Continuation: All these measures aims to eliminate financial problems in the system and setting up of pension and disability insurance in the way of financial sustainability, which is achieved that the revenue from contribution can service the pension rights. This means that at the same time in that stable financial system amount of pension only depends on the wages, paid contribution to the earnings and length of pension service. All indicators of the implementation of the first pillars of the reform of pension and disability insurance and reform of pension administration (Fund for pension and disability insurance) in the previous period shows that the effects is satisfactory and that the implementation of reform measures ensure the stabilization of the Fund in the medium term and create a basis for further reform. After almost five years of applying the Law we have the reduction of inflow of pensioners, preferable structure of pensions with 44.68% old-age pensioners of the total number of pensioners, much greater participation of income from contributions in the total income of the Fund (69.46%) and a decrease in the contribution rate, reduction of operating costs and expenses of Professional services in the total expenses of the Fund, and so on.

9. Continuation: The achieved level of average pension of 250 euros in January 2009, which covering 57.75% average salary in Montenegro, and which in comparison with the replacement rate in some countries in the region shows that in Montenegro care about the financial position of pension population. In the long period of time, the pension system will be more negatively affected by unfavorable demographic trends. Life time is extended, and will be more and more elderly people as birth rates fall, so there is the less young people who enter the labor market and pay contributions. Such demographic trends inevitably lead the pension system based on generational solidarity to the financial difficulties.

10. 5. Is there any differentiation (or choice) between the PAYG schemes Montenegro implemented a pension system which comprises the working population. The compulsory pension insurance have the old-age, disability and survivor`s pension. This rights is regulated with the Law on pension and disability insurance in the same way for employees, self-employed person and farmers. Rights from pension and disability insurance, which have police officers and military, were also arranged with the Law on pension and disability, herewith that on limited time are established special and more favorable conditions for their retirement. The rights for war militant and government officials, are arranged by the special laws.

11. 6. Rights from pension and disability insurance are: a) in the event of the old age - entitlement to an old age pension; A Participant shall become entitled to an old-age pension upon reaching the age of 65 (man), i.e. 60 (woman) and accruing at least 15 years of pension service. Also, A Participant shall become entitled to old age pension upon reaching 40 (men), i.e. 35 (women) years of insurance service and minimum 55 years of age. Age limit for the realization of the rights to an old age pension increases gradually, by 6 months each year, from the beginning of the implementation of Law, to 65 years for men and 60 for women (2013).

12. Continuation: b) in the event of disability – entitlement to a disability pension A Participant who suffered the loss of working capacity shall be entitled to a disability pension: • if the disability was caused by an injury at work or professional disease – regardless of the accrued pension service. • if the disability was caused by an injury away from work or a disease – provided that the loss of working capacity occurred prior to the prescribed retirement age for entitlement to the old-age pension and provided that his/her accrued pension service is at least equal to a third of his/her working life.

13. Continuation: c) in the event of death : • entitlement to a survivor’s pension • entitlement to funeral cost compensation Entitlement to a survivor’s pension may be realized by family members of: • a deceased Participant who had at least five years of accrued insurance service or at least ten years of pension service, or who was eligible to old-age or disability pension, or • a deceased Beneficiary of an old-age or disability pension Where the death of a Participant arose as a consequence of an injury at work or professional disease,members of his/her family shall become entitled to a survivor’s pension regardless of the pension service length of the Participant or person. A widower, i.e. a widow shall be entitled to a survivor’s pension provided that: • he/she reached the age of 50 prior to the death of his/her spouse; or • prior to the death of his/her spouse or within one year following the death of his/her spouse he/she became totally incapable of working; or • following the death of his/her spouse, one or more children are entitled to a survivor’s pension based on that spouse and the widower, i.e. the widow is performing the parental duty. A widower, i.e. a widow, who has become totally incapable of working while exercising his/her right on the above mentioned basis shall remain entitled to a survivor’s pension as long as the incapability remains A child shall become entitled to a survivor’s pension and shall have a right to it up to the age of 15. Beyond the age of 15 the child shall become entitled to survivor’s pension and shall have right to it until the end of education. In the event of death of Beneficiary, the person who takes care of the funeral costs shall be entitled to funeral cost allowance. The allowance for funeral costs shall be equal to the amount of three average pensions in the Republic paid out in the month prior to death of the Beneficiary.

14. Continuation: d) in the event of bodily injury caused by injury at work or professional disease – entitlement to subsidy for bodily injury. Bodily injury is deemed to exist when a Participant experiences a loss, severe injury or considerable disability of some organs or parts of the body, making the normal activity of the body more difficult and requiring more efforts in realizing living needs, regardless of the fact whether it causes disability or not. A Participant with bodily injury caused by injury at work or professional disease of at least 50% shall be entitled to a subsidy.

15. 7. The building up of pension entitlements: a) low income (out of work) categories; Participant, who belongs the pension is less than the minimum pension established by law, by applying the formula for calculation of pension, is determined by the minimum pension, which was established as a category. This is a respected principle of solidarity, to pay all contributions for pension and disability insurance, and that only those who meet the conditions to achieve the right to pension. This refers to the old age and survivor`s pension. Minimum pension is indexed in the same way as other rights from pension and disability insurance.

