BULGARIAN SYSTEM OF PRIVATE FULLY-FUNDED BULGARIAN SYSTEM OF PRIVATE FULLY-FUNDED PENSIONSPENSIONS

(ACHIEVEMENTS AND CHALLENGES)(ACHIEVEMENTS AND CHALLENGES)

““Pension Reform in Eastern EuropePension Reform in Eastern Europe: : Experiences and PerspectivesExperiences and Perspectives” ” KievKiev, , UkraineUkraine,, May May 27-28 27-28,, 2004 2004

Nikola Abadjiev, Ph.DNikola Abadjiev, Ph.D. . ChairmanChairman ofof BASPSCBASPSC

BULGARIAN ASSOCIATION OF SUPPLEMENTARYBULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY COMPANIESPENSION SECURITY COMPANIES

DEVELOPMENT OF BULGARIAN PRIVATE PENSION DEVELOPMENT OF BULGARIAN PRIVATE PENSION SYSTEMSYSTEM

1994 – 1994 – voluntary savings for fully-funded pensions based on individual voluntary savings for fully-funded pensions based on individual account accumulations emerged;account accumulations emerged;

1997 – 1997 – activity consolidation; incorporation of the industry representative activity consolidation; incorporation of the industry representative organization Bulgarian Association of Supplementary Pension Security organization Bulgarian Association of Supplementary Pension Security Companies;Companies;

1999 –1999 – Implementation of the legal framework for II and III pillar of a fully- Implementation of the legal framework for II and III pillar of a fully-funded pension system funded pension system ((SVPIA and MSIC were passedSVPIA and MSIC were passed));;

2000 – 2000 – Institutionalization of the state supervision for pension fund Institutionalization of the state supervision for pension fund management – State Insurance Supervision Agency (SISA)management – State Insurance Supervision Agency (SISA). . Licensing of Licensing of pension fund managing companies; pension fund managing companies;

2001-2002 – 2001-2002 – Start of the II pillar – mandatory fully-funded pensions through Start of the II pillar – mandatory fully-funded pensions through participation in universal and occupational pension funds;participation in universal and occupational pension funds;

2003 – 2003 – Implementation of a Social Insurance Code. Institutionalization of Implementation of a Social Insurance Code. Institutionalization of the state supervision over the entire financial non-banking sector into a the state supervision over the entire financial non-banking sector into a united body – Financial Supervision Commission (FSC).united body – Financial Supervision Commission (FSC).

Bulgarian Pension ModelBulgarian Pension Model

I PILLARMandatory social

insurancePAYG system

NSSI

II PILLARSupplementary

mandatory pension insurance

Fully-funded pension system

with individual accounts

III PILLARSupplementary

voluntary pension Insurance Fully-funded

pension system with individual accounts

Voluntary pension funds – since –1994

Occupational pension funds – mandatory participation of

persons entitled to early retirement for heavy work

Universal pension funds – mandatory participation

of persons born after 31.12.1959

MAJOR FEATURES OF BULGARIAN PENSION MODELMAJOR FEATURES OF BULGARIAN PENSION MODEL

REFORMING THE PUBLIC SOCIAL SECURITY SYSTEM ADMINISTERED BY THE STATE (FIRST PILLAR)

SUPPLEMENTARY MANDATORY PRIVATE PENSION PROVISIONS (SECOND PILLAR– UNIVERSAL AND OCCUPATIONAL PENSION FUNDS)

MANDATORY PARTICIPATION; DEFINED CONTRIBUTIONS; LICENSING REQUIREMENTS FOR INCORPORATING AND MANAGING PENSION

FUNDS; LEGAL INDEPENDENCE OF PENSION FUNDS FROM THEIR MANAGING

COMPANY, WHICH SHOULD BE A JOINT STOCK COMPANY; CENTRALIZED COLLECTION PROCESS ADMINISTERED.

SUPPLEMENTARY VOLUNTARY PRIVATE PENSION PROVISIONS (THIRD PILLAR)

PUBLIC CONTROL OVER THE OPERATION OF PENSION COMPANIES (CONSULTATIVE AND TRUSTEE BOARDS) STATE SUPERVISION OVER THE ACTIVITY OF PENSION FUND

MANAGEMENT; TAX ALLOANCES FOR PENSION FUND MEMBERS AND EMPLOYERS.

