DEVELOPMENT OF PRIVATE PENSION INDUSTRY IN DEVELOPMENT OF PRIVATE PENSION INDUSTRY IN THE REPUBLIC OF BULGARIATHE REPUBLIC OF BULGARIA

Conference Conference ““Evolution of Pension Reforms:Evolution of Pension Reforms: Bulgaria’s Experience and Regional PerspectivesBulgaria’s Experience and Regional Perspectives” ”

Sofia, Bulgaria, February Sofia, Bulgaria, February 16 – 1716 – 17,, 2005 2005

Dr. Nikola AbadjievDr. Nikola Abadjiev Chairman Chairman

Bulgarian Association of Supplementary Pension Security Companies (BASPSC) Bulgarian Association of Supplementary Pension Security Companies (BASPSC)

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

MILESTONES IN THE DEVELOPMENT OF THE FULLY-FUNDED PENSION SYSTEM (SUPPLEMENTARY PENSIONS PROVISION)

19941994:: Provision of supplementary voluntary private pensions - Provision of supplementary voluntary private pensions -

establishment of the first pension fund managing companies establishment of the first pension fund managing companies

19971997:: Consolidation of the activity. Establishment of the industry NGO Consolidation of the activity. Establishment of the industry NGO

institution – BASPSCinstitution – BASPSC

19991999:: Enactment of initial legal framework, establishment of II and III Enactment of initial legal framework, establishment of II and III

pillars of the fully-funded pension system pillars of the fully-funded pension system ((enactment of SVPIA and MSICenactment of SVPIA and MSIC))

20002000:: Institutionalization of the state regulatory and supervisory authority Institutionalization of the state regulatory and supervisory authority

(State Insurance Supervision Agency - SISA)(State Insurance Supervision Agency - SISA). . Licensing of pension fund Licensing of pension fund

managing companiesmanaging companies

2001-20022001-2002::Mandatory fully-funded pension provision startsMandatory fully-funded pension provision starts

20032003:: Enactment of the new law: Social Insurance CodeEnactment of the new law: Social Insurance Code.. Establishment of Establishment of

the Financial Supervision Commission (FSC).the Financial Supervision Commission (FSC).

BASIC FEATURES OF THE PRIVATE (FULLY-FUNDED) BASIC FEATURES OF THE PRIVATE (FULLY-FUNDED) PENSION SECTORPENSION SECTOR

II PILLAR: SUPPLEMENTARY MANDATORY PENSION PROVISION (OCCUPATIONAL AND UNIVERSAL PENSION FUNDS):

Mandatory affiliation; Defined contribution pension schemes; Licensing regime for pension fund incorporation; Legal independence of pension funds from pension fund managing company

(joint stock company); Centralized collection of contributions – National Social Security Institute.

III PILLAR: SUPPLEMENTARY VOLUNTARY PRIVATE PENSION PROVISION

PUBLIC CONTROL OVER THE ACTIVITY OF PENSION FUND MANAGING COMPANIES: ADVISORY AND TRUSTEE BOARDS

STATE SUPERVISION OVER THE PROVISION OF FULLY- FUNDED PENSIONS

TAX INCENTIVES IN FAVOR OF PENSION FUND MEMBERS AND EMPLOYERS.

BULGARIAN PENSION MODELBULGARIAN PENSION MODEL

I PILLAR State Social

Security Provision PAYG system

NSSI

II PILLARSupplementary Mandatory Private Pension Provision

of Fully-funded Individual Accounts

III PILLARVoluntary Private Pension Provision

of Fully-funded Individual Accounts

Occupational PF: employees of heavy

and dangerous professionsrequiring earlier retirement

Universal PF: mandatory participation

of all workers born after 31/12/1959

Voluntary PF: since 1994

Contribution FlowContribution Flow

Employer/Employee/

Employer/Employee/

National Social Security Institute

III PILLARIII PILLAR - - VPFVPF

II pillarII pillar – – UPF; OPFUPF; OPFUniversal

Pension Fund(II(II PILLAR)PILLAR)

Occupational Pension Fund(II(II PILLAR)PILLAR)

Voluntary Pension Fund(III(III PILLAR)PILLAR)

IndividualAccount

Individual Account

Banking system

Individual Account

Individual Account

Individual Account

Individual Account

Specificities of Fully-funded Pension Provision Specificities of Fully-funded Pension Provision SectorSector

Continuous increase of the coverage of the fully-funded Continuous increase of the coverage of the fully-funded pension system by transferring pension system by transferring part of the social security part of the social security contribution from the PAYG system contribution from the PAYG system ((for UPF from for UPF from 2% 2% to to 5 %)5 %)

Legally enforced possibility for one pension company to Legally enforced possibility for one pension company to manage three pension funds for supplementary fully-manage three pension funds for supplementary fully-funded pensionsfunded pensions

Mandatory contribution to OPFMandatory contribution to OPF – 100 % – 100 % financed by financed by employer (or other contribution provider)employer (or other contribution provider)

Mandatory contribution to UPFMandatory contribution to UPF – – liability divided between liability divided between employer and employeeemployer and employee ((2004 2004 ratio ratio – 75:25, 2009 – 75:25, 2009 and and following years ratio - following years ratio - 50:50 50:50 ))

