BULGARIAN SYSTEM OF PRIVATE FULLY-FUNDED BULGARIAN SYSTEM OF PRIVATE FULLY-FUNDED PENSIONS PENSIONS (ACHIEVEMENTS AND CHALLENGES) (ACHIEVEMENTS AND CHALLENGES) “ “ Pension Reform in Eastern Europe Pension Reform in Eastern Europe : : Experiences and Perspectives Experiences and Perspectives ” ” Kiev Kiev , , Ukraine Ukraine , , May May 27-28 27-28, 2004 2004 Nikola Abadjiev, Ph.D Nikola Abadjiev, Ph.D . . Chairman Chairman of of BASPSC BASPSC BULGARIAN ASSOCIATION OF SUPPLEMENTARY BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIES PENSION SECURITY COMPANIES
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BULGARIAN SYSTEM OF PRIVATE FULLY-FUNDED PENSIONS (ACHIEVEMENTS AND CHALLENGES) “Pension Reform in Eastern Europe: Experiences and Perspectives” Kiev,
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BULGARIAN SYSTEM OF PRIVATE FULLY-FUNDED BULGARIAN SYSTEM OF PRIVATE FULLY-FUNDED PENSIONSPENSIONS
(ACHIEVEMENTS AND CHALLENGES)(ACHIEVEMENTS AND CHALLENGES)
““Pension Reform in Eastern EuropePension Reform in Eastern Europe: : Experiences and PerspectivesExperiences and Perspectives” ” KievKiev, , UkraineUkraine,, May May 27-28 27-28,, 2004 2004
Nikola Abadjiev, Ph.DNikola Abadjiev, Ph.D. . ChairmanChairman ofof BASPSCBASPSC
BULGARIAN ASSOCIATION OF SUPPLEMENTARYBULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIESPENSION SECURITY COMPANIES
DEVELOPMENT OF BULGARIAN PRIVATE PENSION DEVELOPMENT OF BULGARIAN PRIVATE PENSION SYSTEMSYSTEM
1994 – 1994 – voluntary savings for fully-funded pensions based on individual voluntary savings for fully-funded pensions based on individual account accumulations emerged;account accumulations emerged;
1997 – 1997 – activity consolidation; incorporation of the industry representative activity consolidation; incorporation of the industry representative organization Bulgarian Association of Supplementary Pension Security organization Bulgarian Association of Supplementary Pension Security Companies;Companies;
1999 –1999 – Implementation of the legal framework for II and III pillar of a fully- Implementation of the legal framework for II and III pillar of a fully-funded pension system funded pension system ((SVPIA and MSIC were passedSVPIA and MSIC were passed));;
2000 – 2000 – Institutionalization of the state supervision for pension fund Institutionalization of the state supervision for pension fund management – State Insurance Supervision Agency (SISA)management – State Insurance Supervision Agency (SISA). . Licensing of Licensing of pension fund managing companies; pension fund managing companies;
2001-2002 – 2001-2002 – Start of the II pillar – mandatory fully-funded pensions through Start of the II pillar – mandatory fully-funded pensions through participation in universal and occupational pension funds;participation in universal and occupational pension funds;
2003 – 2003 – Implementation of a Social Insurance Code. Institutionalization of Implementation of a Social Insurance Code. Institutionalization of the state supervision over the entire financial non-banking sector into a the state supervision over the entire financial non-banking sector into a united body – Financial Supervision Commission (FSC).united body – Financial Supervision Commission (FSC).
