Private pensions funds in North Macedonia and Russia

With regard membership in the mandatory fully funded funds there are two categories of insured persons who are members of the second pillar: mandatory members and voluntary members (Art. 94 Law on Voluntary Fully Funded Pension Insurance). Mandatory members are the insured persons who have been employed, i. e. who have joined the mandatory pension and disability insurance, for the first time, after January 1, 2003 and were born after January 1, 1967; insured persons who have been employed, i.e. entered into compulsory pension and disability insurance, for the first time after January 1, 2019 and who on the date of accession are under 40 years old. The category voluntary members consist of: insured persons who were employed for the first time, before January 1, 2003, who by their own choice by concluding a membership agreement entered into a mandatory fully funded pension insurance and were born after January 1, 1967; insured persons who were employed for the first time, before January 1, 2003, who voluntarily joined the mandatory fully funded pension insurance, were born before January 1, 1967 and who signed a statement for extension of membership in the mandatory fully funded pension insurance.

While the membership in the mandatory funds is related to membership in the PDIFNM, this is not the case with the membership in the voluntary funds. A member of a Voluntary Pension Fund may become any person if aged at least 18 years of age and holds a Voluntary Individual Account or any person that is participant of Occupational

Pension Scheme and holds an Occupational Account Accessed March 20, 2022. http://mapas.gov.mk/mapas-en/pdf/law/LAW%20ON%20

V0LUNTARY%20FULLY%20FUNDED%20PENSI0N%20INSURANCE%20011007.pdf.. The basis of the membership is contractual and there is legal obligation for the pension company to conclude the contract with every person over the age of 18 years and under the age of 70 years. pension macedonia russia taxation

The contractual freedom of the pension company is limited with this imperative norm which only implies to the relative character of the principle of freedom to regulate the obligations (Galev, Dabovikj Anastasovska 2018, 345). Having in mind that this is contract by its legal nature, the general law on contractual relationships will be applicable in this case, and that is the Law on Obligations Official Gazette of Republic of Macedonia 18/01, 78/01, 04/02, 59/02, 05/03, 84/08, 81/09, 161/09, 23/13, 123/13. Accessed March 20, 2022. https://www.slvesnik.com.mk/home.nspx., as general, basic and systematic law in the area of obligations, as stated in its article 16 and 17. In cases of compulsory entering into contract where one or both parties are bound to enter the contract, the other interested party may request that the contract be entered into without delay (Art. 19 (1) Law on Obligations).

The private funds through the prism of pension companies and funds and the number of members. According to MAPAS Accessed March 6, 2022. https://mapas.mk/reports-and-statistics/ffpi-reports/?lang=en., we may say that on the financial market there are only three pension companies that manages 6 pension funds. One pension company manages one mandatory and one voluntary pension fund. In the Macedonian pension industry, the first two private pension funds were established in 2005 as a mandatory pension funds and later in 2008 and two voluntary pension funds at the same time were established, under the same pension companies (Sava pension company and KB first pension company). Nowadays there are 3 pension companies, the last company was established in 2019 Accessed March 29, 2022. https://mapas.mk/wp-content/uploads/2022/01/registar-na-zadolzitelni- penziski-fondovi-2021.pdf..

The pension company may start working after obtaining two types of permits from MAPAS, first permit is issued for establishment of the company and the second permit is a working permit (Art. 37 Law on Voluntary Fully Funded Pension Insurance).

The number of insured in the second pillar continuously increases, which is expected given the mandatory membership for all new employees. Thus, a total of 128 031 subscribed in the second pillar in 2006, at the end of 2014 their number increased to 373 251 contributors, representing an increase of 332.66 % (Patoska, Dimeski 2015, 483-484).

As of 31^st December 2020 the total number of members and temporary assigned insured persons to the mandatory pension funds was 529 983, compared with 2019 the number of the members in the second pillar has been increase for 4 % or 22 427 members MAPAS report on the developments in the fully funded pension insurance for 2020. Accessed March 20,2022. https://mapas.mk/izveshtaj-za-sostojbite-vo-kapitalno-finansiranoto-penzisko-osiguruvanje/pg.37.. According to the main webpage of MAPAS, the current membership and net assets values of the mandatory and the voluntary pension funds has been increased. As from 29.03.2022, the mandatory pension funds have 555 503 members and net asset value of 108.31 billion denars, the voluntary pension funds have 27 916 members and net asset value of 2.93 billion denars Accessed March 29, 2022. https://mapas.mk..

Private pension funds in Russia

According to Russian legislation, a private pension fund is a special legal form of a non-profit organization in the field of social security, its exclusive competencies are activity on private pension provision; activity as an insurer for compulsory pension insurance. According to the CBR, there have been 41 private pensions funds by the end of 2021. The funds carry out each of the two activities independently of another. If the fund is engaged in the mandatory pension insurance, it accumulates pension savings (3 trillion rubles in 2021), invests them (the maximum return of 7.44 % showed the NPF of Sberbank, the inflation rate in Russia was 8.39 %) and pays funded pensions to those retirees, who preferred to transfer their savings to private funds (almost 13 million in 2021). If the fund is engaged in the voluntary pension system, it accumulates pension reserves (1.5 trillion in 2021), investing them (the maximum return of 4.39 % showed the NPF of Sberbank) and paying private pensions to voluntary contributors (57 million in 2021) Pension funds and collective investments. 2022. Accessed March 04, 2022. http://www.cbr.ru/rsci..

