1. 1 THE NEED AND POSSIBILITY OF INTRODUCTION OF MULTIFUND SYSTEM IN THE SUPPLEMENTARY RETIREMENT PROVISION ACTIVITY IN BULGARIA Conference “Development of Supplementary Retirement Provision in EU and the challenges for the joining countries” Sofia, Bulgaria, October 13, 2006 Milen Markov Chairman of Investments and Capital Markets Committee of BASPSC BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIES

2. 2 І. THE NEED OF INTRODUCTION OF MULTIFUND SYSTEM IN THE SUPPLEMENTARY PENSION PROVISION ІІ. POSSIBLE METHODS OF APPROACH AND NECESSARY ACTIONS FOR THE INTRODUCTION OF MULTIFUND SYSTEM IN BULGARIA

3. 3 І. THE NEED OF INTRODUCTION OF MULTIFUND SYSTEM IN THE SUPPLEMENTARY PENSION PROVISION Fundamental reasons for introduction of a multifund system in countries with Pension Systems based on fully funded principal. (Chile, Peru, Mexico): 1. Achieving higher profitability through investing in portfolios with predominantly variable income assets and higher risk; HIGHER PROFITABILITY = HIGHER PENSION HIGHER PROFITABILITY = HIGHER RISK 2. Conforming the life cycle of the insured person with the risk of change of the indexes of the capital markets; 3. Granting the insured persons the right to determine the level of risk of the portfolio in which they are insured; 3. Granting the insured persons the right to determine the level of risk of the portfolio in which they are insured; 4. Clear definition of the different investment portfolio’s profiles;

4. 4 Motives forthe introduction of the multifund system in Bulgaria Motives for the introduction of the multifund system in Bulgaria 1. Development of the capital markets - high growth of the “Bulgarian Stock Exchange-Sofia capitalization; - development of the Corporate bonds market 2. Successful start and development of the Collective investment schemes– Investment Companies and Unit Trusts 3. Liberalization of the investment limitations 4. Achieving a mature stage in the development of the Supplementary Pension Provision System – successful implementation of a daily evaluation of the assets of the pension funds, effective control by the Finance Supervision Commission, clear rules for investment in the capital markets of countries members and non members of the EU.

5. 5 Development of the capital market in Bulgaria 2000200120022003200420052006* 4,81%3,72%4,25%4,25%7,88%10,54%20,11%21,13% Market capitalization of “BSE-Sofia” Market capitalization of “BSE-Sofia” More than 9 time increase 2000200120022003200420052006* (BGN billions)1,2861,1041,3752,7224,0338,4349,914 (EUR billions)0,6580,5640,7031,3922,0624,3125,069 Market capitalization / Gross domestic product Market capitalization / Gross domestic product 2002 2006 * Shares328341 Bonds1262 Number of shares and bonds traded on “BSE-Sofia” Number of shares and bonds traded on “BSE-Sofia”

6. 6 Successful start and development of the Collective investment schemes  Number of local Investment Companies and Unit Trusts 2000200220042005 2006 * Investment Companies 3481011 Unit Trusts ---925  Funds managed by local Investment Companies and Unit Trusts as of 30.06.2006 - Investment Companies - 92 147 BGN thousands. (47 114 EUR thousands) - Unit Trusts - 72 474 BGN thousands. (37 055 EUR thousands)  Foreign Collective investment schemes offered in Bulgaria as of 30.06.2006 – 4 Management Companies offer a total of 37 different Unit Trusts, using the branch network of 4 banks.

7. 7 Aggregated structure of the assets of the Collective investment schemes as of 30.06.2006 Assets (BGN) IC totalUT totalCIS total Value (BGN)Share Value (BGN)Share Value (BGN)Share Cash, including 20 792 92322,56%24 768 623 34,18% 45 561 54627,68% Bank deposits 16 707 53518,13%21 123 996 29,15% 37 831 53122,98% Shares 31 412 03234,09%25 069 895 34,59% 56 481 92734,31% Corporate bonds 22 367 97924,27%15 054 130 20,79% 37 422 10922,73% Mortgage bonds 5 074 0705,51%2 013 036 2,78% 7 087 1064,31% Municipal bonds 783 4510,85%438 226 0,60% 1 221 6770,74% Compensatory notes 1810100,20%0 0,00% 1810100,11% Government bonds 6 600 5747,16%915 500 1,26% 7 516 0744,57% Euro bonds 581 2920,63%0 0,00% 581 2920,35% Foreign securities 2 116 4612,30%1 023 062 1,41% 3 139 5231,91% Receivables 2 049 6472,22%3 094 974 4,27% 5 144 6213,13% Non financial assets 2 049 6472,22%3 094 974 4,27% 5 144 6213,13% Others 188 0710,20%96 692 0,13% 284 7630,17% Total assets 92 147 510100%72 474 142100%164 621 652100% Profit 1 996 0362,17%749 6981,03%2 745 7341,67%

