Warsaw, 19 September 2006 Financial Supervision Commission Bulgaria 1 SUPERVISION OF PENSION SYSTEMS – CURRENT TRENDS AND ISSUES. INTERNATIONAL EXPERIENCE. PENSION FUNDS REGULATION AND SUPERVISION IN BULGARIA BISSER PETKOV Deputy Chairman of Financial Supervision Commission Head of Social Insurance Supervision Division

Financial Supervision Commission Bulgaria 2 Agenda 1. Development and Regulation of Funded Pension Provision 2. Institutional Organization of Pension Supervision 3. Supervisory Approach 4. Challenges Facing Regulation and Supervision of Supplementary Pension Provision

Financial Supervision Commission Bulgaria 3 1. Development and Regulation of Funded Pension Provision (1/12) Background 1994 – Voluntary pension funds launched - fully funded basis,individual accounts – Legal regulation of pension provision activity (Adoption of the Law for Supplementary Voluntary Pension Provision and the Mandatory Social Insurance Code) – Establishment of the State Agency for Social Insurance Supervision and licensing of the first pension insurance companies. – Professional Pension Funds launched – Universal Pension Funds launched – Integration of supervision authority over the non bank financial sector  Establishment of Financial Supervision Commission (FSC)  Social Insurance Code adopted

Financial Supervision Commission Bulgaria 4 1. Development and Regulation of Funded Pension Provision (2/12) I. Mandatory Pay- as-you- go- system. National Social Security Institute National Revenues Agency II. Mandatory supplementary retirement provision. Universal and Professional Pension Funds* III. Voluntary supplementary retirement provision. Voluntary Pension Funds * Universal Pension Funds - mandatory participation for all born after Professional Pension Funds - for workers in hazardous work conditions (1st and 2nd category of labour)  Centralized collection of social insurance contributions by NRA.  Public control over the activity of PICs (Trustee and Advisory Boards)

Financial Supervision Commission Bulgaria 5 1. Development and Regulation of Funded Pension Provision (3/12) Net Replacement Ratio51.0 %51.6 % Pensions / GDP9.1%9.0 % Pensioners Dependency Ratio93.4 %91.6 % Bulgarian Pension System Current Characteristics Contributions (2006):23 % 4% supplementary pensions 19 % state pensions 65 : 35 contributions are divided between employer and employee; to be 50:50 in 2009

Financial Supervision Commission Bulgaria 6 1. Development and Regulation of Funded Pension Provision (4/12) Number of Funds 24 (8 pension fund management companies, each managing 3 types of funds; 1 more PIC to start operation of 3 more funds s by the end of the year) TypesFully funded, DC accumulated in individual accounts; Open-type funds (universal and professional) administered by private Pension Insurance Companies Market Value (in th EUR) of net assets, as of Foreign Participants Substantial share of foreign companies shareholders participation in pension management companies ConcentrationHigh concentration over past years; as of the two major pension fund management companies have 67% of assets and 63% of insured persons Main Characteristics of Funded Pension Provision Market

Financial Supervision Commission Bulgaria 7 1. Development and Regulation of Funded Pension Provision (5/12) Regulatory framework  Social Insurance Code  Financial Supervision Commission Act  Secondary legislation acts adopted by:  Financial Supervision Commission  Council of Ministers  Bulgarian National Bank, Ministry of Finance, NSSI Recent Regulatory Changes  Introduction of occupational pension schemes (transposition Directive 2003/41)  Liberalisation of pension funds investment regime

Financial Supervision Commission Bulgaria 8 1. Development and Regulation of Funded Pension Provision (6/12) Structural (dis)similiarities between the Bulgarian and EU Pension System Models EUBulgaria Applicable EU Regulations Statutory retirement provision schemes 1 st pillar PAYG scheme, publicly managed 1 st pillar (I-A by OECD concept) Regulation 1408/71 Regulation 574/72 Capital retirement provision, privately manages schemes 2 nd pillar (I-B by OECD concept) Regulation 1408/71 Regulation 574/72 Occupational retirement provision schemes 2 nd pillar Directive 1998/49 Directive 2003/41 Directive 86/378 Individual voluntary retirement provision schemes 3 rd pillar Voluntary retirement provision through individual or occupational contributions/or contributions from a third party 3 rd pillar