16. Continuation: b) self employed and farmers; Assets for pension and disability insurance are provided from contributions paid by employers and participants. In addition to employees, participants and, according to the Law on pension and disability insurance, persons who perform independent activities, as well as farmers. Law on Mandatory Social Insurance contributions it was suggested to gradually decrease the contribution rate for mandatory social insurance to 1st January 2010, when the contribution rate for pension and disability insurance will amount to 20% (at the expense of the employer 8% and at the expense of the employee 12%), health insurance for 9% (at the expense of the employer 5% and at the expense of the employee 4%), while the rate of contributions for unemployment insurance remained unchanged (at the expense of the employer 0.5% and at the expense of theemployee's 0.5). The same law established the basis for the payment of contributions for pension, disability and health insurance of farmers which is 20% of monthly gross earnings achieved in the previous year per employee in Montenegro. However, the rate of mandatory insurance contributions of employees and self-employed reduced, and due to high amounts that are paid farmers the Government, on the proposal of the Ministry of Agriculture, adopted Regulation on the facilitation of payment of contributions for insurance of farmers, where the base is established on 12% of average earnings realized in the previous year. Difference in the amount of assets between the calculated rate established by law and determined by the rate of Regulation, the state provides from the budget.

17. Continuation: c) people with an incapacity to work; In the pension and disability insurance was established by full and partial disability pension, depending on whether the loss of working capacity is 100% or at the level of 75%. Participant who suffers complete loss of working capacity will be entitled to full disability pension. Participant who suffers a partial loss of working capacity will be entitled to a partial disability pension. Disability pension is calculated by the same formula as well as age with bestowal service depending on the cause of disability. Disability may be due to injury at work, professional disease, an injury away from work or a disease.

18. Continuation: d) unemployed people; Working relationship, or self-activity and the basis and the payment of contributions for pension and disability insurance, allows realization of the conditions for entitlement to a pension. However, persons who remain without employment and meet certain conditions determined by amendments to the Law on employment, may submit an application to the Employment Agency and the basis to achieve a fee (which is equal to the minimum pension). Also, to persons who achieve right to the benefit, the Employment Agency paid contributions for mandatory social insurance, until entitlement on a pension or re-employment.

19. Continuation: e) people immigrating and thus incapable to constitute a full pension carrier in the territory On the principle of reciprocity, the bilateral international agreements provide the exercise of social insurance rights comprising health insurance rights, pension insurance rights, rights in case of unemployment, rights to child allowance and administrative and legal aid, rights of the citizens of the party state arising from labour relations and residence in one of the party states. Decision of the Parliament of Montenegro as of June 3, 2006 on the proclamation of independence of the Republic of Montenegro ("Official Gazettes of the Republic of Montenegro", No 36/06) sets forth that Montenegro shall apply and accept those international contracts and agreements concluded and acceded by the State Union of Serbia and Montenegro, which relate to Montenegro and which are in accordance with its legal system. Montenegro is coordinating the social insurance system with 25 countries out of which 17 countries are the EU Member States and 2 countries are the candidate countries for EU accession, by applying the old international agreements in accordance with the above mentioned Decision of the Parliament, as well as with signing the new agreement like an independent state. Some agreements are applied to the citizens of the signatories and members of their families. Most agreements also apply to the refugees and stateless persons within the sense of the Geneva Convention. Other agreements are based on the insurance principle, which means that they apply to all the persons who are or were covered by the legislation of the signatories, as well as to the members of their families.

20. 8. Evaluation of intergenerational solidarity in the country, including issues related to the transitional measures, respecting the acquired rights and discrimination against the younger generations. Rights arising from pension and disability insurance are personal rights and can not be transferred to other persons. This means that these rights can be achieved by participant or person who meets the prescribed conditions (that he/she has begun certain risks and has reached required pension service). In order to protect the younger generation, the status of Participant is determined on the basis of application, and cannot be acquired under the age of 15. Existing pensioners and all other beneficiaries of the rights from the pension system, because of the planned reforms could not anything to lose but will continue to serve their vested rights, as well as now. Rights arising from pension and disability insurance shall not expire, except the rights on claims of due but outstanding amounts under circumstances determined by Law. Regarding the future beneficiaries of this system they also can with optimism watch on the conducted reform, because it is made to ensure security of funds for payment of these rights and to provide the conditions for a better financial position of all rights with regular payment of pensions.

21. 9. Administration of pension system The Ministry of Health, Labor and Social Welfare through the competent sector is in charge of monitoring the conditions and studying the phenomena of interest for determined policy implementation and for the functioning of pension and disability insurance system, preparing suggestions for making law drafts and proposals as well as regulations passed on the basis of law in the field of pension and disability insurance, giving expert opinion on implementation of the regulations, drafting analyses, reports, information, studies and programs, which make a bases for determining and implementing the policy of pension and invalid insurance, the direct monitoring of the law implementation, as well as other regulations and general documents from this field, and especially of the work of the Fund of pension and disability insurance. The implementation of the mandatory pension insurance based on the generational solidarity (I pillar) is in the domain of the Pension and Invalidity Insurance Fund, which is, according to the valid legislation, relevant for settling the rights and duties from pension and disability insurance. The Pension and Invalid Insurance Fund perform its function through the central service, nine district services and four local offices.

22. Continuation: In accordance with the recommendations and standards of the World Bank in the implementation of the reform of the Fund for Pension and Disability Insurance, which aims to create a new organizational structure of the Fund for pension and disability insurance and improve technical-technological process of work in order to create conditions for the lawful, effective and timely servicing rights from pension and disability insurance. Concerned with that, Government adopted a Strategy for reform of pension and disability insurance in Montenegro and Project of IT Strategy in Fund for pension and disability insurance. The context of total reform of the reorganization of Fund Technical Service, the Fund of pension and disability insurance continuously carried out activities on the inside-rationalization and implementation of new business processes. In this order is made Program for rationalization of the Professional Service of the Fund, which provides implementation of strategic and reform activities that will contribute to further reduction of the total cost of the Fund PIO and, among other things, related to the restructuring of professional services, further reducing the cost of pension payments, increase in giving pension payments over commercial banks, and others. Within the tax administration and pension system reform, the Government of Montenegro, in cooperation with the World Bank carried out activities on the realization of the Project of combined registration and tax and contributions collection reporting system. In accordance with this, we adopted the Law on combined registration and tax and contributions collection reporting system. The mentioned Law will establish a central registry (in a separate organizational unit of the Tax Administration) of all tax payers and contributions and the participants (for pension and disability insurance, health insurance and unemployment insurance), which will be in the function of all state authorities, who are interested to use the data contained in the registry. The capital collection from the III pillar of the pension insurance is in the domain of voluntary pension funds and pension fund management societies. The Securities Commission monitors the voluntary pension funds business, through the established Sector for investment and pension funds.

23. 10. Optional and an alternative character of the pension system Mandatory pension and disability insurance on the basis of current funding for participants, according to the work relationship, and depending on the length and height of the base investment in the paid contribution for pension and disability insurance, and with application of the principles of reciprocity and solidarity, provide rights in case of old age, disability and bodily injury, and their families member right in case of death of the insured, or user rights. These rights regulated the Law on pension and disability insurance in the same way for employees, self-employed and farmers. In accordance with Agenda of Economic Reforms, and in consultation with the World Bank, the Government is determined that the introduction of III pillar, or voluntary pension funds in 2007, preceded to the introduction of mandatory insurance based on individual capitalized savings or II pillar. Parliament of Montenegro adopted in December 2006 the Law on voluntary pension funds, which came into force on 31 December 2006. The Securities Commission has realized all the by-laws necessary for the establishment and operation of voluntary pension funds

24. 11. Personal scope of pension arrangements With adoption the Law on voluntary pension funds and creation of necessary institutional conditions for the development of voluntary pension savings, Government is provided the opportunity for private pension savings. In order to protect the member of the fund and to prevent possible misuse, the state, through the Securities Commission, is responsible for monitoring, regulation and supervision of voluntary pension funds. Pensions from voluntary pension insurance have a character of additional pension in relation to the pension accrued in the compulsory pension insurance (I pillar). With pension funds, according to applicable regulations is managing a specialized management company that gets the permission from the Securities Commission, and whose minimum capital can not be below 250,000 euros. Management Company charges fee for managing the fund. The paid contribution to fund, is booked on their own account to the members and, by law, it is his property. Money can be withdrawn after he/she reach 50 years of life, and in two ways - to the highest 30 percent pay in cash on the day of fulfillment of conditions established by the rules and the membership agreement that is signed, and the rest in monthly or periodic annuities within not more than three years, or that the amount transferred to "a company that deals with ensuring payment of pensions." The law stipulates that pension funds, money provided by members, may be invested in the shares, investment funds, bonds, state-notes and other short-term securities issued by the state, in the long-term securities of the issuers registered in Montenegro or some of the OECD countries or EU member states.

25. 12. Situation of funded arrangements Before making a final adoption of the Law on compulsory pension insurance based on individual capitalized savings, and choice of an adequate model that will be a good basis for making decisions on the implementation of the second pillar of pension system, the Ministry of Health, Labor and Social Welfare will carry out the adequate analysis and examine the comparative-legal experiences of the countries that have introduced such systems. That experience is necessary to adapt to our conditions and peculiarities. Should bear in mind that in the case of the introduction of II Pillar, i.e. compulsory pension insurance based on individual capitalized savings, revenues based on contribution to the existing pension fund will be significantly reduced, that will inevitably create a deficit of whose cover will need to find adequate sources of funding, which is one of the reasons that II pillar is still not introduced. The first voluntary private pension fund „Pension Plus” officially began with receiving payments in February 2009, and the first working day has the legal threshold to get started.

26. Thank you for attention!