BULGARIAN SYSTEM OF PRIVATE FULLY-FUNDED PENSIONS (ACHIEVEMENTS AND CHALLENGES) “Pension Reform in Eastern Europe: Experiences and Perspectives” Kiev, Ukraine, May 27-28, 2004 Nikola Abadjiev, Ph.D. Nikola Abadjiev, Ph.D. Chairman of BASPSC Chairman of BASPSC BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIES BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIES

DEVELOPMENT OF BULGARIAN PRIVATE PENSION SYSTEM 1994 – voluntary savings for fully-funded pensions based on individual account accumulations emerged; 1997 – activity consolidation; incorporation of the industry representative organization Bulgarian Association of Supplementary Pension Security Companies; 1997 – activity consolidation; incorporation of the industry representative organization Bulgarian Association of Supplementary Pension Security Companies; 1999 – Implementation of the legal framework for II and III pillar of a fully- funded pension system (SVPIA and MSIC were passed); 1999 – Implementation of the legal framework for II and III pillar of a fully- funded pension system (SVPIA and MSIC were passed); 2000 – Institutionalization of the state supervision for pension fund management – State Insurance Supervision Agency (SISA). Licensing of pension fund managing companies; 2000 – Institutionalization of the state supervision for pension fund management – State Insurance Supervision Agency (SISA). Licensing of pension fund managing companies; – Start of the II pillar – mandatory fully-funded pensions through participation in universal and occupational pension funds; – Start of the II pillar – mandatory fully-funded pensions through participation in universal and occupational pension funds; 2003 – Implementation of a Social Insurance Code. Institutionalization of the state supervision over the entire financial non-banking sector into a united body – Financial Supervision Commission (FSC) – Implementation of a Social Insurance Code. Institutionalization of the state supervision over the entire financial non-banking sector into a united body – Financial Supervision Commission (FSC).

Bulgarian Pension Model I PILLAR Mandatory social insurance PAYG system NSSI II PILLAR Supplementary mandatory pension insurance Fully-funded pension system with individual accounts III PILLAR Supplementary 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

MAJOR FEATURES OF BULGARIAN PENSION MODEL   REFORMING THE PUBLIC SOCIAL SECURITY SYSTEM ADMINISTERED BY THE STATE (FIRST PILLAR)   SUPPLEMENTARY MANDATORY PRIVATE PENSION PROVISIONS (SECOND PILLAR– UNIVERSAL AND OCCUPATIONAL PENSION FUNDS) MANDATORY PARTICIPATION; DEFINED CONTRIBUTIONS; LICENSING REQUIREMENTS FOR INCORPORATING AND MANAGING PENSION FUNDS; LEGAL INDEPENDENCE OF PENSION FUNDS FROM THEIR MANAGING COMPANY, WHICH SHOULD BE A JOINT STOCK COMPANY; CENTRALIZED COLLECTION PROCESS ADMINISTERED.   SUPPLEMENTARY VOLUNTARY PRIVATE PENSION PROVISIONS (THIRD 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 SUPERVISION FINANCIAL SUPERVISION COMMISSION specialized state body competent to regulate and supervise the investment, private pension provision and insurance activity in the country. directly regulates and supervises the activity of pension funds and their managing companies in compliance with the Social Insurance Code. There are two departments in the directorate: Directorate of Social Insurance Supervision: directly regulates and supervises the activity of pension funds and their managing companies in compliance with the Social Insurance Code. There are two departments in the directorate: - - Licensing and Risk Valuation Departments and - Supervision Department.

FINANCIAL SUPERVISION COMMISSION, Directorate of Social Insurance Supervision : Competences of the Licensing and Risk Valuation 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, Directorate of Social Insurance Supervision : 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:   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 contributions

 NEW LEGAL FRAMEWORK – THE SOCIAL INSURANCE CODE AND NEW SECONDARY LEGISLATION UNDER IT;  FULLY OPERATING THREE-PILLAR PENSION SYSTME. 8 PENSION COMPANIES ADMINISTERING 24 PENSION FUNDS ;  INCREASING INTEREST AND NEW ATTITUTE TO THE PRIVATE PENSION SYSTEM;  GREATER COVERAGE OF THE FULLY-FUNDED PENSION SYSTEM – INCREASE IN THE NUMBER OF PENSION FUND MEMBERS;  GREATER ROLE FOR PENSION COMPANIES AS INSTITUTIONAL INVESTORS – GOOD TEMP OF INCREASE OF PENSION FUND FINANCIAL ASSETS;  SUCCESSFUL CONCERVATIVE INVESTMENT POLICY – HIGH RATE OF RETURN ON INVESTMENTS;  BETTER COOPERATION AMONG INDUSTRY INSTITUTIONS, INCLUDING PENSION COMPANIES, NSSI AND FSC. News News

ProjectedAchieved

Rate of Increase of Pension Fund Assets In thousands of BGL ( 1,00 BGL = 1,55 USD) ProjectedAchieved

PENSION FUND DEVELOPMENT   Voluntary pension funds: 2003 г. – pension fund members and USD thousand in assets, 2010 г – 665 thousands pension fund members and USD thousand in assets;   Universal pension funds: 2003 г. – pension fund members and USD thousand in assets, 2010 г. – thousand pension fund members and USD 1 billion 433 thousand in assets;   Occupational Pension Funds : 2003 г.– pension fund members and USD thousand in assets, 2010 г thousand pension fund members and USD 389 million in assets;   Total pension funds: 2003 г pension fund members and USD thousand in assets, 2010 г thousand pension fund members and USD 2 billion 729 million in assets.

Rate of Return Indicators UPFOPFVPF from until For 21 months from until From until For 24 months From until GrossFrom until Gross for 24 months for 24 months From until Distribute, net rate of return from until Arithmetic Average Rate of Return 11,23%22,79%11,00%23,19%11,09%23,17%20,77% Weighed Average Rate of Return 10,99%22,73%11,01%22,98%--- * Average interest rate on bank deposits in BGL for 2003 – 5,38% * Inflation Rate – 5,60%

Investment Return of Supplementary Mandatory Pension Funds

Investment Return of Supplementary Voluntary Pension Funds

Regulation of Investment Limits for Universal and Occupational Pension Funds as on

Regulation of Investment Limits for Voluntary Pension Funds as on

Investment Portfolio (total pension funds as on )

Types of Government Securities Held by Pension Funds as on

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 (2)   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, Bulgaria Tel.: ( ) , Fax: ( ) BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIES