Adequate and sustainable pensions in Bulgaria: Contribution from supplementary retirement provisions...

Adequate andAdequate and sustainable pensions sustainable pensions in Bulgariain Bulgaria:: Contribution from Contribution from

supplementary retirement supplementary retirement provisionsprovisions

BISSER PETKOVBISSER PETKOVDeputy Chairman of Financial Supervision Commission Deputy Chairman of Financial Supervision Commission Head of Social Insurance Supervision DivisionHead of Social Insurance Supervision Division

International Conference “Development of Supplementary Retirement Provision in International Conference “Development of Supplementary Retirement Provision in the EU the EU and the Challenges to EU Accession Countries” Sofia, 12-13 October 2006and the Challenges to EU Accession Countries” Sofia, 12-13 October 2006

Challenges to private retirement provision Challenges to private retirement provision in the context of Bulgaria EU accession in the context of Bulgaria EU accession processprocess

AgendaAgenda

Development of private retirement Development of private retirement provisionprovision

Role and future contribution of private Role and future contribution of private retirement provision to Bulgarian pension retirement provision to Bulgarian pension system adequacy and financial system adequacy and financial sustainabilitysustainability

33

Development of Funded Pension Development of Funded Pension Provision Provision 1994 – Voluntary pension funds launched - fully funded 1994 – Voluntary pension funds launched - fully funded

basis,individual accounts.basis,individual accounts.

1999 – Legal regulation of pension provision activity (Adoption of the 1999 – Legal regulation of pension provision activity (Adoption of the Law for SupplementaryLaw for Supplementary

Voluntary Pension Provision and the Mandatory Social Voluntary Pension Provision and the Mandatory Social Insurance Code).Insurance Code).

2000 – Establishment of the State Agency for Social Insurance 2000 – Establishment of the State Agency for Social Insurance Supervision and licensing of the first pension insurance Supervision and licensing of the first pension insurance companies. companies.

– – Professional Pension Funds launched.Professional Pension Funds launched.

2002 – Universal Pension Funds launched.2002 – Universal Pension Funds launched.

2003 – Integration of supervision authority over the non bank 2003 – Integration of supervision authority over the non bank financial sector financial sector

Establishment of Financial Supervision Commission (FSC)Establishment of Financial Supervision Commission (FSC) Social Insurance Code adoptedSocial Insurance Code adopted

44

Architecture of the Bulgarian Pension Architecture of the Bulgarian Pension SystemSystem

I. Mandatory Pay-as-you- go-system.

• National Social Security Institute

• National Revenues Agency

II. Mandatory supplementary retirement provision.

• Universal PF• Professional PF

III. Voluntary supplementary retirement provision.

• Voluntary PF• IORP, 2007

* Universal Pension Funds - mandatory participation for all born after 31.12.1959Professional Pension Funds - for workers in hazardous work conditions (1st and 2nd category of labour) Centralized collection of social insurance contributions by NRA. Public control over the activity of PICs (Trustee and Advisory Boards)

55

StructuralStructural ( (disdis))similiarities between the Bulgarian and EU Pension System Modelssimiliarities between the Bulgarian and EU Pension System Models

EUEU BulgariaBulgaria Applicable EU Applicable EU RegulationsRegulations

StatutoryStatutory retirement retirement provision schemesprovision schemes 11stst pillar pillar

PAYGPAYG scheme, publicly managedscheme, publicly managed 11stst pillarpillar

(I-A by OECD concept)(I-A by OECD concept)

Regulation Regulation 1408/711408/71

Regulation 574/72Regulation 574/72Capital retirement provision, privately Capital retirement provision, privately manages schemesmanages schemes 22ndnd pillar pillar

(I-B by OECD concept)(I-B by OECD concept)

Regulation Regulation 1408/711408/71

Regulation 574/72Regulation 574/72Occupational Occupational retirement provision retirement provision schemesschemes

22ndnd pillar pillar

Directive 1998/49Directive 1998/49



Individual voluntary Individual voluntary retirement provision retirement provision schemes 3schemes 3rdrd pillar pillar

Voluntary retirement provision through Voluntary retirement provision through individual or occupational individual or occupational contributionscontributions//or contributions from a or contributions from a third party 3third party 3rdrd pillar pillar

66

20042004 20052005

Net Replacement RatioNet Replacement Ratio 51.0 51.6

Pensions Pensions // GDPGDP 9.18 9.0

PensionersPensioners 2 320 444 2 301 669

Dependency RatioDependency Ratio 93.4 91.6

Bulgarian Pension System Bulgarian Pension System Current CharacteristicsCurrent Characteristics

Contributions (2006):Contributions (2006): 23 4 supplementary pensions

19 state pensions

65 : 3565 : 35 contributions are divided between contributions are divided between

employer and employee; to be employer and employee; to be 50:5050:50 in in 20092009

