DEVELOPMENT OF PRIVATE PENSION INDUSTRY IN THE REPUBLIC OF BULGARIA Conference “Evolution of Pension Reforms: Bulgaria’s Experience and Regional Perspectives” Bulgaria’s Experience and Regional Perspectives” Sofia, Bulgaria, February 16 – 17, 2005 Dr. Nikola Abadjiev Chairman Bulgarian Association of Supplementary Pension Security Companies (BASPSC) BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIES

MILESTONES IN THE DEVELOPMENT OF THE FULLY-FUNDED PENSION SYSTEM (SUPPLEMENTARY PENSIONS PROVISION) 1994:Provision of supplementary voluntary private pensions - establishment of the first pension fund managing companies 1997:Consolidation of the activity. Establishment of the industry NGO institution – BASPSC 1999:Enactment of initial legal framework, establishment of II and III pillars of the fully-funded pension system (enactment of SVPIA and MSIC) 2000:Institutionalization of the state regulatory and supervisory authority (State Insurance Supervision Agency - SISA). Licensing of pension fund managing companies :Mandatory fully-funded pension provision starts :Mandatory fully-funded pension provision starts 2003: Enactment of the new law: Social Insurance Code. Establishment of the Financial Supervision Commission (FSC). 2003: Enactment of the new law: Social Insurance Code. Establishment of the Financial Supervision Commission (FSC).

BASIC FEATURES OF THE PRIVATE (FULLY-FUNDED) PENSION SECTOR   II PILLAR: SUPPLEMENTARY MANDATORY PENSION PROVISION (OCCUPATIONAL AND UNIVERSAL PENSION FUNDS): Mandatory affiliation; Defined contribution pension schemes; Licensing regime for pension fund incorporation; Legal independence of pension funds from pension fund managing company (joint stock company); Centralized collection of contributions – National Social Security Institute.   III PILLAR: SUPPLEMENTARY VOLUNTARY PRIVATE PENSION PROVISION   PUBLIC CONTROL OVER THE ACTIVITY OF PENSION FUND MANAGING COMPANIES: ADVISORY AND TRUSTEE BOARDS   STATE SUPERVISION OVER THE PROVISION OF FULLY- FUNDED PENSIONS   TAX INCENTIVES IN FAVOR OF PENSION FUND MEMBERS AND EMPLOYERS.

BULGARIAN PENSION MODEL I PILLAR State Social Security Provision PAYG system NSSI II PILLAR Supplementary Mandatory Private Pension Provision of Fully-funded Individual Accounts III PILLAR Voluntary Private Pension Provision of Fully-funded Individual Accounts Occupational PF: employees of heavy and dangerous professions requiring earlier retirement Universal PF: mandatory participation of all workers born after 31/12/1959 Voluntary PF: since 1994

Contribution Flow Employer /Employee/ National Social Security Institute III PILLAR - VPF II pillar – UPF; OPF Universal Pension Fund (II PILLAR) Occupational Pension Fund (II PILLAR) Voluntary Pension Fund (III PILLAR) Individual Account Individual Account Banking system Individual Account

Specificities of Fully-funded Pension Provision Sector  Continuous increase of the coverage of the fully-funded pension system by transferring part of the social security contribution from the PAYG system (for UPF from 2% to 5 %)  Legally enforced possibility for one pension company to manage three pension funds for supplementary fully- funded pensions  Mandatory contribution to OPF – 100 % financed by employer (or other contribution provider)  Mandatory contribution to UPF – liability divided between employer and employee (2004 ratio – 75:25, 2009 and following years ratio - 50:50 )

 FULLY OPERATING THREE-PILLLAR PENSION SYSTEM. 8 PENSION COMPANIES MANAGING 24 PENSION FUNDS;  INCREASING INTEREST IN THE ACTIVITY OF FULLY-FUNDED PENSION PROVISION. NEW ATTITUDE TO THE PENSION SYSTEM;  INCREASED COVERAGE OF THE FULLY-FUNDED SYSTEM –LARGER NUMBER OF PERSONS AFFILIATE TO THE SYSTEM;  INCREASED SIGNIFICANCE OF PENSION FUND MANAGING COMPANIES AS INVESTORS: GOOD RATE OF INCREASE OF FINANCIAL ASSETS;  SUCCESSFUL CONSERVATIVE INVESTMENT POLICY: HIGH RATE OF RETURN TO THE INDIVIDUAL ACCOUNTS;  BETTER INSTITUTIONAL COLLABORATION IN THE SYSTEM, INCLUDING THE MAJOR STAKEHOLDERS: PENSION FUND MANAGING COMPANIES, NATIONAL SOCIAL SECURITY INSTITUTE AND FINANCIAL SUPERVISION COMMISSION REALITY 2005 REALITY IN THE PRIVATE FULLY-FUNDED PENSION SECTOR

ProjectedAchieved

Rate of Increase of Pension Fund Assets Thousands BGL ProjectedAchieved

EVOLUTION OF PENSION FUND SYSTEM   Regarding Voluntary Pension Funds: 2004: members and BGL thousand of assets, 2010: 665 thousand members and BGL million in assets;   Regarding Universal Pension Funds: 2004: members and BGL thousand in assets, 2010: thousand members and BGL thousand in assets;   Regarding Occupational Pension Funds: 2004: members and BGL thousand in assets, 2010: 85 thousand members and BGL 584 million in assets;   Pension Fund System Total: 2004: members and BGL thousand in assets, 2010: thousand members and BGL 4 billion and 94 million in assets.

Annual Rate of Return of Pension Funds Parameters UPFOPFVPF For the period of For the period of of Gross for the period of Average arithmetic return 11,11% 11,00% 10,09 % Average weighted return 11,24% 11,01%10.31% * 2004 Average interest rate for bank deposits in BGL: 5,66% * 2004 Inflation rate: 4,0%

Rate of Return of II Pillar (Mandatory) Pension Funds

Rate of Return of III Pillar (Voluntary) Pension Funds

Investment Portfolio Structure: Pension Fund Total

CHALLENGES AND PRIORITIES IN 2005   Improvement of the regulatory framework in the Social Insurance Code in the sections related to the fully-funded pensions;   Strengthening the mechanisms for larger coverage of the system by tax incentives;   Increase of the relative importance of the fully-funded pension pillars compared to the PAYG first pillar of the system;   Increase of the pension fund contribution;   Improved state supervision over the system with respect to income and retirement entitlement;   Creation of an enabling environment for the investment policy of pension funds;

CHALLENGES AND PRIORITIES IN 2005 (2)   Improved investments: achievement of more effective diversification in the investment portfolios;   Acceleration of the collection process and shortening of the time period for contributions transfer to the individual accounts of pension fund members;   Improvement of pension fund switching procedure;   Dynamic contact with pension fund members by using more actively modern means of communication and information;   Implementation of new and more effective IT solutions in the activity of pension fund managing companies;   Enabling pension funds actual participation in the economic development of the country.