8. 8 Liberalization of investment limitations Investment instrument Limitations for the Mandatory Pension Funds Limitations for the Voluntary Pension Funds Up to 24.02. 2006After 24.02.2006 Up to 24.02. 2006After 24.02.2006 min. % max. % min. % max. % Government bonds50100 30100 Shares admitted to trading on a regulated market 1020 10100 Shares of Special Investment Purpose Companies -5 -10 Stocks and/or shares of collective schemes 15 -100 Corporate bonds on a regulated market 2025 20100 Secured Corporate bonds -5 -10 Municipal bonds 1015 10100 Bank deposits 25 100 Mortgage bonds 30 100 Investment Estate 55 10 Derivatives of securities 2,5 * * Investments in foreign securities 15 ** 20 **

9. 9 ІІ. POSSIBLE METHODS OF APPROACH AND NECESSARY ACTIONS FOR THE INTRODUCTION OF MULTIFUND SYSTEM IN BULGARIA  Introduction of multifunds only in the Supplementary Voluntary Pension Funds  Limitation of the number and types of risk portfolios to 3 different levels of risk, with respect to the share of variable income securities - Conservative up to 20 % - Standard up to 60 % - Aggressive up to 80 % - Aggressive up to 80 %

10. 10 Portfolio composition of VPF as of 30.06.2006 №Investment instruments BGN thousand EUR thousand % 1 Securities issued or guaranteed by the Government160 31781 96938,64 2 Securities admitted to trading on a regulated market109 28155 87526,34 2.1Shares55 70728 48313,43 2.2Corporate bonds53 57427 39212,91 3Municipal bonds1 7879140,44 4Bank deposits96 09849 13423,16 5Mortgage bonds34 69517 7398,36 6Derivatives of securities000,00 7Investment Estate7 0473 6031,70 8Foreign investments5 6342 8801,36 Total investments414 858212 114100,00

11. 11 NECESSARY ACTIONS FOR THE INTRODUCTION OF A MULTIFUND SYSTEM IN BULGARIA 1. Changes in the Normative Framework – common initiative of FSC and BASPSC 2. The Pension companies should develop: - Investment strategy for the portfolios with different risk levels - Investment strategy for the portfolios with different risk levels - Fund rules 3. Licensing of every investment scheme

12. 12 MAIN ISSUES, WHICH SHOULD BE SLOVED BY THE CHANGES OF THE NORMATIVE FRAMEWORK 1. What should be the legal form of the mutlifunds: – one legal person with separate portfolios with different level of risk – each portfolio should be a separate legal person 2. Should the law include maximum and minimum quantitative limitations for the different portfolios or should this be defined in the Fund rules. 3. Should there be limitations of the number of funds managed by a single Pension company

13. 13 MAIN ISSUES, WHICH SHOULD BE SLOVED BY THE CHANGES OF THE NORMATIVE FRAMWORK 4. Status of the already existing funds – determining their risk profile. Determining the type of fund for people who have not made a choice and for unpersonified contributions 5. The right to change funds managed by a single pensions company – taxes and how often it can be done 6. Binding the right to participate in a higher risk fund to the life cycle of a person 7. The amount of taxes collected by the different funds 8.Method of the different portfolio’s asset valuation and calculation of the value of units

14. 14 POSSIBLE OBSTACLES AND PROBLEMS DURING THE INTRODUCTION OF THE MULTI FUND SYSTEM 1. Not enough interest and difficulties in choosing a specific risk portfolio by the insured persons 2. Not enough customers for the formation of a portfolio of a particular kind and difficulties with its effective management 3.Not enough actively traded shares on BSE-Sofia 4.The Pension Companies and FSC having difficulties with the administration of a larger number of funds

15. 15 THANK YOU FOR YOUR ATTENTION QUESTIONS ?