Adequate and sustainable pensions in Bulgaria: Contribution from supplementary retirement provisions BISSER PETKOV Deputy Chairman of Financial Supervision Commission Head of Social Insurance Supervision Division International Conference “Development of Supplementary Retirement Provision in the EU and the Challenges to EU Accession Countries” Sofia, October 2006

Challenges to private retirement provision in the context of Bulgaria EU accession process Agenda Development of private retirement provision Role and future contribution of private retirement provision to Bulgarian pension system adequacy and financial sustainability

3 Development of Funded Pension Provision 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). 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. – Professional Pension Funds launched – Universal Pension Funds launched – Integration of supervision authority over the non bank financial sector Establishment of Financial Supervision Commission (FSC) Establishment of Financial Supervision Commission (FSC) Social Insurance Code adopted Social Insurance Code adopted

4 Architecture of the Bulgarian Pension System I. Mandatory Pay- as-you- go- system. National Social Security Institute National Revenues Agency II. Mandatory supplementary retirement provision. Universal PF Professional PF III. Voluntary supplementary retirement provision. Voluntary PF IORP, 2007 * 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)

5 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

Net Replacement Ratio Pensions / GDP Pensioners Dependency Ratio Bulgarian Pension System Current Characteristics Contributions (2006): 23 4 supplementary pensions 19 state pensions 65 : 35 contributions are divided between 65 : 35 contributions are divided between employer and employee; to be 50:50 in 2009 employer and employee; to be 50:50 in 2009

7 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) Types Fully funded, DC accumulated in individual accounts; Open-type funds (universal and professional) administered by private Pension Insurance Companies Market Value BGN ( EUR) of net assets, as of BGN ( EUR) of net assets, as of Foreign Participants Substantial share of foreign companies shareholders participation in pension management companies Concentration High 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

8 Regulatory framework of private retirement provision 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

Challenges to private retirement provision in the context of Bulgaria EU accession process Agenda Development of private retirement provision Role and future contribution of private retirement provision to Bulgarian pension system adequacy and financial sustainability

10 Common Objectives of the OMC for Pensions 1: Adequacy 1: Adequacy Objective 1: Preventing Social Exclusion Objective 2: Enabling People to Maintain Living Standards Objective 2: Enabling People to Maintain Living Standards Objective 3: Promoting Solidarity 2: FINANCIAL SUSTAINABILITY OF PENSION SYSTEMS 2: FINANCIAL SUSTAINABILITY OF PENSION SYSTEMS Objective 4: Raise Employment Levels Objective 5: Extend Working Lives Objective 5: Extend Working Lives Objective 6: Making Pension Systems Sustainable in a Context of Sound Public Finances Objective 7: Adjust Benefits and Contributions in a Balanced Way Objective 8: Ensure that Private Pension Provision is Adequate and Financially Sound 3: MODERNISATION: RESPONDING TO CHANGING NEEDS 3: MODERNISATION: RESPONDING TO CHANGING NEEDS Objective 9: Adapt to More Flexible Employment and Career Patterns Objective 10: Meet the Aspirations for Greater Equality of Women and Men Objective 11: Demonstrate the Ability of Pension Systems to Meet the Challenges

11 improve pension system sustainability (risk diversification) improve pension system sustainability (risk diversification) Improve pension system transparency (fully finded) Improve pension system transparency (fully finded) descrease solidarity transfers (individual accounts) descrease solidarity transfers (individual accounts) improve long term pension provision coverage (actuarial principles) improve long term pension provision coverage (actuarial principles) Pension Funds as Pension System Components

12 Development in Pension Funds Assets According to Financial Institution (th BGN) Source: FSC 1 EUR = BGN (Exchange rate pegged to EUR in currency board) 1 EUR = BGN (Exchange rate pegged to EUR in currency board)

13 Dynamics of PF Asset Growth Source: FSC, 2006 PF Net Assets (in th BGN) (estimated forecast) 1 EUR = BGN exchange rate pegged to EUR under currency board GDP

