1

TWINNING PROJECT FICHE

1. Basic Information 1.1 Programme: ENPI National Annual Action Programme 2010 for the Republic of Azerbaijan

1.2 Twinning Number: AZ/13/ENP/SO/24

1.3 Title: Support to the State Social Protection Fund on the introduction of funded element within the insurance-pension system, establishment of non-state pension funds and development of legal framework for regulating their activity

1.4 Sector: Social Protection

1.5 Beneficiary country: The Republic of Azerbaijan

2. Objectives

2.1 Overall Objective(s): Development of the insurance-pension system in Azerbaijan

2.2 Project purpose: To enhance capacity of the State Social Protection Fund (SSPF) to establish the regulatory, legal and administrative framework for the introduction of a funded element in the insurance-pension system and the establishment of non-state pension funds

2.3 Contribution to National Development Plan/Cooperation agreement/Association Agreement/Action Plan

As a response to the new geopolitical situation following EU enlargement in May 2004, the European Union (EU) adopted the European Neighborhood Policy (ENP) as a new framework for relations with its neighbors. The ENP extends beyond the existing Partnership and Co-operation Agreements and offers neighboring countries the prospect of an increasingly closer relationship with the EU with the overall goal of fostering the political and economic reform processes, promoting closer economic integration as well as legal and technical approximation and sustainable development.

The central element of the ENP is the bilateral ENP Action Plan (ENP AP), which sets out policy targets and benchmarks for the beneficiary country. With regard to social security and social protection services, the EU-Azerbaijan ENP Action Plan of 14 November 2006 sets out the following priorities to be pursued (priority area 6 and article 4.4. of the AP):

• Reform the social security system, notably to improve targeting and effectiveness of social protection measures and social assistance;

• Promote exchanges of experiences, dialogue and cooperation on matters of social security, notably on issues such as the reforms of the pension system and of the social insurance.

The Partnership and Cooperation Agreement provides for the following activities to be fulfilled (articles 44.2 and 62.3):

2

• "Design policies and other measures to bring social reforms in the Republic of Azerbaijan to be guided by the requirements of harmonious social development";

• "Pay special attention to cooperation in the sphere of social protection which, inter alia, shall include co-operation in planning and implementing social protection reforms in the Republic of Azerbaijan. These reforms shall aim to develop in the Republic of Azerbaijan methods of protection intrinsic to market economies and shall comprise all forms of social protection."

Under section 4 (General objectives and Actions) there is also a specific paragraph referring to pension fund issues, which reads as follows: "Social Insurance – pension system. Promote exchanges of experiences, dialogue and cooperation on matters of social security, notably on issues such as the reforms of the pension system and of the social insurance."

Strengthening social reform, including that of social insurance and pension systems is also foreseen in the NIP 2007-2010 (priority area 2).

The ENP-AP also includes cooperation tools, like Twinning, TAIEX and SIGMA, which play an essential role in the achievement of the Action Plan priorities. In particular, the Twinning instrument, which provides for direct co-operation between EU and Azerbaijani public bodies to support institution building activities, has proved to be particularly efficient in policy areas where the expertise required by the beneficiary country exists mainly in the public sector.

3. Description

3.1 Background and justification:

3.1.1 Background At the start of the 21st century Azerbaijan embarked on a comprehensive reform of the social protection system it inherited from the Soviet Union. A fundamental step in this process was the separation of social assistance to the poor from social insurance and pension provision. Social assistance is under the purview of the Ministry of Labour and Social Protection of the Population (MLSPP), whereas social insurance is under the purview of the State Social Protection Fund (SSPF). There is no hierarchical relationship between these organizations: they are on an equal level and both are represented in the Cabinet of Ministers on an equal footing.

The main outlines of the pension system are described in the “State Program on development of insurance-pension system in the Republic of Azerbaijan in 2009-2015” approved by the Decree of the President of the Republic of Azerbaijan dated December 30, 2008, No.111.

In accordance with this document, the state pension1 system consists of three components:

• A basic component. This component is paid in a fixed amount, independent of wage or contribution history. The only requirement is that the individual has attained a pension age and has made contributions during at least 12 years. The amount of the basic component of the old-age labour pension is set by Presidential Decree. Currently it stands at 85 manat.

• The “insurance” component of the pension. This is essentially based on a Notional Defined Contribution system. The total contribution paid into the system is 25% of wages (22% from the employer, 3% from the employee; there is neither a ceiling to the wage over which mandatory state social insurance contributions are levied, nor is there a ceiling to the pensions themselves).

1 Most often the state pensions are referred to as “labour pensions”

3

Half of this amount (that is: 12.5% of wages) is notionally credited to the individual account of the participant. Upon retirement, the annual pension under this component is calculated by dividing the amount accumulated on the notional account by 144 (that is: assuming an average remaining lifespan at retirement of 12 years for both men and women). By law, both the amounts of notional accumulations and the pensions in payment from this component are annually indexed with Consumer Price Inflation (CPI).

• A component based on real accumulation and investment of social insurance contributions (a Defined Contribution system; the funded component). This component remains to be developed, which is one of the main focuses of this Twinning Project.