FULLY OPERATING THREE-PILLLAR PENSION SYSTEM. 8 PENSION COMPANIES MANAGING 24 PENSION FUNDS;

INCREASING INTEREST IN THE ACTIVITY OF FULLY-FUNDED PENSION PROVISION. NEW ATTITUDE TO THE PENSION SYSTEM;

INCREASED COVERAGE OF THE FULLY-FUNDED SYSTEM –LARGER NUMBER OF PERSONS AFFILIATE TO THE SYSTEM;

INCREASED SIGNIFICANCE OF PENSION FUND MANAGING COMPANIES AS INVESTORS: GOOD RATE OF INCREASE OF FINANCIAL ASSETS;

SUCCESSFUL CONSERVATIVE INVESTMENT POLICY: HIGH RATE OF RETURN TO THE INDIVIDUAL ACCOUNTS;

BETTER INSTITUTIONAL COLLABORATION IN THE SYSTEM, INCLUDING THE MAJOR STAKEHOLDERS: PENSION FUND MANAGING COMPANIES, NATIONAL SOCIAL SECURITY INSTITUTE AND FINANCIAL SUPERVISION COMMISSION.

2005 REALITY 2005 REALITY IN THE PRIVATE FULLY-FUNDED PENSION IN THE PRIVATE FULLY-FUNDED PENSION

SECTORSECTOR

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

2001 2002 2003 2004 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 2004 2010

Thousands BGL

ProjectedAchieved

EVOLUTION OF PENSION FUND SYSTEMEVOLUTION OF PENSION FUND SYSTEM

Regarding Voluntary Pension Funds:

2004: 534 415 members and BGL 325 457 thousand of assets,

2010: 665 thousand members and BGL 1 360 million in assets;

Regarding Universal Pension Funds:

2004: 2 004 776 members and BGL 261 126 thousand in assets,

2010: 2 239 thousand members and BGL 2 150 thousand in assets;

Regarding Occupational Pension Funds:

2004: 176 173 members and BGL 200 832 thousand in assets,

2010: 85 thousand members and BGL 584 million in assets;

Pension Fund System Total:

2004: 2 715 364 members and BGL 787 415 thousand in assets,

2010: 2 989 thousand members and BGL 4 billion and 94 million in

assets.

Annual Rate of Return of Pension FundsAnnual Rate of Return of Pension Funds

ParametersParameters

UPFUPF OPFOPF VPFVPF

For the period For the period of of 01.01.200301.01.2003 - -

31.12.20031.12.20044

For the periodFor the period

of of 01.01.200301.01.2003 - - 31.12.20031.12.20044

Gross for the Gross for the period ofperiod of

01.01.200301.01.2003 - -

31.12.20031.12.20044

11 22 33 44

Average arithmetic returnAverage arithmetic return 11,11,1111%% 11,00%11,00% 1100,09,09%%

Average weighted returnAverage weighted return 1111,,2424%% 11,01%11,01% 10.31%10.31%

* 2004 Average interest rate for bank deposits in BGL: 5,66%

* 2004 Inflation rate: 4,0%

Rate of Return of II Pillar (Mandatory) Pension Rate of Return of II Pillar (Mandatory) Pension FundsFunds

0

2

4

6

8

10

12

14

16

UPF OPF

2002

2003

2004

Rate of Return of III Pillar (Voluntary) Pension Rate of Return of III Pillar (Voluntary) Pension FundsFunds

9,2

9,4

9,6

9,8

10

10,2

10,4

10,6

10,8

2002 2003 2004

Investment Portfolio Structure: Pension Fund TotalInvestment Portfolio Structure: Pension Fund Total

19,45%

55,76%

0,46%1,68%

12,15%

10,50%Government bonds

Iinvestment instruments traded on regulated capital markets

Municipal bonds

Bank deposits

Real Estate

Other investments

18,31%

64,50%

0,01%1,89%

0,75%

14,53%

2004 2003

CHALLENGES AND PRIORITIES IN CHALLENGES AND PRIORITIES IN 2005 2005

Improvement of the regulatory framework in the Social Insurance

Code in the sections related to the fully-funded pensions;

Strengthening the mechanisms for larger coverage of the system by

tax incentives;

Increase of the relative importance of the fully-funded pension

pillars compared to the PAYG first pillar of the system;

Increase of the pension fund contribution;

Improved state supervision over the system with respect to income

and retirement entitlement;

Creation of an enabling environment for the investment policy of

pension funds;

CHALLENGES AND PRIORITIES IN 2005CHALLENGES AND PRIORITIES IN 2005 ((22))

Improved investments: achievement of more effective diversification in the

investment portfolios;

Acceleration of the collection process and shortening of the time period for

contributions transfer to the individual accounts of pension fund members;

Improvement of pension fund switching procedure;

Dynamic contact with pension fund members by using more actively

modern means of communication and information;

Implementation of new and more effective IT solutions in the activity of

pension fund managing companies;

Enabling pension funds actual participation in the economic development

of the country.