In order to invest pensions savings and pension reserves, funds conclude and terminate trust agreements with managing companies. Managing companies are required to have licenses for all types of activities in which they carry out transactions with pension savings and reserves. The difference is that assets in which pension savings can be invested, and the structure of the investment portfolio are strictly regulated in legislation, while assets for pensions reserves have only general framework of limitations (for example, the value of pension reserves placed in one asset can't exceed 15 % of the total value of pension reserves etc.) (Art. 24.1 of Federal Law No. 75-FZ of May 7, 1998 “On Non-State Pension Funds”).

According to Federal Law No. 49-FZ of March 7, 2018 “On Amendments to Certain Legislative Acts of the Russian Federation on Regulating the Activities of Non-State Pension Funds”, the NPF shareholders are obliged to compensate losses to their clients. If it turns out that the funds on client accounts have decreased due to deliberate investment in low-quality assets in someone's interests, the fund's shareholders will be required to compensate the losses and to pay additional lost amounts to the client's personal accounts. Over the past 20 years, the number of NPFs has decreased by 75 % (from 282 in 2002 to 41 in 2022) due to the tightening of legal requirements for NPFs and requirements for the quality of investments (assets) of NPFs by the CBR Pension Funds. 2022. Accessed March 4, 2022. http://www.cbr.ru/RSCI/activity_npf..

In Russia, as mentioned above, savings of insured persons for funded pensions accumulated since 2002 till 2015 could be transferred from the PFRF to the NPFs on the basis of a written application of insured person under the contract with the chosen NPF. Participation in voluntary pension systems also implies the conclusion of an agreement with the NPF.

According to the Law on Non-State Pension Funds in the Russian Federation, an agreement is concluded between the NPF and the contributor, while the contributor can be both a legal entity or an individual. A person who is identified by the contributor as a recipient of a non-state pension is a participant. If the contributor has concluded an agreement in his favor, he is both a contributor and a participant.

The agreement determines the pension scheme, in compliance with the Pension Rules of the NPF, the amount and frequency of payment by a contributor, the procedure for applying for a pension, the procedure for assigning and paying, the conditions for succession (inheritance), the procedure for maintaining a pension account -- accounting for pension contributions and accrual of income, the procedure for terminating a contract and receiving a redemption amount. Pension schemes may provide for the payment of a pension for a number of years specified in the agreement; for lifetime, or with the condition of the subsequent payment of a lifetime pension to the surviving spouse in the case of death of the participant during the payment period.

Taxation of contributions to private pension funds. The specifics of taxation of pensions and pension benefits from the second (private mandatory pension funds) and the third pillar (private voluntary pension funds) are according the Law on Pensions and Pensions Benefit Payment from Fully Funded Pension Insurance Official Gazette of Republic of Macedonia 11/2012, 147/2015, 30/2016, 103/2021. Accessed March 23, 2022. https://mapas.mk/regulations/laws/?lang=en 1624957865531-e6dacaf8-03b5., but the general provisions of pension taxation, exemptions and deductions on personal income (in this case pension incomes) are under the Law on personal income tax. Therefore, the individual and legal persons may exercise right to personal and corporate income tax reliefs and exemptions.

The pensions that are received from the public pension fund (state pension insurance) are the monthly income to the pensioner, these personal incomes are exempt of taxation. But, the pension income from the second pillar, depending the way that are paid off, may be subject to taxation. According to the article 50 of the Law on Pensions and Pensions Benefit Payment from Fully Funded Pension Insurance. “Second pillar pensions that are paid through programmed withdrawals and annuities are subject to personal income tax according to the Law on Personal Income Tax Official Gazette of Republic of Macedonia 241/18, 275/19, 290/20, 85/21. Accessed March 20, 2022. https://www.slvesnik.com.mk/home.nspx.. The pension company or the insurance company that pays the pensions has the obligation to calculate and pay the personal income tax in the name and for the account of the pension beneficiary”.

The voluntary contributions that are made to the individual account and / or professional account are exempt from the personal income tax. The taxation of the pension benefit from the voluntary fund depends of the pension fund income. The income from the voluntary individual account and/or professional account is variable and depends on the income of the voluntary pension fund and the fees paid by the pension company that manages the voluntary pension fund. According to Article 12 Paragraph 1, point 36, Law on Personal Income Tax there is exemption for the paid contribution to a voluntary pension fund for one calendar year, for employees and for a taxpayer earning income from selfemployment, in the amount of up to two average monthly gross salaries in the Republic of Macedonia, published in January of the current year according to data from the State Statistical Office. The personal income tax for payments through the pension scheme is not chargeable for a paid contribution in a voluntary pension fund in the amount of up to two average monthly gross salaries in RSM per employee, published in January for the current year (Art. 12, p. 36 Law on Personal Income Tax). Additionally, there are tax reliefs for the legal entities (the Employers) regarding the profit tax for payments through the pension scheme. The expenditures on the basis of paid contribution in the voluntary pension fund in one calendar year are tax-recognized expenditure, in the amount of up to two average monthly gross salaries, paid in the previous year in R. S. M (Art. 9, p. 5 Law on Profit Tax) Official Gazette of Republic of Macedonia No. 112/14, 275/19, 290/2020, 151/2021. Accessed March 22, 2022. https://www.slvesnik.com.mk/home.nspx.. In our opinion, the popularity of these types of pension funds grows because of the possibility the employer to pay additional pension insurance funds to all or some of their employers (so called occupational pension schemes or voluntary collective pension insurance) because of the tax incentives mentioned supra.