Apart from the state pension system, the State Program mentioned above foresees the creation of a market for private pension provision, through the creation of a legal basis for Non-state Pension Funds (NPF) to emerge. This is a secondary point of focus for this Twinning Project.

In the widely used World Bank (WB) terminology, the “basic” and “notional insurance” (NDC) components of the pension system are considered “pillar I” pensions. The funded component of the state system is considered to constitute “pillar II” and private NPF are considered to make up “Pillar III”.

The retirement age has been increased and is still further being increased. Whereas in the Soviet Union the most common retirement age was 60 for men and 55 for women, currently the retirement age in Azerbaijan had been increased to 63 for men and 58 years 6 months (as of 2012) for women. Over the period 1 January 2013 – 1 January 2016 it will be increased for women in three annual steps of 6 months each to 60. This means that by 2016 not only the retirement age will have been increased, but that also the difference in retirement age between men and women will have been decreased from 5 to 3 years over the period 2012-2015.

For most new pensioners a significant part of career was before 2006. The procedure for considering a service record of these years in calculation of pensions has been reset based on new principles. This has been done by crediting the individual account of each person who worked before 2006 with a pension capital of 170 manat for each year worked prior to 2006.

Pensioners, who were assigned a pension before 2006, were assigned such a pension based on the old (Defined Benefit) rules, inherited from the Soviet Union. Although there was no ceiling and some individuals received a relatively high pension, for most inflation and currency reform eroded the pension and before 2006 pensions were on average below 30 Euro / month. After reform, each pensioner became entitled to a pension of at least the basic pension. Recently, the pensions of those who retired before 2006 were recalculated on the new basis with 1.94 manat (by giving pension capital of 170 manat for each year) for each year of service.

Due to these reforms currently the average monthly state pension has been raised to 150 manat. This compares to an average wage of around 380 manat, resulting in a macro-economic replacement rate of around 40%.

It should be noted that for civil servants, the military and some similar categories on the top of these pension amounts special supplements are made by the state.

Currently, there are almost 1.3 million recipients of state pensions, of which 61% are women. Of the current stock of pensioners, only around 0.3 million have retired after 2006.

Apart from old age pensions the SSPF pays disability pensions, survival pensions and a number of other social insurance payments, the total cost of which is relatively small when compared with the cost of old age pensions.

4

There are a little over 1.3 million contributors who are employees and almost 0.7 million contributors who are individual entrepreneurs or farmers. The latter pay a nominal contribution based on a minimum income or based on land ownership and soil quality. Therefore these contributions are small. This means that the relation of contributing employees to pensioners is close to 1:1. To finance pensions of those who retired in the old system as well as state supplements to the pensions, to top up income from contributions at a 40% replacement rate, relatively large transfers are made from the general budget: around 40-42% of the budget of the SSPF consists of this transfer from the general budget.

In the budget for 2013 a total of around 2.5 billion manat in pension payments is foreseen. Of this amount, about 1.5 billion manat is expected to be funded from mandatory social insurance contributions. The remaining part is expected to be funded on the basis of a transfer from the state budget.

Whereas around 2 million individuals in one way or another contribute to the state pension system, the employed population of Azerbaijan is estimated to consist of over 4 million individuals. This means that there is a large component of informal labour. Furthermore, among the employees who do contribute to the pension system, the official wage on the basis of which contributions are calculated is on average significantly lower than the average wage in the economy as assessed by surveys. Factors that may reinforce this mechanism include:

• The registration of business entities is not with SSPF (the registration of business entities is carried out by tax agencies on a single window system)

• SSPF’s possibilities to control the conclusion of labour contracts are weak (authorities in this area are given to the Ministry of Taxes and the Labour Inspection Service of the Ministry of Labour and Social Protection of the Population)

• Absence of progressive social insurance rates’ scale for the employees and regressive social insurance rates’ scale for the employers

• Absence of a single control methodology ensuring legalization of the number of employees and the salaries at the same time

One of the policy goals of the Government of Azerbaijan is to increase compliance with the obligation to pay social insurance contributions by increasing formal employment at the expense of the informal sector.

3.1.2 Justification The main justification for this Twinning project is that Azerbaijan has decided to embark on the implementation of funded component and non-state pension funds as part of its pension system (as described above).

More in particular, the SSPF requires access to the experience of a similar institution from an EU Member State with more advanced standards and if possible some similarities with the system that Azerbaijan is implementing. Thus SSPF and Azerbaijan will be able to learn from the experiences – both successes and setbacks – of this EU Member State.

The Development Concept “Azerbaijan – 2020: the vision of the future”, which was adopted at the end of 2012, has once more reaffirmed the development of the pension system in line with the “State Program on development of insurance-pension system in the Republic of Azerbaijan in 2009-2015”. To this effect on 29 November 2012 the President issued an order mandating the development of a

5

conceptual document that should contain the main approaches of such further development. This concept paper is expected to appear in spring 2013.

3.2 Linked activities: The State Social Protection Fund of Azerbaijan Republic (SSPF) has already received technical and financial support from international donors.

The United Nations Development Program (UNDP) project “On capacity building for the State Social Protection Fund of Azerbaijan Republic” (2003-ongoing) has been elaborating the methodological, technological and legal basis for the establishment, introduction and administration of the personal accounts system, developing and conducting of special training courses for SSPF’s structural units to ensure the transition to this system.

