New Bulgarian Multi Pillar Pension System: Legislative Development Bulgaria, Sofia, February 16 th and 17 th, 2005

1 © 2002 BearingPoint, Inc. New Pension Legislation: Goal Build a financially sound and sustainable system that will provide better pension protection by diversifying the sources of retirement income.

2 © 2002 BearingPoint, Inc. Main Principles reflected in the Legislation SECURITY, PLURALISM AND DIVERSITY:  Public and Private pension providers  Mandatory and Voluntary components  Universal and occupational pension funds  Pay-as-you-go and fully-funded (solidarity + personal responsibility)  Defined Contribution and Defined Benefit

3 © 2002 BearingPoint, Inc. Phases of legal development DESIGN :  Reflect broad working group views  Actuarial Model results  Government Pension Reform Strategy DEVELOPMENT:  Supplementary Voluntary Pension Insurance Act  Mandatory Social Insurance Code (2000)  Bylaws IMPLEMENTATION:  Active working groups : industry and regulators and Nssi  Permanent dialogue regarding key issues CONSOLIDATION:  Harmonization and optimisation  Social Insurance Code ( 2003)

4 © 2002 BearingPoint, Inc. Legislative Process Approach n Active involvement of all stakeholders in working groups n Evaluation of other pension reforms: lessons learned/ tailored solutions n EU requirements fulfilled n Best international practices and standards taken into account

5 © 2002 BearingPoint, Inc. Main outcomes of the basic pension laws n Diversification of risk of old age security n Private pension system organized to minimize conflicts, maximize security and facilitate supervision n Increase choice by allowing switching pension funds n Proactive supervision, regular reporting, frequent inspections and early intervention n Development of new financial instruments

6 © 2002 BearingPoint, Inc. Nature of pension contracts n Long term n Like all financial contracts, strong reliance on trust n Require effective supervision n People should make informed decisions

7 © 2002 BearingPoint, Inc. Objectives of private pension supervision n Increase long term security n Promote good governance n Provide freedom of choice n Education n Promotion of pension savings culture

8 © 2002 BearingPoint, Inc. Prudential and protective rules n “Fit & proper” test n Asset segregation, diversification and valuation n Checks and balances (Fund governance, custodians, auditors, actuaries) n Extensive disclosure and high transparency

9 © 2002 BearingPoint, Inc. Proactive supervision n Clear rules on financial soundness and good conduct n Regular reporting in electronic form n Strong capability for financial analysis and frequent inspection n Clear powers of intervention to avoid losses and protect members

10 © 2002 BearingPoint, Inc. Challenges Public education “Rights are meaningless unless adequately disclosed and understood” Disclosure n sufficient information – content, timing, manner of delivery (limited information restricts alternatives) n information should be easily understandable to target audience n standardized and comparable information

11 © 2002 BearingPoint, Inc. Challenges Flexible investment rules  Reduce the pension fund herd behavior on investments.  Allow investment portfolios to vary according to life cycle.  Allow involvement of the consumers.  give consumers a role to play regarding retirement  increase incentives to search for information increase the expected value of pension benefits

12 © 2002 BearingPoint, Inc. Lessons n A competitive market may not necessarily wait for well defined rules. Product developments have outpaced legislation. Proactive legislative process is required. n Legal rules should frame the extent of and manner in which disclosure and education are provided. These safeguards are important to ensure accuracy and objectivity. n Legislation should not hamper market efficiency and development. n Stakeholders active participation in legislative process is beneficial.

13 © 2002 BearingPoint, Inc.