77

Number of Number of FundsFunds

24 (8 pension fund management companies, each 24 (8 pension fund management companies, each managing 3 types of funds; 1 more PIC to start managing 3 types of funds; 1 more PIC to start operation of 3 more funds s by the end of the year)operation of 3 more funds s by the end of the year)

TypesTypes

Fully funded, DC accumulated in individual Fully funded, DC accumulated in individual accounts;accounts;

Open-type funds (universal and professional) Open-type funds (universal and professional) administered by private Pension Insurance administered by private Pension Insurance CompaniesCompanies

Market ValueMarket Value 11 378378 256256 201201 BGN (BGN (704 691 206704 691 206 EUR) EUR) ofof net net assets, as of 30.09.2006assets, as of 30.09.2006

Foreign Foreign ParticipantsParticipants

Substantial share of foreign companies shareholders Substantial share of foreign companies shareholders participation in pension management companiesparticipation in pension management companies

ConcentrationConcentration

High concentration over past years; as of High concentration over past years; as of 30.06.2006 the two major pension fund 30.06.2006 the two major pension fund management companies have 67 of assets and 63 management companies have 67 of assets and 63 of insured personsof insured persons

Main Characteristics of Funded Pension Provision MarketMain Characteristics of Funded Pension Provision Market

88

Regulatory frameworkRegulatory framework of private of private retirement provisionretirement provision

Regulatory frameworkRegulatory framework Social Insurance CodeSocial Insurance Code Financial Supervision Commission Act Financial Supervision Commission Act Secondary legislation acts adopted bySecondary legislation acts adopted by::

Financial Supervision CommissionFinancial Supervision Commission Council of MinistersCouncil of Ministers Bulgarian National Bank, Ministry of Finance, NSSIBulgarian National Bank, Ministry of Finance, NSSI

Recent Regulatory ChangesRecent Regulatory Changes Introduction of occupational pension schemes (transposition Introduction of occupational pension schemes (transposition

Directive 2003/41) Directive 2003/41) Liberalisation of pension funds investment regimeLiberalisation of pension funds investment regime


AgendaAgenda



1010

Common Objectives of the OMC for Common Objectives of the OMC for PensionsPensions

1: 1: AdequacyAdequacyObjective 1: Preventing Social ExclusionObjective 1: Preventing Social Exclusion

Objective 2: Enabling People to Maintain Living StandardsObjective 2: Enabling People to Maintain Living StandardsObjective 3: Promoting SolidarityObjective 3: Promoting Solidarity

2: 2: FINANCIAL SUSTAINABILITY OF PENSION SYSTEMSFINANCIAL SUSTAINABILITY OF PENSION SYSTEMSObjective 4: Raise Employment LevelsObjective 4: Raise Employment Levels

Objective 5: Extend Working LivesObjective 5: Extend Working LivesObjective 6: Making Pension Systems Sustainable in a Context of Objective 6: Making Pension Systems Sustainable in a Context of Sound Public FinancesSound Public FinancesObjective 7: Adjust Benefits and Contributions in a Balanced WayObjective 7: Adjust Benefits and Contributions in a Balanced WayObjective 8: Ensure that Private Pension Provision is Objective 8: Ensure that Private Pension Provision is Adequate and Financially SoundAdequate and Financially Sound

3: 3: MODERNISATION: RESPONDING TO CHANGING NEEDSMODERNISATION: RESPONDING TO CHANGING NEEDSObjective 9: Adapt to More Flexible Employment and Career Objective 9: Adapt to More Flexible Employment and Career PatternsPatternsObjective 10: Meet the Aspirations for Greater Equality of Women Objective 10: Meet the Aspirations for Greater Equality of Women and Menand MenObjective 11: Demonstrate the Ability of Pension Systems to Meet Objective 11: Demonstrate the Ability of Pension Systems to Meet the Challengesthe Challenges

1111

improveimprove pension system sustainability pension system sustainability ((risk diversificationrisk diversification))

Improve pension system transparencyImprove pension system transparency ((fully findedfully finded))

descreasedescrease solidarity transferssolidarity transfers ((individual individual accountsaccounts))

improveimprove long term pension provision long term pension provision coveragecoverage ((actuarial principlesactuarial principles))

Pension Funds as Pension System Pension Funds as Pension System ComponentsComponents

1212

DevelopmentDevelopment inin Pension Funds Assets Pension Funds Assets According to Financial Institution (th According to Financial Institution (th

BGN)BGN)

Source: FSC

440 844261 125

114 05841 705

253 312200 832

143 817

95 241

51 536

417 966325 457252 669

195 519

135 363

16 67811 2416 76012 75514 096

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005

LIC

VPF

PPF

UPF

1 EUR 1 EUR = 1.95583 BGN (Exchange rate pegged to EUR in currency board)= 1.95583 BGN (Exchange rate pegged to EUR in currency board)