The project “Technical Assistance for Pension Reforms Project” (January 2011 – July 2012) with the United States Trade and Development Agency has advised on issues concerning the financing of the pension system.

3.3 Results: The project will have two main components:

I. Capacity building aimed at implementation of the funded component in the state insurance-pension system (“second pillar”);

II. Capacity building aimed at the establishment of non-state pension funds (“third pillar”).

These components coincide with two lines of development mandated by the “State Program on development of insurance-pension system in the Republic of Azerbaijan in 2009-2015”. It should be noted that these directions of development are envisaged as conceptually quite separate from each other. The only major point of overlap is where private pension funds may play a role in the management of “second pillar” pension accumulations.

In line with the requirements of the State Program, 5 mandatory results have been identified for the Twinning project, as follows:

Component I

1. Relevant pieces of legislation elaborated for establishment of the funded component in the state insurance-pension system.

As regards this result, the Twinning project partners will draw on the experience of the EU member state(s) involved in implementing this Twinning project, but should also systematically consider relevant elements of legislation issued in other countries with similar systems where this is practical. This legislation is expected to provide a legal basis for: a) identifying a mechanism for collecting of funds on real funded accounts; b) developing the methods for managing the funds accumulated on the funded accounts as well as a legislative basis providing for the requirements to managing companies and specialized custodians; c)defining the procedures for the selection of managing companies to manage the funds accumulated on the funded accounts as well as rules on selection of the relevant managing companies by the insured persons; d) developing regulatory and legal framework providing for the mechanisms of administrative and technical control over the investment of the funds on the funded part of individual accounts of the insured.

6

2. Technical description of the mechanism for accumulation and management of the funds on the individual real funded accounts.

The description of the mechanism is meant to outline the technical details of organizational solutions at the SSPF in order to implement the pieces of legislation (framework legislation and by-laws and secondary regulations) in relation to implementation of the funded component in the state system. The description is as a minimum to include proposals, solutions for adaptation of the current, and design of new organizational structures and IT systems within the SSPF.

Component II

3. Elaboration of a relevant legal framework to organize the process of establishment of non-state pension funds.

This is a package of legislation to enable and regulate non-state pension funds in the envisioned market for private, voluntary pension arrangements. This legislation is expected to provide a legal basis in the following directions: a) development of legal framework for the establishment of non-state pension funds and regulating their activity; b) development of regulations for allocation of non-state pension funds’ resources and control over such placements; c) development of mechanisms for granting, financing and delivery of non-state pensions by non-state pension funds; d) involvement of non-state pension funds to the participation in the management of resources on the funded part of the insured’s individual account in the state pension system. Draft of the relevant legislation will be developed, with frequent consultations with an interdepartmental working group, involving representatives of other ministries and state bodies, such as MoF, NB, MED, SC and possibly representatives of employers, employees, consumer organizations etc.

Two further results are foreseen that relate to both components:

4. Capacity of the relevant SSPF staff enhanced through training and coaching to ensure effective launch and implementation of the funded component in the state pension system and to play a role (which role remains to be decided) in creating a market for non-state pension funds.

Relevant SSPF staff (mainly staff of Individual Accounts Department, Finance-Budget Department, Legal and Strategic Researches Department, Labour Pension Department, International and Public Relations Department and IT Department) is to get trained and prepared to launch and manage the introduction of the funded elements into the state pension system.

5. A communication strategy elaborated to raise public awareness concerning the new funded component of the state pension system and the newly created market of private pension funds.

The communication strategy is to set out approaches for the SSPF to deploy in order to deliver appropriate communication messages to employees, employers, and other players regarding the funded components of the state pension system and the newly created market of private pension funds.

3.4 Activities: The Twinning will allow the SSPF for developing a close relationship with their peer institution from an EU member state. The listed activities and the proposed means for achieving the activities are

7

indicative and upon necessity may be revised in the course of preparation and implementation of the contract between the twinned institutions.

General activities

0.1 Kick-off conference

Method The first month of the project will be used to allow the installation of the Resident Twinning Adviser (RTA) in Azerbaijan. The RTA will work from an office at the SSPF.

A ‘ceremonial’ event - one-day kick-off meeting - will be organized in the first month aiming at launching and presenting the project to the stakeholders, the media and the public at large. The event should involve the key EU MS and SSPF officials, EU Delegation and eventually other EC officials, representatives of the PAO, representatives of international organisations, and other stakeholders within Azerbaijan, including relevant Government departments. In order to guarantee large public information about the start of the project, the meeting will be concluded with a press conference and a press release.

Benchmarks Stakeholders, media and public informed about the start and content of the project by end of month 2

0.2 Thematic mid-term project visibility event

Method This kind of event is an opportunity to communicate on the project achievements and propose the way forward but it can more appropriately be an opportunity to raise awareness, facilitate enforcement and implementation of legislations or measures adopted by the project so far or tackle an important issue which is relatively new. The following stakeholders may be invited: representatives of other ministries, civil society, NGOs, private firms, trade unions, professional associations, the tripartite council, international organisations, EU MS representatives in the country, international speakers. The presence of the media is a must. A leaflet, press releases shall be prepared.