Financial Supervision Commission Bulgaria 9 1. Development and Regulation of Funded Pension Provision (7/12) Market Capitalisation of Bulgaria Stock Exchange – Sofia 3,74,37,910,520,1 Insurance and Health Companies Premium Income 1,61,9 2,22,6 Pension Funds Net Assets 0,61,01,42,12,7 Bank Assets41,145,050,265,078,3 Depth of Financial Market - Assets as Share of GDP in %

Financial Supervision Commission Bulgaria Development and Regulation of Funded Pension Provision (8/12) Evolution of PF Investment Portfolio Structure % Securities issued or guaranteed by the government Shares3713 Corporate bonds71013 Municipal bonds111 Bank deposits19 22 Mortgage bonds1197 Investment property211 Investments abroad0,512

Financial Supervision Commission Bulgaria Development and Regulation of Funded Pension Provision (9/12) Investment Restrictions (%) Mandatory Pension Funds Voluntary Pension Funds Government issued or backed securities no limit Shares and Rights Shares andUnits in Mutual Inv Schemes Shares in Special Purpose Investment ( 5 in MIS managed by one company) 5 5 single issuer 10 in MIS managed by one company 10 Municipal Bonds 155 single issuer Bank Deposits 255 single bank Bonds (corp and mortgage) 555 single issuer Investment property 5 10 (up to 5% in single property) Forex 2030 Derivatives established in FSC draft ordinance

Financial Supervision Commission Bulgaria Development and Regulation of Funded Pension Provision (10/12) Fees Structure Fund Type Front-up Fee On Each Contribution Management Fee Transfer Fee Mandatory Pension Funds Up to 5 % Up to 1 % of fund’s assets on an annual basis Up to 20 BGN* Voluntary Pension Funds Up to 7 % Up to 10% generated profit Up to 20 BGN *1 EUR = BGN exchange rate pegged to EUR under currency board

Financial Supervision Commission Bulgaria Development and Regulation of Funded Pension Provision (11/12) Source: FSC, 2006 Increased contribution amounts Lower social contribution evasion rates PF Net Assets (in th BGN) (estimated forecast) 1 EUR = BGN exchange rate pegged to EUR under currency board

Financial Supervision Commission Bulgaria % 20% 30% 40% 50% 60% TotalI pillarII pillar Net Replacement Rate 1. Development and Regulation of Funded Pension Provision (12/12)

Financial Supervision Commission Bulgaria 15 Agenda 1. Development and Regulation of Funded Pension Provision 2. Institutional Organization of Pension Supervision 3. Supervisory Approach 4. Challenges Facing Regulation and Supervision of Supplementary Pension Provision

Financial Supervision Commission Bulgaria Institutional Organization of Pension Funds Supervision (1/7) Bulgarian National Securities Commission (Since 1996) Staff: 125 Insurance Supervision Agency (Since 1997) Staff: 45 State Insurance Supervision Agency (Since 2000) Staff: 43 Financial Supervision Commission (FSC) (Since March 1, 2003) Staff: 197 Transition from Sector Based to Integrated Supervision

Financial Supervision Commission Bulgaria Institutional Organization of Pension Funds Supervision (2/7) Institutional Environment of Pension Supervision  Financial Supervision Commission  Ministry of Labor and Social Policy  National Social Security Institute  Ministry of Finance  Bulgarian National Bank  Financial Stability Consultative Council (Coordination Body)

Financial Supervision Commission Bulgaria Institutional Organization of Pension Funds Supervision (3/7) Financial Supervision Commission Organisational Structure FSC Chairman Deputy Chairman Investment Supervision Deputy Chairman Social Insurance Supervision Activity On Site Inspection Unit Off-site Inspection Unit Supervisory measures Court representation Regulatory Regimes and Risk Evaluation Regulatory Regimes Unit Risk Evaluation Unit Deputy Chairman Insurance Supervision 3 Members

Financial Supervision Commission Bulgaria Institutional Organization of Pension Funds Supervision (4/7) FSC Objectives  Protecting the interests of the investors, insurance policy holders and pension insured persons;  Providing integrity, transparency and credibility of the financial markets

