Development and Results of Development and Results of Fully Funded Pension Provision Fully Funded Pension Provision

in Bulgariain Bulgaria

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

Conference “Private Pensions – Consolidation of a New Conference “Private Pensions – Consolidation of a New Market”, Market”,

1818th th OctoberOctober 2006, Bucharest2006, Bucharest,, Romania Romania

22

Development of Funded Pension Development of Funded Pension Provision in BulgariaProvision in Bulgaria

1994 – Voluntary pension funds launched - fully funded basis,1994 – Voluntary pension funds launched - fully funded basis, individual accounts, non-regulatedindividual accounts, non-regulated

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

33

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)

44

Main characteristics Main characteristics of Bulgarian Pension Reformof Bulgarian Pension Reform

Based on the World Bank conception for multipillar social Based on the World Bank conception for multipillar social protection system, considering the national tradition and protection system, considering the national tradition and specificity:specificity:

Industry-driven reform;Industry-driven reform;

Leading role of the solidarity PAYG system changing it Leading role of the solidarity PAYG system changing it parameters;parameters;

Gradual increase of the coverage of the fully-funded part by Gradual increase of the coverage of the fully-funded part by transferring increasing portion of mandatory contributions transferring increasing portion of mandatory contributions towards it;towards it;

the possibility for each PIC to manage three pension funds;the possibility for each PIC to manage three pension funds;

Gradually shifting the early retirement pensions (bridging Gradually shifting the early retirement pensions (bridging pensions) in special segment of the II-nd pillar.pensions) in special segment of the II-nd pillar.

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

Directive 2003/41Directive 2003/41

Directive 86/378Directive 86/378

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):

ratesrates 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

OLD SYSTEM NEW SYSTEM

MEN WOMEN MEN WOMEN

Retirement age 60 55 63 60

Insurance service

25 20 - -

Pension points - . 100 94

Life expected after

retirement 15.4 23.2 13.5 19.0

Qualifying condition for pension Qualifying condition for pension accessaccess

(general rules)(general rules)

88

Adequacy of the reformed pension Adequacy of the reformed pension systemsystem

Replacement rate from the three pillars (final Replacement rate from the three pillars (final goal of the reform) – 70 – 75%, as follows:goal of the reform) – 70 – 75%, as follows: I-st solidarity pillarI-st solidarity pillar – 40 – 40%%;; II-d funded pillarII-d funded pillar – – 15%15%;; III-rd funded pillar - III-rd funded pillar - 10 – 2010 – 20%%

Current disappointment of the pension levels. Current disappointment of the pension levels. Very thrifty pension indexation formula;Very thrifty pension indexation formula;

Individual accounts, good motivation and Individual accounts, good motivation and personal choice in II and III pillarpersonal choice in II and III pillar..

99

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

1010

List of licensed PICList of licensed PIC

PIC "DOVERIE“PIC "DOVERIE“ PLC PLC

PIC "SAGLASIE“PIC "SAGLASIE“ PLC PLC

PIC "DSK-RODINA“PIC "DSK-RODINA“ PLC PLC

PIC "ALLIANZ-BULGARIA“PIC "ALLIANZ-BULGARIA“ PLC PLC

"ING PIC“"ING PIC“ PLC PLC

PIPICC "CKB-SILA“ "CKB-SILA“ PLC PLC

PIC "LUKOIL-GARANT“PIC "LUKOIL-GARANT“ PLC PLC

PPIC IC "DZI-PI“"DZI-PI“ PLC PLC

PPIICC ““TOPLINATOPLINA““ PLC PLC

Institutional organization of the pension Institutional organization of the pension supervision: transition from the specialized supervision: transition from the specialized

model to the partially integrated supervision model to the partially integrated supervision modelmodel

Greater institutional independence of the Greater institutional independence of the supervisory bodysupervisory body

Expansion of the regulatory powersExpansion of the regulatory powers

Sharing of good supervisory practices in Sharing of good supervisory practices in the field of the non-banking financial the field of the non-banking financial sectorsector

Organizational integration with Organizational integration with preservation of the sectoralpreservation of the sectoral//subjective subjective approachapproach

1212

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

1313

Rate of Return on Pension Funds Rate of Return on Pension Funds InvestmentsInvestments

0

2

4

6

8

10

12

14

UPF

PPF

VPF

Inflation

Source: FSC and NSI

1414

Fees StructureFees Structure

Fund TypeFund TypeFront-up FeeFront-up Fee

On Each On Each ContributionContribution

Management Management FeeFee Transfer FeeTransfer Fee

Mandatory Pension Funds

Up to 5 %

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

Up to 20 BGN*

Voluntary Pension Funds

Up to 7 %Up to 10% generated profit

Up to 20 BGN

*1 EUR = 1.95583 BGN exchange rate pegged to EUR under currency board*1 EUR = 1.95583 BGN exchange rate pegged to EUR under currency board

1515

Asset Class Asset Class MandatoryMandatoryPension FundsPension Funds

Voluntary Voluntary Pension FundsPension Funds

Government issued or backed securities

no limit no limit

Shares and RightsShares and Units in Mutual Inv. Schemes (UCITS)

Shares in Special Purpose Investment Vehicles (REITs)

2015

( 5 in MIS managed by one company)

5

5 single issuer10 in MIS managed

by one company

10

Municipal Bonds 15 5 single issuer

Bank Deposits 25 5 single bank

Bonds (corporate and mortgage) 55 5 single issuer

Investment property 510 (up to 5% in single

property)

Forex 20 30

Derivativesestablished in FSC

ordinanceestablished in FSC

ordinance

PF’s Investment RegulationPF’s Investment Regulation(Quantative limits as % of net assets)(Quantative limits as % of net assets)

1616

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

provisionprovision (%) (%)

55,28

39,43

3,41 7,52

17,48

7,149,79

13,12

11,098,02

5,29

57,25

18,81

17,00 20,08

0

10

20

30

40

50

60

70

80

90

100

31.12.2004 31.12.2005 30.9.2006

Inv estment property

Bank Deposits

Deriv ativ es

Inv estments abroad

Mortgage bonds, issued

buy priv ate banks

Municipal Bonds

Corporate Bonds

Shares

Gov ernment issued /

backed securities

1717

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

provision (%)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

1818

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

1919

Bulgarian Pension Reform:Bulgarian Pension Reform:key lessonskey lessons

Strong political will and responsibility with large Strong political will and responsibility with large public support;public support;

Favorable macroeconomic environment;Favorable macroeconomic environment;Favorable public attitude;Favorable public attitude;Institutional capacity and well developed Institutional capacity and well developed

information and communication system;information and communication system;Bridge between reformers and researchers;Bridge between reformers and researchers;Technical and financial support by international Technical and financial support by international

community;community;Active and continuous PRActive and continuous PR

2020

Thank you for your attentionThank you for your attention!!

Petkov_b@fsc.bgPetkov_b@fsc.bg

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