Benchmarks Stakeholders, media and public informed about the project progress by the end of month 11

0.3 Closing Conference

Method During the last two months of the project, a closing conference, which could have the format of a symposium, will be organized, where the results of the project will be presented. The conference will be concluded with some recommendations for possible follow-up and lessons learnt for sustainability actions and follow-up steps. The final event can also be organised as a visibility event on a specific theme of interest.

Benchmarks Closing Conference organized (Month 18)

8

Recommendations and Lessons learnt formulated and discussed (Month 18)

Stakeholders, media and public informed about the results of the project at its end (Month 18)

Component I Capacity building aimed at implementation of the funded component in the state pension system (“second pillar”)

1.1 Workshop on the key issues to be addressed in the implementation of a funded component in a multi-level state insurance-pension system

Method The RTA and short term experts will conduct a two-day workshop with relevant staff of the SSPF to list and address the key issues that need to be resolved in the implementation of the system. The key issues will at least include:

• Mechanisms of accumulation of the funds on the funded accounts;

• Mechanisms of managing the funds accumulated on the funded accounts contributions;

• Type of investments the accumulations may be channeled;

• Methodology to value assets and calculate investment return;

• Choice of investment options offered;

• Possible use of private sector institutions for the funded component in the state pension system;

• Initial mechanism for the pay-out phase.

The discussions in the workshop and subsequent informal follow-up meetings are to result in a detailed blueprint/paper that would re-confirm the new design of the system.

Benchmarks Two day training session conducted and follow-up meetings held (Month 2)

A paper, providing a detailed blueprint of the accumulations system is provided as a draft to the management of the SSPF for consideration. (Month 2)

1.2 Drafting of the legislation in relation to a funded component in a multi-level state pension system

Method The RTA, and short term experts as appropriate, will assist the SSPF in drafting of the appropriate legislation, in a format that corresponds to the formal and informal requirements (“legal culture”) to Azerbaijani law. Legislation will consist of framework laws, and also comprise any bylaws and regulations that are necessary to make the system work in practice.

The drafting process should involve a series of working meetings between

9

Twinning partners (SSPF experts and STE from EU MS administration) to ensure that the know-how is transferred in an on-the-job training mode.

Benchmarks A comprehensive set of legislative documents providing a viable basis for the operation of the accumulations system is provided as a draft to the management of the SSPF for consideration.

1.3 Workshop on the legislative proposals with the key stakeholders

Method Twinning partners will hold a workshop with the key stakeholders (other governmental bodies, employers and employees organisations, as the case might be) to discuss the proposed legislation. The workshop is supposed to facilitate the consultation process after the SSPF distributes the legislative proposals to relevant institutions of the Azerbaijani administration, as appropriate.

During the workshop, the Twinning partners will explain the background of the pension system reform, as well as present the particular pieces of legislation to the key stakeholders.

Benchmarks One-day workshop with SSPF and the key stakeholders

Report on the workshop, including the list of remarks and comments to the proposed legislation

2.1 Thorough analysis of management processes of the SSPF

Method The RTA and STE will make a detailed review of the management systems, including IT systems, currently installed at the SSPF. During the system review, the experts will take into account requirements that derive from the blueprint and the legislation under elaboration, assess the current management systems at the SSPF to identify likely gaps and provide proposals for technical solutions.

Benchmarks Assessment Report on the management processes at the SSPF, including recommendations on what amendments to be introduced in order to address the provisions in the blueprint and the draft legislation (Month 6)

2.2 Drafting a technical description of the mechanism for accumulating and management of the funds on the real funded accounts

Method The RTA, and short term legal experts as appropriate, will assist the SSPF in drafting a “turn-key” solution for the technical process of accumulating and management of the funds on the individual funded accounts, allowing the resulting accumulations to be invested, keeping track / capturing the change in value of accumulations over time, reporting back to participants, converting accumulations into payments etc.

This subcomponent is very important as it allows Azerbaijan to profit from the “hands-on” experience of the MS in operating the system, avoiding any pitfalls that the MS may have had to learn to avoid by trial and error.

If and when subsequent changes will be made to the overall blueprint of the system and/or to the legislative base, it needs to be assessed to what extent the technical design developed needs to be adjusted as well. This may take place during the Twinning project, but most likely will be carried forward by SSPF

10

itself afterwards based on the enhanced capacity it has acquired in his field

Benchmarks A comprehensive description of the mechanism is provided to the management of the SSPF for consideration. (Month 12)

2.3 Workshop on the proposed technical solutions to the management systems, including IT systems, in the SSPF

Method After the comprehensive description of the mechanism is provided, RTA and short-term experts will hold a specific workshop. It is foreseen as a summary presentation of the mechanism to the key decision makers at the SSPF.

Benchmarks One-day workshop delivered to up to 20 trainees

Component 2: Capacity building aimed at the development of non-state pension funds (“third pillar”)

3.1 Workshop on key issues to be addressed for private, voluntary, pension arrangements

Method The RTA, and short term experts as appropriate, will work with the RTA Counterpart and SSPF professional staff as appropriate to address all the issues that need to be resolved prior to implementation of the system by means of legislation and real-world infrastructure. Even more than in component 1, it is important that in this process other stakeholders will be actively involved. This involvement will be facilitated by the SSPF.