1313

Dynamics of PF Asset GrowthDynamics of PF Asset Growth

Source: FSC, 2006

0

1000000

2000000

3000000

4000000

5000000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Universal Professional Voluntary Total

PF Net Assets (PF Net Assets (in in th BGN) th BGN) 331.12.2002 1.12.2002 - - 331.12.1.12.2010 (estimated forecast)2010 (estimated forecast)1 EUR = 1.95583 BGN exchange rate pegged to EUR under currency board1 EUR = 1.95583 BGN exchange rate pegged to EUR under currency board

6.4

2.7

GDP

1414

Pension fund assets in selected non-Pension fund assets in selected non-OECD members, 2005OECD members, 2005

Source: OECD, Global Pension Statistics

1515

Private Pension Provision Coverage Private Pension Provision Coverage Rate Rate //Socially Insured PersonsSocially Insured Persons in PFin PF /working /working

age populationage population//

Source for working population statisticsSource for working population statistics: : NSI, 2006NSI, 2006

Type of Type of FundFund 31.12.200231.12.2002 31.12.20031.12.200

3331.12.20031.12.200

4 4 31.12.20031.12.200

5 5

UPFUPF 24,7024,70 34,0334,03 41,9341,93 46,5246,52

PPFPPF 3,293,29 3,483,48 3,693,69 3,793,79

VPFVPF 10,2810,28 10,8810,88 11,2011,20 11,4211,42

TotalTotal:: 38,2738,27 48,3848,38 56,8256,82 61,7361,73

1616

Rate of Return on Pension Funds Rate of Return on Pension Funds InvetmentsInvetments

0

2

4

6

8

10

12

14

UPF

PPF

VPF

Inflation

Source: FSC and NSI

1717

Fee Structure in Fee Structure in Mandatory Pension Funds Mandatory Pension Funds

Fund Type

Front-up FeeOn Each Contributio

n

Management Fee

Transfer Fee

Fee as established in regulation

Up to 5 %

Up to 1 % of fund’s assets on an annual basis

Up to 20 BGN*

1818

Replace Rate for Pensions in Replace Rate for Pensions in Supplementary Voluntary Retirement Supplementary Voluntary Retirement

ProvisionProvision

YearYear/ / MonthMonth20042004 20052005

1212 33 66 99 1212

Number of pensioners in Number of pensioners in VPFVPF 2 3302 330 2 2142 214 2 2002 200 2 1472 147 2 0922 092

Pensions paid out in BGNPensions paid out in BGN 106 010106 010 101 115101 115 101 101 608608 99 76099 760 96 90496 904

Average monthly pensionAverage monthly pension 4646 4646 4646 4646 4646

Average monthly social Average monthly social insurance incomeinsurance income 356356 326326 324324 333333 370370

Replace Rate Replace Rate 12,7712,77 14,0014,00 14,2514,25 13,9613,96 12,5212,52

SourceSource average social insurance incomeaverage social insurance income: : NSSINSSI

1919

Social Security Short Run Social Security Short Run Pensions AdequacyPensions Adequacy

Фиг. № 7. КОЕФИЦИЕНТ НА ЗАМЕСТВАНЕ НА ДОХОДА ЗА ПЕРИОДА 2000 - 2008 г.

53,8%53,3%53,0%51,3%49,7%49,6%49,9%48,2%51,1%

0

50

100

150

200

250

300

350

2000 г. 2001 г. 2002 г. 2003 г. 2004 г. 2005 г. 2006 г. 2007 г. 2008 г.

0%

10%

20%

30%

40%

50%

60%

Средна пенсия на един пенсионер - лв.

Средномесечен нетен осигурителен доход - лв.

КОЕФИЦИЕНТ НА ЗАМЕСТВАНЕ

2020

Net replacement Net replacement raterate

0,0

10,0

20,0

30,0

40,0

50,0

60,0

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2052

2054

Total I pillar II pillar

Long Term Pensions AdequacyLong Term Pensions Adequacy

2121

foster andfoster and increase savingsincrease savings decreasedecrease market cost of capitalmarket cost of capital developdevelop institutional investors activityinstitutional investors activity improve internal financial marketimprove internal financial market influence corporate governanceinfluence corporate governance

Pension Funds as Financial InstitutionsPension Funds as Financial Institutions

2222

2001 2001 2002 2002 2003 2003 20042004 20052005

Market Capitalisation Market Capitalisation of Bulgarian Stock of Bulgarian Stock Exchange – SofiaExchange – Sofia