Financial Supervision Commission Bulgaria Institutional Organization of Pension Funds Supervision (5/7) Powers of the Financial Supervision Commission  Development of the regulatory framework  Licensing regime  Supervision  Sanctions Powers of the Deputy Chairman of FSC in Charge of Social Insurance Supervision  Issues authorisations as provided in the Social Insurance Code  Approves documents and defines the requirements thereof  Approves methodological guidelines, document samples, etc.  Orders on-site inspections  Implements enforcement measures and issues penalty decrees

Financial Supervision Commission Bulgaria Institutional Organization of Pension Funds Supervision (6/7) Institutional Independence of FSC  Autonomous institution created under a special legislative act  Reporting to Parliament  Selection of the FSC members by the Parliament with a 6 year term in office  Mixed funding (State Budget/ Supervised entities)

Financial Supervision Commission Bulgaria Institutional Organization of Pension Funds Supervision (7/7) Cooperation and Consultation  FSC is member of:  Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) (observer status);  International Organization of Pension Supervisors (IOPS);  International Organization of Securities Commissions (IOSCO);  International Association of Insurance Supervisors (IAIS).  Memorandums of Understanding and Exchange of Information signed with partner institutions.

Financial Supervision Commission Bulgaria 23 Agenda 1. Development and Regulation of Funded Pension Provision 2.Institutional Organization of Pension Supervision 3.Supervisory Approach 4.Challenges Facing Regulation and Supervision of Supplementary Pension Provision

Financial Supervision Commission Bulgaria Supervisory Approach (1/5) Characteristics of the style and approach implemented in Bulgarian pension supervision  Restrictive – license with strict requirements for stepping into the social insurance market  Proactive – on-going monitoring and regular interventions  Intensive – daily communication  Legislatively oriented (compliance based)

Financial Supervision Commission Bulgaria Supervisory Approach (2/5) Reporting Approach and evaluation program Response from the management and follow-up activities Supervision planning and strategy Examination function Enforced admin. measures Analysis, evaluation and priori- tising Organization and staff Off-site supervision On-site supervision Supervisory measures Supervisory Methods and Processes

Financial Supervision Commission Bulgaria Supervisory Approach (3/5) Preliminary Supervision Licensing Requirements for Pension Insurance Companies as regards:  Capital  Shareholders with significant participation  Managerial and controlling bodies and the actuaries  Internal control system  Technical equipment, staffing and information provision

Financial Supervision Commission Bulgaria Supervisory Approach (4/5) Off-site Supervision of Pension Insurance Companies (1)  On-going monitoring over  Asset valuation of pension funds,  Calculation of unit value  Keeping of investment limits  Information sources:  Daily reports by the PICs and the custodian banks submitted electronically to the FSC  Supervision over the contents of the PIC’s WEB-pages  Means of supervsion:  IT system for supervision (Е-fsc) through built-in filters  Supervisory activities/ measures:  Requests for corrections  Imposition of enforces administrative measures  Imposition of property payments

Financial Supervision Commission Bulgaria Supervisory Approach (5/5) On-site Supervision of Pension Insurance Companies  Planning of examinations  Types of examination – planned (theme), and claims based  Integration of the off-site and on-site supervision

Financial Supervision Commission Bulgaria 29 Agenda 1. Development and Regulation of Funded Pension Provision 2.Institutional Organization of Pension Supervision 3.Supervisory Approach 4.Challenges and Possible Solutions for Funded Pension Funds Supervision and Regulation

Financial Supervision Commission Bulgaria Challenges in Private Pension Funds Supervision and Regulation (1/2)  Regulation of the pay-out phase regarding the life-long pensions under the second pillar  Expanding the investment choice opportunities of participants in the voluntary pension insurance  Transition from the approach of quantitative portfolio limits to the prudent person investment approach

Financial Supervision Commission Bulgaria Challenges in Private Pension Funds Supervision and Regulation (2/2)  Integrated regulation of the financial markets in keeping with the EU directives  Transition towards functional integration and consolidated supervision over the non-banking financial sector  Change in the supervision approach and style: from traditional (static) to dynamic (risk-based)

Financial Supervision Commission Bulgaria 32 Q & A? Thank you for your attention! phone: (+359 2) fax: (+359 2)