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

• Author: Enkeleda Shehi
• Position: Albanian Financial Supervisory Authority
• Pages: 9-20

9

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 www.iipccl.org

Payout phase in DC pension funds – policy option - Theoretical

considerations and Albanian available options

Enkeleda Shehi

Albanian Financial Supervisory Authority

Abstract

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