STATE SUPERVISIONSTATE SUPERVISION

FINANCIAL SUPERVISION COMMISSION

specialized state body competent to regulate and supervise the investment, private pension provision and insurance activity in the country.

Directorate of Social Insurance Supervision: directly regulates and supervises the activity of directly regulates and supervises the activity of pension funds and their managing companies in pension funds and their managing companies in compliance with the Social Insurance Code. There compliance with the Social Insurance Code. There are two departments in the directorate:are two departments in the directorate:

- - Licensing and Risk Valuation Departments and

- Supervision Department .

FINANCIAL SUPERVISION COMMISSION, FINANCIAL SUPERVISION COMMISSION, Directorate of Social Insurance SupervisionDirectorate of Social Insurance Supervision: :

Competences of the Licensing and Risk Valuation Competences of the Licensing and Risk Valuation Department:Department:

Issues and revokes licenses; Gives permission for registration pension funds; Drafts and issues methodologies, guidelines and document samples; Prepares projections for the industry; Maintains a database for risk analysis and valuation; Studies and analysis the implementation of actuarial standards; Makes suggestions on the implementation and issues recommendations on

the interpretation of legislation; Participated in the drafting of laws, regulations, instructions and written

guidelines on the activity; Together with the Supervision Department, carries out on-site inspections

on law compliance.

FINANCIAL SUPERVISION COMMISSION, FINANCIAL SUPERVISION COMMISSION, Directorate of Social Insurance SupervisionDirectorate of Social Insurance Supervision: :

Competences of the Supervision Department:Competences of the Supervision Department: Prepares methodology for state supervision; Sets up the requirements to the types, format and contents of pension

companies’ reports; Collects, processes and analyzes information from pension companies

reports; Plans supervision activity and analyzes results from it; Imposes administrative sanctions and measures; Supervises pension companies in liquidation or insolvency; Makes statements on the minimum return guarantee; Makes statements and writes replies to inquiries, complains and signals

related to the activity; Performs its functions by: - preliminary, on-going and follow-up control;

- off-site supervision and on-site inspections.

Specificities of the Bulgarian pension model:Specificities of the Bulgarian pension model:

The PAYG pillar of DB pensions continues to dominate the system;

The scope of private fully-funded pensions increases gradually by transferring a percentage of the social security contribution from the PAYG to the fully-funded system (for the universal pension fund the percentage is planned to increase from 2% to 5-7%);

One pension company is legally entitled to manage three pension funds: two mandatory and one voluntary;

Mandatory contributions to the occupational pension funds are entirely on the account of the employer/insurer;

Mandatory contributions to the universal pension funds are on the account of the employer and employee in ratio of 75:25 in 2004 to reach 50:50 in 2009 and stay so.

Path of pension fund contributionsPath of pension fund contributions

Employer /Employee/

Bank system

National Social Security Institute (NSSI)

Universal pension fund (UPF) II pillar

Occupational pension fund (OPF) II pillar

Voluntary pension fund (VPF) III pillar

Individual account Индивидуална партида

Individual account

Individual account

II pillar

III pillar

Individual account

Individual account

Individual account

NEW LEGAL FRAMEWORK – THE SOCIAL INSURANCE CODE AND NEW SECONDARY LEGISLATION UNDER IT;

FULLY OPERATING THREE-PILLAR PENSION SYSTME. 8 PENSION COMPANIES ADMINISTERING 24 PENSION FUNDS ;

INCREASING INTEREST AND NEW ATTITUTE TO THE PRIVATE PENSION SYSTEM;

GREATER COVERAGE OF THE FULLY-FUNDED PENSION SYSTEM – INCREASE IN THE NUMBER OF PENSION FUND MEMBERS;

GREATER ROLE FOR PENSION COMPANIES AS INSTITUTIONAL INVESTORS – GOOD TEMP OF INCREASE OF PENSION FUND FINANCIAL ASSETS;

SUCCESSFUL CONCERVATIVE INVESTMENT POLICY – HIGH RATE OF RETURN ON INVESTMENTS;

BETTER COOPERATION AMONG INDUSTRY INSTITUTIONS, INCLUDING PENSION COMPANIES, NSSI AND FSC.