The workshop will result in a detailed blueprint for private, voluntary pension arrangements.

Benchmarks A blueprint, providing a detailed description of the market for private, voluntary, pension arrangements is submitted to the management of the SSPF for consideration. (Month 12)

3.2 Drafting of legislation to facilitate and regulate private, voluntary, pension arrangements

Method The RTA, and short term legal experts as appropriate, will assist the SSPF in drafting of the appropriate legislation, in a format that corresponds to the formal and informal requirements (“legal culture”) to Azerbaijani law.

Legislation will not only consist of framework laws, but also comprise any bylaws and regulations that are necessary to make the system work in practice.

Benchmarks A comprehensive set of legislative documents providing a viable basis to facilitate and regulate private, voluntary, pension arrangements is provided to the management of the SSPF.

Activities relating to both components:

4.1 In-depth presentation of the state pension system of the EU MS to relevant SSPF staff and other stakeholders

11

Method This is an introductory event to familiarize the SSPF staff with pension systems in the EU MS. The RTA, and short term experts as appropriate, will conduct a one-day workshop on all the aspects governing the state pension system in the EU MS. This workshop will serve to increase awareness of a wide group of specialists in SSPF and other stakeholders, which will allow them to grasp more easily the advice provided by the EU MS experts. Participants provided a report with “lessons learned” and follow-up questions

Benchmarks Training event for up to 30 participants

Report with “lessons learned” and follow-up questions

4.2 Conducting a training needs analysis of the relevant SSPF staff

Method The RTA and short-term experts on human resource management will conduct a training needs analysis of the SSPF staff who will be involved in the preparation and implementation of the funded component in the state pension system. The findings of the analysis will be highlighted in a separate report. The report will define the training topics that need to be addressed to ensure necessary staff skills are in place, as well as training methods, i.e. balance between group training activities and on-the-job training.

Benchmarks Report on the training needs analysis (Month 1)

4.3 Training relevant SSPF staff

Method Based on the TNA results, RTA and short-term experts will carry out a series of training sessions. The group training sessions will constitute a part of SSPF staff capacity development efforts. These sessions will supplement on-the-job training activities which is a basis for knowledge and skill transfer.

Benchmarks 2 training sessions to SSPF staff completed

4.4 Study mission / internship for a maximum of three SSPF staff to the EU MS

Method The EU MS Twinning partners will arrange a study mission for a maximum of three SSPF staff to the EU MS to show how the system in the EU MS works in actual reality. The goal of this study mission is to make discussions less abstract by providing a point of reference a system that is operating successfully. The focus should not be on presentations, but on actual “hands-on” experience of how the system operates on a day-to-day basis on the working level.

Benchmarks Study mission / internship completed

5.1 Drafting a communication strategy to raise public awareness concerning the new funded

12

component of the state insurance-pension system

Method The RTA, and short term experts as appropriate, will assist the SSPF in drafting a communication strategy to raise public awareness concerning the new funded component of the state pension system.

Benchmarks A communication strategy to raise public awareness concerning the new funded component of the state pension system ready to be implemented if and when deemed appropriate. (Month 14)

5.2 Launch of pilot communication activities to raise public awareness of the pension system

Method RTA and short-term experts on public relations will support the SSPF to initiate pilot communication activities. These will at least include printed information materials, web portal, etc.

Benchmarks Information materials designed and delivered (Month 17)

3.5 Means/ Input from the MS Partner Administration:

3.5.1 Profile and tasks of the Project Leader The Project Leader will be expected to devote a minimum of 3 days per month to the project in his home administration. In addition, he will coordinate, from the Member state side, the Project steering Committee (PSC), which will meet in Azerbaijan every three months.

Profile:

• At least 10 years of experience in the field of funded pension systems; • Experience in an active senior management position in the Member State institution for at least 3

years; • Experience in project management; • Excellent command of English; • Experience in Twinning would be an asset • Experience working in the countries implementing funded component in the state insurance-

pension system and established non-state pension funds would be an asset; • Ability to use Russian, Turkish or Azeri as a working language is an advantage

Tasks:

• Overall coordination, guidance and monitoring of the project; • Preparation of project progress reports with support of RTA; • Timely achievement of the project results; • Co-Chairing of project steering committees; • Provision of legal and technical advice and analysis whenever needed.

13

3.5.2 Profile and tasks of the RTA One Resident Twinning Adviser (RTA) over a period of 18 months as well as medium/short term experts will implement the above-listed components. The main responsibility of the RTA will be to provide “hands-on” experience and knowledge to the beneficiary and to guide the beneficiary through the process of decision making on all relevant aspects of the system. Apart from this, the RTA has the responsibility to guide the work of the team. This is far from a role as merely a “process manager”. The RTA needs to be highly knowledgeable and act as the “lead consultant” to the SSPF. The RTA should be a specialist in the area of funded and notionally Defined Contribution pension systems.