Taxation of investment income and payments from private pension funds. The reformed pension system has offered several legal bases to fulfilling the right of pension returns. The payment of pensions and pension benefits from the first and the second pillar may be fulfilled through the member's personal choice regarding: programmed withdrawals; buying a pension annuity; combination of the two previous options. The pension benefits from the voluntary pension fund may be paid through the member's personal choice regarding: pension annuity; programmed withdrawals; onetime payment (taking the entire pot), multiple payments and combination of all previous options (Art. 51, para. 1 Law on Law on pensions and pensions benefit payment).

Pension plan type, definition type and contract type. The account holder -member of the voluntary pension fund that has pension benefits through his employer so-called professional pension schemes are obliged to pay income tax. This tax burden goes to the accountholder, if the contributions were made through the professional pension scheme, since the tax deductions are already used by the company- Employer. That is not the case if the person was paying contributions to the voluntary pension fund individually. In this case the accountholder is obliged to pay income tax only on the capital gain as a investment result of the pension fund. The tax regime also defers if the accountholder withdraws the pension as a lump-sum from the voluntary pension fund. This type of pension payment it is not allowed for the contributions from the mandatory pension fund, as mentioned earlier.

The retirement portfolio of the member depends the way the fund assets investment and it's investment performance. Therefore, the subject to taxation is the yield gain from the accumulated invested asset in defined period of time. The return to the account holder directly depends of the asset allocation. In most countries, bonds and equities were the two main financial instruments in which retirement savings were invested at the end of 2020, having in mind the investment portfolios of the private pension funds.

According to the article 3 of the Law on pensions and pensions benefit payment from fully funded pension insurance, the insurance companies and the pension management companies are allowed to use the following ways of the pension payments -- as a lifetime annuity, as programmed withdrawals and temporary programmed withdrawals combined with life delay annuity. Although the law allows freedom to choose one of the 3 types of pension payments, for now the system allows only one possibility to receive the pension payment from the mandatory pension fund and that is programmed withdrawals. These programmed withdrawals from the mandatory pension funds are directly conditioned by the pension contributions from the Public Fund.

Taxation in Russia. The key participants in voluntary pension system in Russia are: 1) private pension funds, 2) individuals, and 3) participants in favor of whom the agreement with the private pension fund is concluded. So, in general there are two possible situations: when only two parties are involved -- the fund and the individual, and when three parties are involved -- the fund, the legal entity (the employer) and the individual (the employee).

References

Borda, Marta, Natalia Grishchenko, Patrycja Kowalczyk-Rolczynska. 2017. “Pension reforms in Poland and Russia: Mid-term experiences from the participants' perspective”. Rozprawy Ubezpieczeniowe 25 (3): 48-63.

Bornarova, Suzana, Natasha Bogoevska, Svetlana Trbojevikj. 2013. “Pension system reforms in the Republic of Macedonia: Expected benefits and challenges”. Academic Journal of Interdisciplinary Studies 2 (9): 393-399.

Fultz, Elaine, Kenichi Hirose. 2018. Second-pillar pension re-reforms in Bulgaria, Croatia, Estonia, Latvia, Macedonia, Romania, and Slovakia. Geneva, International Labour Organization.

Galev, Gale, Jadranka Dabovikj Anastasovska. 2018. Law of obligations. Skopje, Faculty of Law Iustinianus Prumis Skopje.

Grishchenko, Natalia. 2016. “Pensions after pension reforms: A comparative analysis of Belarus, Kazakhstan, and Russia”. Procedia Economics and Finance 36: 3-9.

Misheva, Kristina, Marija Ampovska, Biljana Todorova. 2019. “Challenges and opportunities of the Macedonian pension system according the EU Recommendations (Social, legal and financial aspects)” EU and comparative law issues and challenges series (ECLIC 3), 988-1007. Osijek, University Josip Juraj Strossmayer of Osijek.

Mustafai, Habil. 2017. “Pension system reform in the Republic of Macedonia”. International Refereed Scientific Journal Vision 2 (1): 69-78.

Patoska, Aleksandra, Branko Dimeski. 2015. “Pension system reforms in Macedonia: Causes, conditions and benefits”. Journal of International Scientific Publications 9: 478-486.

Pudovkin, Aleksey. 2016. “World experience of using the voluntary and mandatory funded pension systems: Lessons for Russia”. Vestnik MGIMO-Universiteta 3 (48): 258-264. (In Russian)