Bulgarian Pension ModelBulgarian Pension Model
I PILLARMandatory social
insurancePAYG system
NSSI
II PILLARSupplementary
mandatory pension insurance
Fully-funded pension system
with individual accounts
III PILLARSupplementary
voluntary pension Insurance Fully-funded
pension system with individual accounts
Voluntary pension funds – since –1994
Occupational pension funds – mandatory participation of
persons entitled to early retirement for heavy work
Universal pension funds – mandatory participation
of persons born after 31.12.1959
MAJOR FEATURES OF BULGARIAN PENSION MODELMAJOR FEATURES OF BULGARIAN PENSION MODEL
REFORMING THE PUBLIC SOCIAL SECURITY SYSTEM ADMINISTERED BY THE STATE (FIRST PILLAR)
PUBLIC CONTROL OVER THE OPERATION OF PENSION COMPANIES (CONSULTATIVE AND TRUSTEE BOARDS) STATE SUPERVISION OVER THE ACTIVITY OF PENSION FUND
MANAGEMENT; TAX ALLOANCES FOR PENSION FUND MEMBERS AND EMPLOYERS.
STATE SUPERVISIONSTATE SUPERVISION
FINANCIAL SUPERVISION COMMISSION
specialized state body competent to regulate and supervise the investment, private pension provision and insurance activity in the country.
Directorate of Social Insurance Supervision: directly regulates and supervises the activity of directly regulates and supervises the activity of pension funds and their managing companies in pension funds and their managing companies in compliance with the Social Insurance Code. There compliance with the Social Insurance Code. There are two departments in the directorate:are two departments in the directorate:
- - Licensing and Risk Valuation Departments and
- Supervision Department .
FINANCIAL SUPERVISION COMMISSION, FINANCIAL SUPERVISION COMMISSION, Directorate of Social Insurance SupervisionDirectorate of Social Insurance Supervision: :
Competences of the Licensing and Risk Valuation Competences of the Licensing and Risk Valuation Department:Department:
Issues and revokes licenses; Gives permission for registration pension funds; Drafts and issues methodologies, guidelines and document samples; Prepares projections for the industry; Maintains a database for risk analysis and valuation; Studies and analysis the implementation of actuarial standards; Makes suggestions on the implementation and issues recommendations on
the interpretation of legislation; Participated in the drafting of laws, regulations, instructions and written
guidelines on the activity; Together with the Supervision Department, carries out on-site inspections
on law compliance.
FINANCIAL SUPERVISION COMMISSION, FINANCIAL SUPERVISION COMMISSION, Directorate of Social Insurance SupervisionDirectorate of Social Insurance Supervision: :
Competences of the Supervision Department:Competences of the Supervision Department: Prepares methodology for state supervision; Sets up the requirements to the types, format and contents of pension
companies’ reports; Collects, processes and analyzes information from pension companies
reports; Plans supervision activity and analyzes results from it; Imposes administrative sanctions and measures; Supervises pension companies in liquidation or insolvency; Makes statements on the minimum return guarantee; Makes statements and writes replies to inquiries, complains and signals
related to the activity; Performs its functions by: - preliminary, on-going and follow-up control;
- off-site supervision and on-site inspections.
Specificities of the Bulgarian pension model:Specificities of the Bulgarian pension model:
The PAYG pillar of DB pensions continues to dominate the system;
The scope of private fully-funded pensions increases gradually by transferring a percentage of the social security contribution from the PAYG to the fully-funded system (for the universal pension fund the percentage is planned to increase from 2% to 5-7%);
One pension company is legally entitled to manage three pension funds: two mandatory and one voluntary;
Mandatory contributions to the occupational pension funds are entirely on the account of the employer/insurer;
Mandatory contributions to the universal pension funds are on the account of the employer and employee in ratio of 75:25 in 2004 to reach 50:50 in 2009 and stay so.