The RTA is expected to fulfill the following profile:

• Minimum 7 years of experience in the relevant field as described above; • Previous experience in project management; • Experience in working on similar projects in transition countries will be an asset; • Experience in Twinning would be an asset • Experience working in the countries where funded component in the state insurance-pension

system is implemented and non-state pension funds established would be an asset; • Good training, public speaking, diplomatic and written communication skills; • Excellent computer literacy (Word, Excel, Power Point); • Excellent command of spoken and written English; • Ability to use Russian, Turkish or Azeri as a working language is an advantage.

Tasks:

• Overall supervision of the project implementation and coordination of all activities, as well as management of the project administration;

• Coordination of the activities of the team members in line with the logical framework and detailed work programme, to enable timely completion of project outputs;

• Providing technical input to the project whenever needed and provision of advice in his field of expertise;

• Liaison with MS and BC Project Leaders and daily contacts with RTA-Counterpart; • Preparation of project progress reports, in conjunction with MS and BC Project Leaders; • Liaison with EU Project Manager; • Liaison with other relevant projects and Azerbaijani institutions. 3.5.3 Profile and tasks of the short-term experts Profile of short-term expertise

There should be a pool of short term experts to ensure smooth implementation of the project during the overall implementation period. STEs should be identified by the Project Leader/RTA and have to be agreed with the Beneficiary administration in the course of designing and delivery of the project.

In terms of general experience and qualifications, the short- and medium-term experts shall have:

• University degree in a relevant subject; • Minimum of five years of experience in their respective field;

14

• Experience in Twinning would be an asset • Experience working in the region or in CIS countries would be an asset; • Excellent command of written and spoken English; • Ability to use Russian, Turkish or Azeri as a working language is an advantage;

4. Institutional Framework The State Social Protection Fund of the Republic of Azerbaijan (SSPF) is the designated central executive authority for the management of the social insurance and pension system. The main normative legal documents regulating the activity of the Fund are the Laws of the Republic of Azerbaijan on Social Insurance, on Individual Accounting in the State Social Insurance System and on Labour Pensions. Functions regarding personal accounting in the state social insurance system are exercised by the Personal accounts Department of the Fund's Central Office and in local branches.

The SSPF plays a leading role in the reform of the pension system and has equal status to a line ministry and is represented by its chairman on an equal footing in the Cabinet of Ministers.

The State Social Protection Fund of Azerbaijan Republic (SSPF) was established by the Decree of the President of Azerbaijan Republic dated 30th September, 1992 “On the establishment of the State Social Protection Fund of Azerbaijan Republic” on the basis of the Pension Fund of Azerbaijan Republic and the Social Insurance Fund of Azerbaijan Republic, with the aim of improving the administration in the area of financing the provision of pensions and social insurance. Supported by an independent finance–bank system, the SSPF was commissioned with the financing of pensions, benefit and payment expenses as its fundamental duty.

In 1997 the Law “On social insurance”, the activities of the State Social Protection Fund were reviewed to allow the SPPF to become the State administration responsible in the area of mandatory state social insurance.

A Presidential Decree dated 17th July 2001 approved a series of measures taken during the period 2001–2005 with the aim of fulfilling “The Concept of Pension Reform in the Republic of Azerbaijan”. The aim was to foster the development of a social insurance and provision of pension system in line with European standards.

Since 27th November 2001, based on the Law “On individual accounts in the system of the state social insurance”, the SPPF has been operating as the central executive body carrying out individual accounting in the state social insurance system.

To comply with the President's Decree # 908 dated 4th August 2003 “On measures for improving the state pension system in Azerbaijan Republic”, the functions of the Ministry of Labor and Social Protection of the Population of Azerbaijan Republic on granting, financing and control over payments of pensions and supplemental benefits were transferred to the State Social Protection Fund. Hence, the SPPF has now a mandate for the administration in the area of individual accounting and mandatory state social insurance schemes.

The new Mandate of the SPPF was approved by decree of the President #781 dated August 31, 2002 (with additions and changes on the basis of the decrees #908 dated August 4 2003; # 148 dated December 2 2004; # 294 dated September 15, 2005; # 499dated December 22, 2006).

According to the new mandate, the overall objective of SSPF is to administer the State social insurance and labor pensions in the Republic of Azerbaijan. The main functions of the SSPF are as follows:

• To develop proposals on the state policy in the area of social insurance and labour pensions as well as participation in the implementation of this policy;

15

• To manage the mandatory state social insurance funds, to carry out administration in the area of labor pensions as well as assignment, funding and control over payment of labor pensions;

• To determine the rules of registration and deregistration of mandatory state social insurance participants;

• To determine, in accordance with legislation, the rules of accounting, calculation and collection of mandatory state social insurance contributions;

• To control, within the limits of the legislation, the correct calculation and payment of mandatory state social insurance contributions;

• To receive the reports on mandatory state social insurance from employers and entrepreneurs; • To collect, summarize and present to the appropriate agencies monthly, quarterly and annual

reports from the agencies specified under the legislation on the budget performance of the Fund; • To issue state insurance cards to the insured; • To carry out accounting and statistics in the established manner; • To carry out appropriate activities for professional development of staff; • To provide practical and methodical assistance to its local branches in the organization of their

work, to investigate and disseminate best practice; • To carry out activities for the establishment of information technology in the local branches of

the Fund.