NewsNews - - 2004 2004

0

500000

1000000

1500000

2000000

2500000

3000000

2001 2002 2003 2005 2010

Rate of Increase of pension fund members

ProjectedAchieved

Rate of Increase of Pension Fund AssetsRate of Increase of Pension Fund Assets

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

2001 2002 2003 2005 2010

In thousands of BGL ( 1,00 BGL = 1,55 USD)

ProjectedAchieved

PENSION FUND DEVELOPMENT PENSION FUND DEVELOPMENT

Voluntary pension funds:

2003 г. – 516 148 pension fund members and USD 169 719 thousand in assets,

2010 г – 665 thousands pension fund members and USD 906 667 thousand in assets;

Universal pension funds:

2003 г. – 1 613 875 pension fund members and USD 76 146 thousand in assets,

2010 г. – 2 239 thousand pension fund members and USD 1 billion 433 thousand in assets;

Occupational Pension Funds :

2003 г.– 164 943 pension fund members and USD 95 973 thousand in assets,

2010 г. - 85 thousand pension fund members and USD 389 million in assets;

Total pension funds:

2003 г. 2 294 966 pension fund members and USD 341 839 thousand in assets,

2010 г. - 2 989 thousand pension fund members and USD 2 billion 729 million in assets.

Rate of ReturnRate of Return

Indicators Indicators

UPFUPF OPFOPF VPFVPF

fromfrom

01.01.200301.01.2003

untiluntil

31.12.200331.12.2003

For For 21 21 months months

from from 01.04.200201.04.2002

untiluntil

31.12.200331.12.2003

From From 01.01.200301.01.2003

untiluntil

31.12.200331.12.2003

For For 24 24 monthsmonths

From From

01.01.200201.01.2002

untiluntil

31.12.200331.12.2003

GrossGross

FromFrom

01.01.200301.01.2003

untiluntil

31.12.200331.12.2003

Gross Gross

for for 24 24 monthsmonths

From From 01.01.20001.01.20022

untiluntil

31.12.20031.12.20033

Distribute, Distribute, net rate of net rate of

return return

fromfrom

01.01.200201.01.2002 untiluntil

31.12.200331.12.2003

11 22 33 44 55 66 77 88

Arithmetic Arithmetic Average Average Rate of Rate of Return Return

11,23%11,23% 22,79%22,79% 11,00%11,00% 23,19%23,19% 11,09%11,09% 23,17%23,17% 20,77%20,77%

Weighed Weighed Average Average Rate of Rate of ReturnReturn

10,99%10,99% 22,73%22,73% 11,01%11,01% 22,98%22,98% -- -- --

* Average interest rate on bank deposits in BGL for 2003 – 5,38%

* Inflation Rate – 5,60%

Investment Return of Supplementary Investment Return of Supplementary Mandatory Pension FundsMandatory Pension Funds

10,99%

22,73%

11,01%

22,98%

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

Average weighted rate of return of universal pension funds Average weighted rate of return of occupational pension funds

Return realized during the period 01.01.2003- 31.12. 2003

Return realized during the 21-month period from 01.04.2002 through 31.12.2003

Return realized during the period from 01.01.2003 through 31.12.2003

Return realized for the 2-year period betw een 01.01.2002 and 31.12.2003

Investment Return of Supplementary Investment Return of Supplementary Voluntary Pension FundsVoluntary Pension Funds

9,97%

11.09 %

20,77%

23.17 %

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

Return realized during the period01.01.2003- 31.12. 2003

Return realized over the 2-year periodbetween 01.01.2002 and 31.12.2003

gross rate of return

net rate of return

Regulation of Investment Limits for Universal Regulation of Investment Limits for Universal and Occupational Pension Funds as on and Occupational Pension Funds as on

