2. Labor Market Project Rodina hotel, Sofia 22 May 2003 The Private Pension System. Investment of Pension Fund Resources

3. 2 THE PRIVATE PENSION SYSTEM CHARACTERISTICS OF THE SYSTEM INVESTMENT OF PENSION FUND RESOURCES

4. 3 The Private Pension System There are 3 aspects that define the essence of the system of individual capitalization: 1.Selection of the particular system; 2.Determination of the way it will be managed; 3.Destination of the funds while they are not used for pension payments.

5. 4 Characteristics of the System Role Separation; Equity Separation; Individual Capitalization; Private Administration of Funds; Free Choice of Pension Funds.

6. 5 Characteristics of the System Role Separation:  The Separation can be observed between : –Pension Fund Superintendence – SISD –Securities and Exchange Superintendence –Pension Fund Management Companies –Custodian Banks –Pension Funds As Regulators and Supervisors As Actors of the System That represent the individual ownership of all contributors

7. 6 Characteristics of the System Role Separation:  Therefore the regulative and supervision activities are not compromised with the pension system administration;  The state must provide warranties and it has to exercise control.

8. 7 Characteristics of the System Separation between the equity of the pension fund and the management company; Individual Capitalization:  The amount of the pension will depend on the amount of the savings and there is therefore a direct relationship between personal effort and the pension obtained. Private Administration of Funds:  The pension system is managed by private institutions known as Pension Fund Management Companies.

9. 8 Characteristics of the System Free choice of pension fund:  Workers choose the entity to which they wish to be affiliated and they may move from one pension fund to another whenever they deem fit;  This is one of the foundations of the Individual Capitalization System;  In principle it increases the personal responsibility of workers and stimulates competition innovation and efficiency.

10. 9 Investment of Pension Fund Resources Investment Limits. Authorized Markets. Appraisal of Instruments. Minimum Rate of Return. The Value of Pension Fund.

11. 10 Investment of Pension Fund Resources Investment Limits:  In general terms Pension Fund law sets forth that Pension Fund resources must be invested with a view to securing adequate yield and safety;  This definition is enforced among other regulations by means of investment limits: Per instrument; Per issuer; Per specific risks; Per group of instruments; Per limits for issuers related to the management company.

12. 11 Investment of Pension Fund Resources Authorized Markets:  Trading of financial instruments involving Pension Fund resources must be carried out only in markets expressly authorized for that purpose;  They must comply with certain minimum requirements: Simultaneous presence of buyers and sellers of the instruments when determining the price; Information readily available to the general public; Instrument negotiation mechanisms; The necessary infrastructure; Internal rules of procedure.  The above is based on the need for transparency and fairness when trading securities;

13. 12 Investment of Pension Fund Resources Appraisal of Instruments:  The value of each Pension Fund portfolio must be determined on a daily basis on the grounds of economic or market value of the investments;  Therefore the methods for appraising the various instruments are based on the above principle through which undesired transfers of resources among the affiliates of the System, as a result of inflows and disbursements of resources from the individual account, are provided.  To this end, the instruments eligible for Pension Fund may be divided into four groups: Financial intermediation or single instruments; Fixed income serial instruments; Capital instruments; Derivates.

14. 13 Investment of Pension Fund Resources Minimum Rate of Return :  First of all, one of the main reasons for the existence of minimum yield is the need to guard the safety of social security savings.  To offer “reasonable” pensions in terms of the imposable remuneration.  To generate a reference portfolio in Pension Funds System: Under certain conditions, minimum yield could contribute to the foundation of reference portfolios that could serve as guidelines for those managers with less relative experience.  Finally, minimum yield constitutes an efficient mechanism to restitute resources to the Pension Fund in an immediate manner, provided that certain conditions are met, thus demotivating practices which harm Pension Funds and avoiding other kinds of even more troublesome and dear procedures.

15. 14 Investment of Pension Fund Resources The Value of a Pension Fund :  Taking into account all the mentioned arguments, the value of each Pension Fund must be determined on a daily basis on the grounds of economic or market value of the Pension Fund investments.  This introduces the concept of “share” or unit of value.  The value of Pension Fund share is based on its Net Asset Value per share: Net Asset Value per share = Market value of the portfolio - Liabilities Number of Pension Fund shares outstanding

16. 15 Investment of Pension Fund Resources The Value of a Pension Fund :  This method allows all the accounting of Pension Fund income, expenses, assets and liabilities to be done at Pension Fund portfolio level, and not at the individual capitalization account level.  The Pension Fund should not distribute income and gains or losses to individual accounts.  Individual accounting should be restricted to accounting for the number of shares owned by each affiliate.  The total net asset value of the Pension Fund valued at the daily market price involves all income and realized and unrealized appreciation.  This method is simple, cost effective and fully in compliance with the National and International Accounting Standards. It is also consistent with international best practices.

17. 16 Investment of Pension Fund Resources The Value of a Pension Fund :  The following formula can be used to calculate the total return of the Fund for any time-period: where: Um = the value of the Pension Fund share at a particular day m.  Using this methodology it is easy to compare, in a homogeneous basis, the return of two or more Pension Funds over some evaluation period, and it is also useful for evaluating performance over different periods. Rm = Um – Um -1 - x 100 Um-1 1