To carry out its functions, the SSPF is currently divided into a Central Administration, 3 departments (Department for work with major employers, Department for work with legal entities in Baku city, Department for work with military personnel and persons with special ranks) and 84 regional offices (one local office for each region of Azerbaijan). The Central Administration, located in the headquarter of SSPF consists of 14 departments among which the main beneficiaries of the Twinning project are the Individual accounts department, the Finance-budget department and the HR and staff training department.

The number of employees (excluding support staff) is as follows:

• SSPF – 2,424 persons; • Central Office – 170 persons; • Individual accounts department – 21 persons; • Finance-budget department – 19 persons; • HR and staff training department – 8 persons.

5. Budget The beneficiary will provide in kind contribution in the form of office facilities as per the Common Twinning Manual. The maximum total budget available of the action is € 750,000.

6. Implementation Arrangements

6.1 Implementing Agency: The European Union Delegation in Baku will be responsible for tendering, contracting, payments and financial reporting, and will work in close cooperation with the beneficiary.

16

Delegation of the European Union to the Republic of Azerbaijan Landmark III 11th Floor 90A Nizami Street AZ1010 Baku Phone: (+994 12) 497 20 63 Fax (+994 12) 497 20 69 Website: www.eeas.europa.eu/delegations/azerbaijan Programme Administration Office will support the Twinning Project implementation process together with the EU Delegation. The person in charge of this project is:

Mr. Sahil Babayev, Director of PAO

Head of the Department on Cooperation with International organizations Ministry of Economic Development of the Republic of Azerbaijan 6th floor, Government House, 40 Uzeyir Hajibeyov Street Baku, AZ 1000 Republic of Azerbaijan Tel.: (+994 12) 493 88 67 (ext. 2115) Fax: (+994 12 ) 598 07 86 Email: s.babayev@economy.gov.az

6.2 Main counterpart in the BC Project leader:

Mrs. Shalale Jafarova Head of Personal Accounts Department State Social Protection Fund of the Republic of Azerbaijan 80, H. Zardabi Avenue, AZ 1122 Baku, Azerbaijan

RTA counterpart:

Mr. Emin Alirzayev Consultant at the Unit for informing the insured persons and archiving Personal Account Department. State Social Protection Fund of the Republic of Azerbaijan 80, H. Zardabi avenue, AZ 1122 Baku, Azerbaijan Apart from the above officials, the beneficiary will appoint a component leader for each of the components of the project. Each component leader will lead a working group.

6.3 Contracts The project will be implemented through one Twinning contract.

17

A new Financial Regulation applicable to the general budget of the European Union entered into force on 1st January 20132. This implies several changes to the Twinning contract templates. An updated version of the Twinning Manual and of its Annexes, incorporating these changes, is in preparation and shall be published soon on Europe Aid website3. The Twinning contract that shall be signed as a result of the present procedure shall follow the templates of the updated Twinning Manual and Annexes.

6.4. Project Steering Committee: A Project Steering Committee (PSC) will be established for the control and supervision of the project activities and the mandatory results. The Steering Committee will meet every quarter to present a quarterly report. Official minutes of the PSC meetings will be kept in English and Azeri and distributed to all parties within 15 days after the PSC meeting.

7. Implementation Schedule (indicative) 7.1. Launching of the call for proposals: March 2013

7.2. Start of project activities: October 2013

7.3. Project completion: June 2015

7.4 Work plan duration:

The work plan duration (presence of the RTA in Azerbaijan) is 18 months. Duration of the Twinning Contract is 21 months, which includes the period of additional 3 months for commencement and finalization of the project).

8. Sustainability The project will enhance the capacity of SSPF to play a leading role in the introduction of funded elements in the pension system of Azerbaijan. By means of both formal training and training-on-the-job, not only legislation and other deliverables will appear, but also the capacity of SSPF staff to take the reform further will be enhanced. The preparation of a communication strategy to raise public awareness about the introduction of funded components will prepare the Government of Azerbaijan and SSPF to involve the wider public and thereby to create awareness of and support for the intended reform.

9. Crosscutting issues Fairness of pension outcomes for male and female workers/citizens is an issue that should be taken into account in the implementation of this project. “Fairness” on the one hand can mean “get what

2 Financial Regulation: Regulation (EC, Euratom) No 966/2012 of the European Parliament and of the Council of 25 October 2012 on the financial rules applicable to the general budget of the Union and repealing Council Regulation (EC, Euratom) No 1605/2002. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:298:0001:0096:EN:PDF Rules of Application: Commission Delegated Regulation (EU) No 1268/2012 of 29 October 2012 on the rules of application of Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council on the financial rules applicable to the general budget of the Union. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:362:FULL:EN:PDF

3Link to DEVCO twinning page EN: http://ec.europa.eu/europeaid/where/neighbourhood/overview/twinning_en.htm

18

you paid for”. On the other hand it can mean “difference being not too large”. What exactly is fairness and how to achieve it is an issue for the beneficiary and the project to define and implement.