Path of pension fund contributionsPath of pension fund contributions
Employer /Employee/
Bank system
National Social Security Institute (NSSI)
Universal pension fund (UPF) II pillar
Occupational pension fund (OPF) II pillar
Voluntary pension fund (VPF) III pillar
Individual account Индивидуална партида
Individual account
Individual account
II pillar
III pillar
Individual account
Individual account
Individual account
NEW LEGAL FRAMEWORK – THE SOCIAL INSURANCE CODE AND NEW SECONDARY LEGISLATION UNDER IT;
* Average interest rate on bank deposits in BGL for 2003 – 5,38%
* Inflation Rate – 5,60%
Investment Return of Supplementary Investment Return of Supplementary Mandatory Pension FundsMandatory Pension Funds
10,99%
22,73%
11,01%
22,98%
0,00%
5,00%
10,00%
15,00%
20,00%
25,00%
Average weighted rate of return of universal pension funds Average weighted rate of return of occupational pension funds
Return realized during the period 01.01.2003- 31.12. 2003
Return realized during the 21-month period from 01.04.2002 through 31.12.2003
Return realized during the period from 01.01.2003 through 31.12.2003
Return realized for the 2-year period betw een 01.01.2002 and 31.12.2003
Investment Return of Supplementary Investment Return of Supplementary Voluntary Pension FundsVoluntary Pension Funds
9,97%
11.09 %
20,77%
23.17 %
0,00%
5,00%
10,00%
15,00%
20,00%
25,00%
Return realized during the period01.01.2003- 31.12. 2003
Return realized over the 2-year periodbetween 01.01.2002 and 31.12.2003
gross rate of return
net rate of return
Regulation of Investment Limits for Universal Regulation of Investment Limits for Universal and Occupational Pension Funds as on and Occupational Pension Funds as on
31.12.200331.12.2003
Minimum %
Maximum %
minimum net assets value (%)
maximum net assets value (%)
Securities issued or guaranteed by the government
57,93 85,73 50.00
Bulgarian equities 0.00 5.33 10.00Corporate bonds 0.00 7.20 20.00Municipal bonds 0.00 3.67 10.00Bank deposits - total 0.00 36.19 25.00Mortgage bonds 1.21 14.75 30.00Real estate 0.00 3.48 5.00Derivatives - put options of indexes and bonds 0.00 0.00
2.50
Foreign investments 0.00 0.29 15.00
Investment instruments
Regulation of Investment Limits for Voluntary Regulation of Investment Limits for Voluntary Pension Funds as on Pension Funds as on 31.12.200331.12.2003
Minimum %
Maximum %
minimum net assets value of the fund (%)
maximum net assets value of the fund (%)
Securities issued and or guaranteed by the government
44.23 75.71 30.00
Bulgarian equities 0.00 5.73 10.00Corporate bonds 0.00 8.23 20.00Municipal bonds 0.00 2.17 10.00Bank deposits - total 0.00 38.22 25.00Mortgage bonds 3.28 18.36 30.00Investment estate 0.00 6.12 10.00Derivatives - put options and bonds 0.00 0.00
2.50
Foreign investments 0.00 0.15 20.00
Current structure in SPF
Investment instruments
Regulatory limits
Investment Portfolio Investment Portfolio (total pension funds as on (total pension funds as on 31.1 31.122.200.2003)3)
14,44%
0,38%
1,42% 0,25%
66,44%
17,06% Government securities
Securities traded on regulateddomestic capital markets
Municipal bonds
Bank deposits
Real Estate
Other investments
Types of Government Securities Held by Types of Government Securities Held by Pension Funds as on Pension Funds as on 31.12.200331.12.2003
PRIORITIES AND CHALLENGES (1)PRIORITIES AND CHALLENGES (1)
Enlargement of the system’s scope by tax allowances; Increase of the fully-funded pension system to the decrease of the PAYG system;Increase of the contribution amount; Fixing a direct relationship between contributions and pension benefits; Improved control over the income system and over entitlement to a pension benefit; Creation of a better environment for the investment policies of pension funds;Implementation of daily valuation for pension fund assets and administration in unit value;
PRIORITIES AND CHALLENGES (PRIORITIES AND CHALLENGES (22))
Introduction of new and improved IT systems in pension fund management;
Improved investments – implementation of more efficient diversification in investment portfolios;
Speed-up of contributions collection process to shorten the time for having the contributions get into the pension fund members individual accounts;
Improvement of switching procedure; Dynamic relation with pension fund members through
modern IT and communication systems; Actual impact of pension funds on the economic
development of the country.
91 V. Levski Blv., Sofia 1000, Bulgaria91 V. Levski Blv., Sofia 1000, Bulgaria