3,73,7 4,34,3 7,97,9 10,510,5 20,120,1

Insurance and Health Insurance and Health Companies Companies Premium IncomePremium Income

1,61,6 1,91,9 1,91,9 2,22,2 2,62,6

Pension Funds Net Pension Funds Net AssetsAssets

0,60,6 1,01,0 1,41,4 2,12,1 2,72,7

Bank AssetsBank Assets 41,141,1 45,045,0 50,250,2 65,065,0 78,378,3

Depth of Financial Market – Depth of Financial Market –

Assets as Share of GDP Assets as Share of GDP (%)(%)

2323

Role of PFRole of PF as Capital Market Playersas Capital Market Players

* * Market capitalisation of BSEMarket capitalisation of BSE на БФБ на БФБ includesincludes: : Official securities marketOfficial securities market ( (segmentssegments А, В, С, А, В, С, without investment companieswithout investment companies) ) and OTCand OTC ( (without investment comopanieswithout investment comopanies););

SourceSource: : BSEBSE

** ** Investments in investment companies are included in the value of the investments of pensionInvestments in investment companies are included in the value of the investments of pension funds for voluntary pension insurancefunds for voluntary pension insurance

Type of pension fundType of pension fund UPFUPF PPFPPF VPFVPF** ** Investments in sharesInvestments in shares – – as as

of September of September 2006 /2006 /th th BGNBGN./ ./

99 521 54 426 84 587

Share of Private pension Share of Private pension funds in BSE market funds in BSE market capitalisationcapitalisation

0,89 0,49 0,75

* * Market capitalisation on BSEMarket capitalisation on BSE - - SeptemberSeptember 2006 2006 / /th BGNth BGN./ - ./ - 11 210 11 210 815815

2424

Changes in the structure of investment Changes in the structure of investment portfolio of funds for mandatory portfolio of funds for mandatory supplementary pension provisionsupplementary pension provision

55,28

39,43

3,41 7,52

17,48

7,149,79

13,12

11,098,02

5,29

57,25

18,81

17,0020,08

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

100,00

31.12.2004 31.12.2005 30.9.2006

Investment property

Bank Deposits

Derivatives

Investments abroad

Mortgage bonds, issued buyprivate banks

Municipal Bonds

Corporate Bonds

Shares

Government issued / backedsecurities

2525

Changes in the structure of investment Changes in the structure of investment portfolio of funds for voluntary portfolio of funds for voluntary

supplementary pension provision supplementary pension provision

53,6045,61

32,35

3,117,21

19,07

7,31 9,50 13,98

11,92 11,34 7,87

20,37 23,31 21,78

0

10

20

30

40

50

60

70

80

90

100

31.12.2004 31.12.2005 30.9.2006

Investment income

Bank deposits

Derivatives

Investments abroad

Mortgage bonds

Municipal Bonds

Corporate Bonds

Shares

Government backed securities

2626

Pension Reform Sustainability to Pension Reform Sustainability to Challenges of the FutureChallenges of the Future

Risks for the capital funded pillars:Risks for the capital funded pillars: Financial destabilisationFinancial destabilisation, , bankruptcies and bankruptcies and

ruined confidence in reformsruined confidence in reforms BadBad pension funds assetspension funds assets management, low management, low

rate of returnrate of return Political riskPolitical risk – – reformed stopped, regressive reformed stopped, regressive

actions towards the systemactions towards the system IInstitutional Risksnstitutional Risks


AgendaAgenda



2828

Challenges to Private Retirement Challenges to Private Retirement Provision in the Context of Bulgaria EU Provision in the Context of Bulgaria EU

Accession ProcessAccession Process

BulgariaBulgaria has gone aheadhas gone ahead of the old Europe of the old Europe member states in terms of pension reformmember states in terms of pension reform, , however with a significance difference to be however with a significance difference to be noticednoticed: : EU population gets rich before growing EU population gets rich before growing old, while the Bulgarian population grows old old, while the Bulgarian population grows old before getting rich.before getting rich.

DifferencesDifferences in pension systems models in pension systems models implementationimplementation

Implementation of EU Directives in the field of Implementation of EU Directives in the field of supplementary pension provisionsupplementary pension provision

2929

ChallengesChallenges (2)(2)

EUROSTATEUROSTAT and statistical classification of and statistical classification of supplementary mandatory pension fundssupplementary mandatory pension funds

Growing roleGrowing role of privately managed pensionsof privately managed pensions ((30 % 30 % out of general pension paymentsout of general pension payments in EU)in EU) and increased competitionand increased competition among providers of among providers of funded pension provisionfunded pension provision

3030

Thank you for your attentionThank you for your attention!!

[email protected][email protected]

http://www.fsc.bghttp://www.fsc.bg

Adequate and sustainable pensions in Bulgaria: Contribution from supplementary retirement provisions...

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