BISSER PETKOV Deputy Chairman of Financial Supervision Commission

1. Adequate andsustainable pensions in Bulgaria: Contribution from supplementary retirement provisions BISSER PETKOV Deputy Chairman of Financial Supervision Commission Head of Social Insurance Supervision Division International Conference “Development of Supplementary Retirement Provision in the EU and the Challenges to EU Accession Countries” Sofia, 12-13 October 2006

2. Agenda Development of private retirement provision Role and future contribution of private retirement provision to Bulgarian pension system adequacy and financial sustainability Challenges to private retirement provision in the context of Bulgaria EU accession process

3. Development of Funded Pension Provision 1994 – Voluntary pension funds launched - fully funded basis,individual accounts. 1999 – Legal regulation of pension provision activity (Adoption of the Law for Supplementary Voluntary Pension Provision and the Mandatory Social Insurance Code). 2000 – Establishment of the State Agency for Social Insurance Supervision and licensing of the first pension insurance companies. – Professional Pension Funds launched. 2002 – Universal Pension Funds launched. 2003 – Integration of supervision authority over the non bank financial sector • Establishment of Financial Supervision Commission (FSC) • Social Insurance Code adopted

4. Architecture of the Bulgarian Pension System • I. Mandatory Pay-as-you- go-system. • National Social Security Institute • National Revenues Agency • II. Mandatory supplementary retirement provision. • Universal PF • Professional PF • III. Voluntarysupplementary retirement provision. • Voluntary PF • IORP, 2007 • * Universal Pension Funds - mandatory participation for all born after 31.12.1959 • Professional 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)

5. Structural (dis)similiarities between the Bulgarian and EU Pension System Models

6. Bulgarian Pension System Current Characteristics

7. Main Characteristics of Funded Pension Provision Market

8. Regulatory framework of private retirement provision Regulatory framework • Social Insurance Code • Financial Supervision Commission Act • Secondary legislation acts adopted by: • Financial Supervision Commission • Council of Ministers • Bulgarian National Bank, Ministry of Finance, NSSI Recent Regulatory Changes • Introduction of occupational pension schemes (transposition Directive 2003/41) • Liberalisation of pension funds investment regime

9. Agenda Development of private retirement provision Role and future contribution of private retirement provision to Bulgarian pension system adequacy and financial sustainability Challenges to private retirement provision in the context of Bulgaria EU accession process

10. Common Objectives of the OMC for Pensions 1: Adequacy Objective 1: Preventing Social Exclusion Objective 2: Enabling People to Maintain Living Standards Objective 3: Promoting Solidarity 2: FINANCIAL SUSTAINABILITY OF PENSION SYSTEMS Objective 4: Raise Employment Levels Objective 5: Extend Working Lives Objective 6: Making Pension Systems Sustainable in a Context of Sound Public Finances Objective 7: Adjust Benefits and Contributions in a Balanced Way Objective 8: Ensure that Private Pension Provision is Adequate and Financially Sound 3: MODERNISATION: RESPONDING TO CHANGING NEEDS Objective 9: Adapt to More Flexible Employment and Career Patterns Objective 10: Meet the Aspirations for Greater Equality of Women and Men Objective 11: Demonstrate the Ability of Pension Systems to Meet the Challenges

11. Pension Funds as Pension System Components • improvepension system sustainability (risk diversification) • Improve pension system transparency(fully finded) • descreasesolidarity transfers(individual accounts) • improvelong term pension provision coverage(actuarial principles)

12. DevelopmentinPension Funds Assets According to Financial Institution (th BGN) • 1 EUR = 1.95583 BGN (Exchange rate pegged to EUR in currency board) Source: FSC

13. Dynamics of PF Asset Growth PF Net Assets (in th BGN) 31.12.2002 - 31.12.2010 (estimated forecast) 1 EUR = 1.95583 BGN exchange rate pegged to EUR under currency board GDP 6.4 2.7 Source: FSC, 2006

14. Pension fund assets in selected non-OECD members, 2005 Source: OECD, Global Pension Statistics

15. Private Pension Provision Coverage Rate /Socially Insured Personsin PF/working age population/ • Source for working population statistics: NSI, 2006

16. Rate of Return on Pension Funds Invetments Source: FSC and NSI

17. Fee Structure in Mandatory Pension Funds

18. Replace Rate for Pensions in Supplementary Voluntary Retirement Provision • Sourceaverage social insurance income: NSSI

19. Social Security Short Run Pensions Adequacy

20. Long Term Pensions Adequacy Net replacement rate 60,0 50,0 40,0 30,0 20,0 10,0 0,0 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

21. Pension Funds as Financial Institutions • foster andincrease savings • decreasemarket cost of capital • developinstitutional investors activity • improve internal financial market • influence corporate governance

22. Depth of Financial Market – Assets as Share of GDP (%)

23. Role of PFas Capital Market Players * Market capitalisation on BSE - September 2006 /th BGN./ - 11 210 815 * Market capitalisation of BSE на БФБ includes: Official securities market (segments А, В, С, without investment companies) and OTC (without investment comopanies); Source: BSE ** Investments in investment companies are included in the value of the investments of pensionfunds for voluntary pension insurance

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

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

26. Pension Reform Sustainability to Challenges of the Future Risks for the capital funded pillars: • Financial destabilisation, bankruptcies and ruined confidence in reforms • Badpension funds assetsmanagement, low rate of return • Political risk – reformed stopped, regressive actions towards the system • Institutional Risks

27. Agenda Development of private retirement provision Role and future contribution of private retirement provision to Bulgarian pension system adequacy and financial sustainability Challenges to private retirement provision in the context of Bulgaria EU accession process

28. Challenges to Private Retirement Provision in the Context of Bulgaria EU Accession Process • Bulgariahas gone aheadof the old Europe member states in terms of pension reform, however with a significance difference to be noticed: EU population gets rich before growing old, while the Bulgarian population grows old before getting rich. • Differencesin pension systems models implementation • Implementation of EU Directives in the field of supplementary pension provision

29. Challenges(2) • EUROSTATand statistical classification of supplementary mandatory pension funds • Growing roleof privately managed pensions(30 % out of general pension paymentsin EU)and increased competitionamong providers of funded pension provision

30. Thank you for your attention! Petkov_b@fsc.bg http://www.fsc.bg