10. Conditionality and sequencing There is no precondition set for this Twinning project.

ANNEXES TO THE PROJECT FICHE: ANNEX I - LOGFRAME PLANNING MATRIX:

Programme name and number:

Introduction of funded element within the pension system of the Republic of Azerbaijan , establishment of non-state pension funds and development of legal framework for regulating their activity

Overall objective Objectively verifiable

indicators Sources of Verification Assumptions

To strengthen the social insurance and pension system in Azerbaijan

Positive assessment of the pension reform by local and international organisations (Commission of the European Union, the World Bank, NGO)

EU ENP Progress Report World Bank reports on country’s progress Annual reports of the State Social Protection Fund

Project purpose Objectively verifiable indicators

Sources of Verification Assumptions

To enhance capacity of the State Social Protection Fund (SSPF) to establish the regulatory, legal and administrative framework for the introduction of funded element in the pension system, establishment of non-state pension funds and development of legal framework for regulating their activity

Positive assessment of the SSPF capacities

EU ENP Progress Report Annual reports of the SSPF

- The President of the Republic of Azerbaijan supports the proposal of the SSPF for the pension reform - SSPF establishes appropriate cooperation and information exchange links with other relevant institutions in the administration (e.g. Ministry of Finance, Ministry of Taxes, etc.) - Adequate financial resources are allocated to ensure solid backing of the pension reform - Capital market and other relevant financial institutions are further developed in Azerbaijan - There is overall understanding and support of the pension reform on the business side as well as employees

Results Objectively verifiable indicators

Sources of Verification Assumptions

1. Relevant pieces of legislation elaborated for establishment of the funded component in the state pension system 2. Technical description of the mechanism for accumulation and management of the funds on the individual funded accounts elaborated 3. Relevant pieces of legislation elaborated to facilitate the development of non-state pension institutions 4. Capacity of the relevant SSPF staff enhanced through training and coaching to ensure effective launch and implementation of the funded component in the state pension system 5. A communication strategy elaborated to raise public awareness concerning the new funded component of the state pension system

• Package of legislation for establishment of the funded component of the pension system accepted by the SSPF for use in dialogue with other stakeholders by the end of the project duration;

• Technical description of the internal SSPF mechanisms in relation to implementation of the funded component in the state pension system accepted by the SSPF by the end of the project duration;

• Positive improvement of the SSPF staff assessment results (impact of training and coaching activities) by the end of the project duration;

• Communication strategy to raise awareness on the pension reform accepted by

• Twinning project interim quarterly and final report;

• Decisions of the SSPF Director

• Minutes of the SSPF consultation meetings/presentations to relevant stakeholders

- SSPF retains its key staff who possess relevant knowledge, competences and skills to continue working on the pension reform - There is political will at the top management of the SSPF to promote introduction of the funded elements in the pension system, and overall political support to the SSPF for the pension reform

the SSPF management;

• Package of legislation on development of non-state pension institutions accepted by the SSPF Board of Directors for use in dialogue with other stakeholders by the end of the project duration

Activities/Components or input Means (indicative) Assumptions 0.1 Kick-off conference 0.2 Thematic mid-term project visibility event 0.3 Closing Conference 1.1 Workshop on the key issues to be addressed in the implementation of a funded component in a multi-level state pension system 1.2 Drafting of the legislation in relation to a funded component in a multi-level state pension system 1.3 Workshop on the legislative proposals with the key stakeholders 2.1 Thorough analysis of management processes of the SSPF 2.2 Drafting a technical description of the mechanism for accumulation and management of funds on the individual funded accounts 2.3 Workshop on the proposed technical solutions to the management systems, including IT systems, in the SSPF 3.1 Workshop on key issues to be addressed for private, voluntary, pension arrangements 3.2 Drafting of legislation to organize and regulate private, voluntary, pension arrangements

PL, RTA, RTA Assistant, STEs, translation/interpretation, transportation, printed materials, venues

- Continued political will on the part of the SSPF to engage in moving towards the introduction of funded elements in the pension system - Sufficiently qualified, knowledgeable and energetic staff can be made available to work alongside the RTA and short tern-consultants to work on these issues - SSPF will have already developed appropriate econometric models and have them in place enabling assessment of different pension reform scenarios and its key variables

4.1 In-depth presentation of the state pension system of the EU MS to relevant SSPF staff and other stakeholders 4.2 Conducting a training needs analysis of the relevant SSPF staff 4.3 Training relevant SSPF staff 4.4 Study mission / internship for a maximum of three SSPF staff to the EU MS 5.1 Drafting a communication strategy to raise public awareness concerning the new funded component of the state pension system 5.2 Launch of pilot communication activities to raise public awareness of the pension system Preconditions none

Annex II List of Legislation

1. Law of the Republic of Azerbaijan "On Labour Pensions" № 54-IIIQ (7.02.2006) 2. Law of the Republic of Azerbaijan on Social Insurance № 250-IQ (18.02.1997) 3. “State Program on development of insurance-pension system in the Republic of Azerbaijan in

2009-2015” approved by the Decree of the President of the Republic of Azerbaijan dated December 30, 2008, No.111

4. Development Concept “Azerbaijan – 2020: the vision of the future”, adopted by the Decree of the President of the Republic of Azerbaijan on 29 December 2012