1. The Challenges before the Bulgarian Pension Funds Pawel Pelc Deputy President of Capital Market Association

2. The Challenges Implementation of the Social Security Code solutions (2004) EU enlargements and Eurostat role Currency risk Pay out phase and annuity issue Reserves Assets of pension fund (real estates issue) Competition Contributions

3. Bulgarian Pension System Implementation of the Social Security Code solutions in 2004: Valuation Units Transparency

4. Bulgaria as a future EU Member Lack of common regulations related to pension funds Directive related to occupational pension Tran border portability Eurostat and pension funds statistical classification

5. Eurostat ESA 95 doesn’t recognize Chilean type pension funds Chilean type pension funds are present only in new EU Member states as well as in accession countries Eurostat decision from March 2004 (just before enlargement the EU) excludes fully funded DC arrangements from social security

6. Eurostat (cont.) Poland strong opposition against interpretation of Eurostat from March 2004 Negative consequences for ability to join Euro zone (3% deficit and 60% debenture): if pension funds are not a part of the social security – are not a part of the public finance and all expenses related to them increases the budgetary deficit and debt

7. Eurostat (3) If pension funds are not a part of the social security and are not a part of pubic finance in the consequence the pension funds are also a subject of free movement of capital rule and are exposed to the risk related to international competition and currency risk.

8. Currency risk Before Bulgaria is a Member of European Monetary Union there is huge currency risk related to foreign investments The currency may be stronger based of expectations of EU and than EMU Membership (example of Poland)

9. Pay out phase Annuity should be backed by pooled assets Individual account in the pay out phase should be related to programmed withdrawal Usually pension funds are responsible for programmed withdrawal, annuity is treated as insurance product offered by life insurance industry.

10. Reserves If reserves are invested in the way the rest of assets is invested, reserves should be treated as a part of pension fund assets to limit costs and increase transparency and security of the system. It allows to avoid double transaction costs during investment phase as well as to avoid not necessary transactions when reserve is used.

11. Assets Pension assets should be invested only in financial assets. In case of investments in real estates there are important problems with daily valuation, and limits, also role of custodian is limited as not all assets are safe kept by the custodian. Also transparency of the system is limited.

12. Competition Huge concentration Issue of incentives for better investment results Units crucial for transparency and comparisons between pension funds Fees Investment decisions’ concentration

13. Contribution Increase of the level of contribution allows to achieve: higher replacement ratio based on higher amount of invested money, better relation of stable costs to invested assets Space for competition The issue of the size of capital market.

14. Conclusions The main challenges before the Bulgarian Pension Funds are related to Bulgarian Membership in the UE and EMU, Development of the Bulgarian Capital Market Competition and transparency of the Market

15. Conclusions (cont.) Very important role of strong state supervision and daily control of transactions Important role of self-regulation of the pension managers Corporate governance development to secure interests of financial investors

16. Conclusions (3) Market should be developed with common understanding of the role of any participant and regulator Interests of pension funds participants are subject to special care of the State Pension funds investment differ from any other investments

17. Thank you for your attention Pawel Pelc p.pelc@radca.lex.pl www.pelc.net.pl