Since 2002, when the Federal Republic of Yugoslavia was replaced by the union of Serbia and Montenegro, the two republics are replacing federal law such as pensions with republican legislation. With the two republics using different currencies – Serbia retains the dinar while Montenegro adopted the euro – a unified pensions system is not a viable proposition.
For Serbia, which with a population of 7.5m (excluding Kosovo) against Montenegro’s 680,000 is by far the larger of the two former Yugoslavian entities, the series of wars from 1991 onwards exacerbated demographic pressures as many younger Serbs emigrated. Pensions expenditure alone consumes around 12% of GDP. Serbia operates three pensions system: the Employee Fund, which is funded by mandatory wage contributions and the self-employed and farmers’ fund which are voluntary systems financed by members’ contributions. The largest of these, the Employee Fund, is not self-financing and requires annual contributions from the budget, while the previously self-financing farmer’s fund has recently required budgetary support. The replacement rate, at 70% of gross salary, is one of the highest in the region.
Serbia has moved more aggressively than Montenegro in reforming its first pillar pensions law. In December 2001 the parliament raised the retirement age in one go by three years to 63 for men and 58 for women. The indexation of benefits was changed from wage growth to the so-called Swiss system based on both wages and inflation, the rate of indexed rises reduced from monthly to quarterly, while the minimum pension was set at 20% of gross annual wages. According to the IMF, by 2005 these reforms should cut Employee Fund contributions to 9.9% of GDP, from a projected 12.7% had no reforms taken place.
Further reforms designed to strengthen the link between contributions and final benefits took effect this April. The calculation of final pensions benefits was changed from the average of the last 10 working years to a complex points system which multiplies the ratio of worker’s salary to average national salary by the number of contribution years. The retirement age was raised further, to 65 and 60 for men and women respectively, for those with less than 40 years of work service. There are also plans to merge the three state pensions funds. International aid for the overhauls has included a World Bank draft of the third-pillar law and assistance for reforming the first pillar, while USAID is assisting with the establishment of competent supervision of the financial sector, including pensions and insurance. Meanwhile the government recently promised to set up a working group on third-pillar pensions.
Private provision has already started. Zepter and Delta offer health insurance, and there is one third pillar pension fund, Dunav-TBI, which received its licence in September 2002. Dunav-TBI is a joint venture between the state-owned Dunav Osiguranje, Serbia’s largest life and general insurer, and the Dutch-based company TBIH, which has extensive holdings in central and eastern Europe, including the subsidiaries Tatry-Sympatia, Slovakia’s largest private pensions company, and Bulgaria’s Doverie Pension Assurance Company. As of September it had 12,000 members and assets of around E1m. Its clients are primarily private and small state-owned companies, along with some private individual members. Dunav-TBI offers two types of pensions: a savings plan for retirement, and one where part of the contribution purchases additional survivor and disability insurance.
Under the current law contributors to private pensions receive some relief from state pensions contributions, but there are no tax exemptions.
Dunav-TBI targets the country’s leading companies, including foreign-owned entities, and uses both Dunav’s and TBIH’s branches. In addition it co-operates with the trade unions. In the case of company schemes, the employer would typically pay the full contribution. This is in line with a long-standing socialist tradition of the major employers taking care of many of its employee’s needs despite the currently high level of unemployment – 1m are currently out of work. Investment and capital requirements are largely governed by the 1997 insurance law, which is currently being redrafted. The new law would impose a minimum capital requirement of E3m for companies offering pensions insurance and E4m for both life and pensions insurance. Current investment regulations restrict private pensions and insurance companies to domestic markets. According to Zeev Hadar, member of the board of directors of Dunav-TBI and TBIH country manager, Dunav-TBI’s portfolio is currently in government instruments. The stock exchange, is a promising source of future investment.

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