14 Pension fund assets in selected non-OECD members, 2005 Source: OECD, Global Pension Statistics

15 Private Pension Provision Coverage Rate /Socially Insured Persons in PF /working age population/ Source for working population statistics: NSI, 2006 Source for working population statistics: NSI, 2006 Type of Fund UPF24,7034,0341,9346,52 PPF3,293,483,693,79 VPF10,2810,8811,2011,42 Total: 38,2748,3856,8261,73

16 Rate of Return on Pension Funds Invetments Source: FSC and NSI

17 Fee Structure in Mandatory Pension Funds Fund Type Front-up Fee On Each Contribution Management Fee Transfer Fee Fee as established in regulation Up to 5 % Up to 1 % of fund’s assets on an annual basis Up to 20 BGN*

18 Replace Rate for Pensions in Supplementary Voluntary Retirement Provision Year/ Month Number of pensioners in VPF Pensions paid out in BGN Average monthly pension Average monthly social insurance income Replace Rate 12,7714,0014,2513,9612,52 Source average social insurance income: NSSI

19 Social Security Short Run Pensions Adequacy

20 Net replacement rate 0,0 10,0 20,0 30,0 40,0 50,0 60, TotalI pillar II pillar Long Term Pensions Adequacy

21 f foster and increase savings d decrease market cost of capital evelop institutional investors activity i improve internal financial market nfluence corporate governance Pension Funds as Financial Institutions

Market Capitalisation of Bulgarian Stock Exchange – Sofia 3,74,37,910,520,1 Insurance and Health Companies Premium Income 1,61,91,92,22,6 Pension Funds Net Assets 0,61,01,42,12,7 Bank Assets 41,145,050,265,078,3 Depth of Financial Market – Assets as Share of GDP (%)

23 Role of PF as Capital Market Players * Market capitalisation of BSE на БФБ includes: Official securities market (segments А, В, С, without investment companies) and OTC (without investment comopanies); Source: BSE ** Investments in investment companies are included in the value of the investments of pension funds for voluntary pension insurance Type of pension fund UPFPPFVPF ** Investments in shares – as of September 2006 /th BGN./ Share of Private pension funds in BSE market capitalisation 0,890,490,75 * Market capitalisation on BSE - September 2006 /th BGN./

24 Changes in the structure of investment portfolio of funds for mandatory supplementary pension provision

25 Changes in the structure of investment portfolio of funds for voluntary supplementary pension provision

26 Pension Reform Sustainability to Challenges of the Future Risks for the capital funded pillars: FFFFinancial destabilisation, bankruptcies and ruined confidence in reforms BBBBad pension funds assets management, low rate of return PPPPolitical risk – reformed stopped, regressive actions towards the system IIIInstitutional Risks

Challenges to private retirement provision in the context of Bulgaria EU accession process Agenda Development of private retirement provision Role and future contribution of private retirement provision to Bulgarian pension system adequacy and financial sustainability

28 Challenges to Private Retirement Provision in the Context of Bulgaria EU Accession Process Bulgaria has gone ahead of the old Europe member states in terms of pension reform, however with a significance difference to be noticed: EU population gets rich before growing old, while the Bulgarian population grows old before getting rich. Bulgaria has gone ahead of the old Europe member states in terms of pension reform, however with a significance difference to be noticed: EU population gets rich before growing old, while the Bulgarian population grows old before getting rich. Differences in pension systems models implementation Differences in pension systems models implementation Implementation of EU Directives in the field of supplementary pension provision Implementation of EU Directives in the field of supplementary pension provision

29 Challenges (2) EUROSTAT and statistical classification of supplementary mandatory pension funds EUROSTAT and statistical classification of supplementary mandatory pension funds Growing role of privately managed pensions (30 % out of general pension payments in EU) and increased competition among providers of funded pension provision Growing role of privately managed pensions (30 % out of general pension payments in EU) and increased competition among providers of funded pension provision

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