1. DEVELOPMENT OF PRIVATE PENSION INDUSTRY IN THE REPUBLIC OF BULGARIA Conference “Evolution of Pension Reforms: Bulgaria’s Experience and Regional Perspectives” Bulgaria’s Experience and Regional Perspectives” Sofia, Bulgaria, February 16 – 17, 2005 Dr. Nikola Abadjiev Chairman Bulgarian Association of Supplementary Pension Security Companies (BASPSC) BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIES

2. MILESTONES IN THE DEVELOPMENT OF THE FULLY-FUNDED PENSION SYSTEM (SUPPLEMENTARY PENSIONS PROVISION) 1994:Provision of supplementary voluntary private pensions - establishment of the first pension fund managing companies 1997:Consolidation of the activity. Establishment of the industry NGO institution – BASPSC 1999:Enactment of initial legal framework, establishment of II and III pillars of the fully-funded pension system (enactment of SVPIA and MSIC) 2000:Institutionalization of the state regulatory and supervisory authority (State Insurance Supervision Agency - SISA). Licensing of pension fund managing companies 2001-2002:Mandatory fully-funded pension provision starts 2001-2002:Mandatory fully-funded pension provision starts 2003: Enactment of the new law: Social Insurance Code. Establishment of the Financial Supervision Commission (FSC). 2003: Enactment of the new law: Social Insurance Code. Establishment of the Financial Supervision Commission (FSC).

3. BASIC FEATURES OF THE PRIVATE (FULLY-FUNDED) PENSION SECTOR   II PILLAR: SUPPLEMENTARY MANDATORY PENSION PROVISION (OCCUPATIONAL AND UNIVERSAL PENSION FUNDS): Mandatory affiliation; Defined contribution pension schemes; Licensing regime for pension fund incorporation; Legal independence of pension funds from pension fund managing company (joint stock company); Centralized collection of contributions – National Social Security Institute.   III PILLAR: SUPPLEMENTARY VOLUNTARY PRIVATE PENSION PROVISION   PUBLIC CONTROL OVER THE ACTIVITY OF PENSION FUND MANAGING COMPANIES: ADVISORY AND TRUSTEE BOARDS   STATE SUPERVISION OVER THE PROVISION OF FULLY- FUNDED PENSIONS   TAX INCENTIVES IN FAVOR OF PENSION FUND MEMBERS AND EMPLOYERS.

4. BULGARIAN PENSION MODEL I PILLAR State Social Security Provision PAYG system NSSI II PILLAR Supplementary Mandatory Private Pension Provision of Fully-funded Individual Accounts III PILLAR Voluntary Private Pension Provision of Fully-funded Individual Accounts Occupational PF: employees of heavy and dangerous professions requiring earlier retirement Universal PF: mandatory participation of all workers born after 31/12/1959 Voluntary PF: since 1994

5. Contribution Flow Employer /Employee/ National Social Security Institute III PILLAR - VPF II pillar – UPF; OPF Universal Pension Fund (II PILLAR) Occupational Pension Fund (II PILLAR) Voluntary Pension Fund (III PILLAR) Individual Account Individual Account Banking system Individual Account

6. Specificities of Fully-funded Pension Provision Sector  Continuous increase of the coverage of the fully-funded pension system by transferring part of the social security contribution from the PAYG system (for UPF from 2% to 5 %)  Legally enforced possibility for one pension company to manage three pension funds for supplementary fully- funded pensions  Mandatory contribution to OPF – 100 % financed by employer (or other contribution provider)  Mandatory contribution to UPF – liability divided between employer and employee (2004 ratio – 75:25, 2009 and following years ratio - 50:50 )

7.  FULLY OPERATING THREE-PILLLAR PENSION SYSTEM. 8 PENSION COMPANIES MANAGING 24 PENSION FUNDS;  INCREASING INTEREST IN THE ACTIVITY OF FULLY-FUNDED PENSION PROVISION. NEW ATTITUDE TO THE PENSION SYSTEM;  INCREASED COVERAGE OF THE FULLY-FUNDED SYSTEM –LARGER NUMBER OF PERSONS AFFILIATE TO THE SYSTEM;  INCREASED SIGNIFICANCE OF PENSION FUND MANAGING COMPANIES AS INVESTORS: GOOD RATE OF INCREASE OF FINANCIAL ASSETS;  SUCCESSFUL CONSERVATIVE INVESTMENT POLICY: HIGH RATE OF RETURN TO THE INDIVIDUAL ACCOUNTS;  BETTER INSTITUTIONAL COLLABORATION IN THE SYSTEM, INCLUDING THE MAJOR STAKEHOLDERS: PENSION FUND MANAGING COMPANIES, NATIONAL SOCIAL SECURITY INSTITUTE AND FINANCIAL SUPERVISION COMMISSION. 2005 REALITY 2005 REALITY IN THE PRIVATE FULLY-FUNDED PENSION SECTOR

8. ProjectedAchieved

9. Rate of Increase of Pension Fund Assets Thousands BGL ProjectedAchieved

10. EVOLUTION OF PENSION FUND SYSTEM   Regarding Voluntary Pension Funds: 2004: 534 415 members and BGL 325 457 thousand of assets, 2010: 665 thousand members and BGL 1 360 million in assets;   Regarding Universal Pension Funds: 2004: 2 004 776 members and BGL 261 126 thousand in assets, 2010: 2 239 thousand members and BGL 2 150 thousand in assets;   Regarding Occupational Pension Funds: 2004: 176 173 members and BGL 200 832 thousand in assets, 2010: 85 thousand members and BGL 584 million in assets;   Pension Fund System Total: 2004: 2 715 364 members and BGL 787 415 thousand in assets, 2010: 2 989 thousand members and BGL 4 billion and 94 million in assets.

11. Annual Rate of Return of Pension Funds Parameters UPFOPFVPF For the period of 01.01.2003 - 31.12.2004 For the period of 01.01.2003 - 31.12.2004 of 01.01.2003 - 31.12.2004 Gross for the period of 01.01.2003 - 31.12.2004 1234 Average arithmetic return 11,11% 11,00% 10,09 % Average weighted return 11,24% 11,01%10.31% * 2004 Average interest rate for bank deposits in BGL: 5,66% * 2004 Inflation rate: 4,0%

12. Rate of Return of II Pillar (Mandatory) Pension Funds

13. Rate of Return of III Pillar (Voluntary) Pension Funds

14. Investment Portfolio Structure: Pension Fund Total 20042003

15. CHALLENGES AND PRIORITIES IN 2005   Improvement of the regulatory framework in the Social Insurance Code in the sections related to the fully-funded pensions;   Strengthening the mechanisms for larger coverage of the system by tax incentives;   Increase of the relative importance of the fully-funded pension pillars compared to the PAYG first pillar of the system;   Increase of the pension fund contribution;   Improved state supervision over the system with respect to income and retirement entitlement;   Creation of an enabling environment for the investment policy of pension funds;

16. CHALLENGES AND PRIORITIES IN 2005 (2)   Improved investments: achievement of more effective diversification in the investment portfolios;   Acceleration of the collection process and shortening of the time period for contributions transfer to the individual accounts of pension fund members;   Improvement of pension fund switching procedure;   Dynamic contact with pension fund members by using more actively modern means of communication and information;   Implementation of new and more effective IT solutions in the activity of pension fund managing companies;   Enabling pension funds actual participation in the economic development of the country.