Development and Results of Fully Funded Pension Provision in Bulgaria BISSER PETKOV Deputy Chairman of Financial Supervision Commission Head of Social Insurance Supervision Division Conference “Private Pensions – Consolidation of a New Market”, 18 th October2006, Bucharest, Romania 18 th October 2006, Bucharest, Romania

2 Development of Funded Pension Provision in Bulgaria 1994 – Voluntary pension funds launched - fully funded basis, individual accounts, non-regulated 1999 – 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. – 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

3 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)

4 Main characteristics of Bulgarian Pension Reform Based on the World Bank conception for multipillar social protection system, considering the national tradition and specificity:  Industry-driven reform;  Leading role of the solidarity PAYG system changing it parameters;  Gradual increase of the coverage of the fully-funded part by transferring increasing portion of mandatory contributions towards it;  the possibility for each PIC to manage three pension funds;  Gradually shifting the early retirement pensions (bridging pensions) in special segment of the II-nd pillar.

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): rates 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 Qualifying condition for pension access (general rules)

8 Adequacy of the reformed pension system Replacement rate from the three pillars (final goal of the reform) – 70 – 75%, as follows: Replacement rate from the three pillars (final goal of the reform) – 70 – 75%, as follows: I-st solidarity pillar – 40%; I-st solidarity pillar – 40%; II-d funded pillar – 15%; II-d funded pillar – 15%; III-rd funded pillar - 10 – 20% III-rd funded pillar - 10 – 20% Current disappointment of the pension levels. Very thrifty pension indexation formula; Current disappointment of the pension levels. Very thrifty pension indexation formula; Individual accounts, good motivation and personal choice in II and III pillar. Individual accounts, good motivation and personal choice in II and III pillar.

9 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

10 List of licensed PIC PIC "DOVERIE“ PLC PIC "SAGLASIE“ PLC PIC "DSK-RODINA“ PLC PIC "ALLIANZ-BULGARIA“ PLC "ING PIC“ PLC PIC "CKB-SILA“ PLC PIC "LUKOIL-GARANT“ PLC PIC "DZI-PI“ PLC PIC “TOPLINA“ PLC

Institutional organization of the pension supervision: transition from the specialized model to the partially integrated supervision model Greater institutional independence of the supervisory body Expansion of the regulatory powers Sharing of good supervisory practices in the field of the non-banking financial sector Organizational integration with preservation of the sectoral/subjective approach

12 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

13 Rate of Return on Pension Funds Investments Source: FSC and NSI

14 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

15 Asset Class Mandatory Pension Funds Voluntary Government issued or backed securitiesno limit Shares and Rights Shares and Units in Mutual Inv. Schemes (UCITS) Shares in Special Purpose Investment Vehicles (REITs) ( 5 in MIS managed by one company) 5 5 single issuer 10 in MIS managed by one company 10 Municipal Bonds155 single issuer Bank Deposits255 single bank Bonds (corporate and mortgage)555 single issuer Investment property5 10 (up to 5% in single property) Forex2030 Derivatives established in FSC ordinance PF’s Investment Regulation (Quantative limits as % of net assets)

16 Changes in the structure of investment portfolio of funds for mandatory supplementary pension provision (%)

17 Changes in the structure of investment portfolio of funds for voluntary supplementary pension provision (%)

18 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

19 Bulgarian Pension Reform: key lessons  Strong political will and responsibility with large public support;  Favorable macroeconomic environment;  Favorable public attitude;  Institutional capacity and well developed information and communication system;  Bridge between reformers and researchers;  Technical and financial support by international community;  Active and continuous PR

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