Payout phase in DC pension funds - policy option - Theoretical considerations and Albanian available options

AuthorEnkeleda Shehi
PositionAlbanian Financial Supervisory Authority
IIPCCL Publishing, Tirana-Albania
Academic Journal of Business, Administration, Law and Social Sciences Vol. 1 No. 3
November 2015
ISSN 2410-3918
Acces online at
Payout phase in DC pension funds – policy option - Theoretical
considerations and Albanian available options
Enkeleda Shehi
Albanian Financial Supervisory Authority
The aim of this paper is to provide a brief overview of the third pillar of pensions in Albania
and what are the different alternatives related to the payout.
Referring to the actual development of this market in Albania, experience of the actors involved,
I find it indispensable and necessary to provide some theoretical background and
considerations, and then build up a simple model of projection of a pension scheme cost and
a model for payout alternatives for the Albanian pension funds. A great deal of importance is
shown towards posing the assumptions.
Also, the paper gives an explanation about the differences among different payout options
and suggests the best option for the existing pension funds in Albania. The best option
represents my conclusion and recommendation for the actual third pillar of pensions and the
others that might join latter.
To sum up, the first conclusion of the paper is that the annuity option is the best alternative for
the payout phase of the pensions. It has the advantage of providing the highest protection
against the risk of longevity. The second conclusion is that based on other countries experiences,
the annuity market have to be developed hand in hand with the pension system development.
Therefore Albania should rely on and follow this experience.
Keywords: Voluntary Pension Funds, Life annuities, Longevity risk.
Introduction - Albanian pension scheme in brief
The pension scheme in Albania consists of two pillars. The first pillar is PAYG funded
system, publicly managed by the Social Insurance Institute, and “defined benefits”
(DB) calculated according to a specific formula based on the number of working-
years, wages earned, and contributions paid. The second pillar, as per international
definition of it, does not exist. Instead, there is third pillar, privately managed,
voluntary contributed and defined contributions (DC). During the past decade, the
first pillar has demonstrated certain problems, like low net replacement rate, high
dependency rate and considerable high level of evasion of contributions payment.
The international financial organizations like the World Bank and International
Monetary Fund have been closely supporting and assisting the Albanian
Administration to measure those problems, and provide studies and financial support
to undertake several reforms. Concerning the third pillar, under the assistance of the
World Bank experts, the new law on Voluntary Pension Funds was drafted, and
approved in 2010, including new concepts of corporate governance, fit and proper
criteria for management level, risk-based supervision, custodianship of assets, etc.
Albanian Financial Supervisory Authority has licensed three Asset Management

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