31.12.200331.12.2003

Minimum %

Maximum %

minimum net assets value (%)

maximum net assets value (%)

Securities issued or guaranteed by the government

57,93 85,73 50.00

Bulgarian equities 0.00 5.33 10.00Corporate bonds 0.00 7.20 20.00Municipal bonds 0.00 3.67 10.00Bank deposits - total 0.00 36.19 25.00Mortgage bonds 1.21 14.75 30.00Real estate 0.00 3.48 5.00Derivatives - put options of indexes and bonds 0.00 0.00

2.50

Foreign investments 0.00 0.29 15.00

Investment instruments

Regulation of Investment Limits for Voluntary Regulation of Investment Limits for Voluntary Pension Funds as on Pension Funds as on 31.12.200331.12.2003

Minimum %

Maximum %

minimum net assets value of the fund (%)

maximum net assets value of the fund (%)

Securities issued and or guaranteed by the government

44.23 75.71 30.00

Bulgarian equities 0.00 5.73 10.00Corporate bonds 0.00 8.23 20.00Municipal bonds 0.00 2.17 10.00Bank deposits - total 0.00 38.22 25.00Mortgage bonds 3.28 18.36 30.00Investment estate 0.00 6.12 10.00Derivatives - put options and bonds 0.00 0.00

2.50

Foreign investments 0.00 0.15 20.00

Current structure in SPF

Investment instruments

Regulatory limits

Investment Portfolio Investment Portfolio (total pension funds as on (total pension funds as on 31.1 31.122.200.2003)3)

14,44%

0,38%

1,42% 0,25%

66,44%

17,06% Government securities

Securities traded on regulateddomestic capital markets

Municipal bonds

Bank deposits

Real Estate

Other investments

Types of Government Securities Held by Types of Government Securities Held by Pension Funds as on Pension Funds as on 31.12.200331.12.2003

value (thousands)

share (%)

value (thousands)

share (%)

value (thousands)

share (%)

value (thousands)

share (%)

Discount T-bonds 795 1.02 146 0.15 244 0.21 1,185 0.41Interest-bearing T-bonds 39,083 50.34 46,610 48.48 44,530 39.20 130,223 45.32ZUNK bonds* 23,830 30.69 32,672 33.98 31,612 27.83 88,114 30.66Eurobonds 2,425 3.12 4,426 4.61 12,381 10.90 19,232 6.69Global bonds 11,502 14.83 12,288 12.78 24,828 21.86 48,618 16.92Total 77,635 100.00 96,143 100.00 113,594 100.00 287,372 100.00

TotalTypes of government securities

UPF OPF VPF

PRIORITIES AND CHALLENGES (1)PRIORITIES AND CHALLENGES (1)

Enlargement of the system’s scope by tax allowances; Increase of the fully-funded pension system to the decrease of the PAYG system;Increase of the contribution amount; Fixing a direct relationship between contributions and pension benefits; Improved control over the income system and over entitlement to a pension benefit; Creation of a better environment for the investment policies of pension funds;Implementation of daily valuation for pension fund assets and administration in unit value;

PRIORITIES AND CHALLENGES (PRIORITIES AND CHALLENGES (22))

Introduction of new and improved IT systems in pension fund management;

Improved investments – implementation of more efficient diversification in investment portfolios;

Speed-up of contributions collection process to shorten the time for having the contributions get into the pension fund members individual accounts;

Improvement of switching procedure; Dynamic relation with pension fund members through

modern IT and communication systems; Actual impact of pension funds on the economic

development of the country.

91 V. Levski Blv., Sofia 1000, Bulgaria91 V. Levski Blv., Sofia 1000, Bulgaria

Tel.: (+ 359 2) 980 76 45, Fax: (+ 359 2) 989 08 66 Tel.: (+ 359 2) 980 76 45, Fax: (+ 359 2) 989 08 66

E-mail: baspsc@cablebg.netE-mail: baspsc@cablebg.net

BULGARIAN ASSOCIATION OF SUPPLEMENTARYBULGARIAN ASSOCIATION OF SUPPLEMENTARYPENSION SECURITY COMPANIESPENSION SECURITY COMPANIES