The Bulgarian pension model : regulatory and supervisory practices

1. The Bulgarian pension model: regulatory and supervisory practices Bisser Petkov Deputy chairperson of the Financial Supervision Commission, head of the Social Insurance Supervision Division Evolution of pension reforms: Bulgaria’s experience and regional perspectives, February 16-17, 2005 - Sofia

2. Contents Regulatory framework of supplementary pension insurance in Bulgaria Evolution of the institutional organization of pension supervision Main characteristics of the supervisory approach that is being implemented and methods for supervision over PICs and PFs Challenges facing the regulation and supervision of supplementary pension insurance in Bulgaria

3. Main characteristics of the Bulgarian pension model SECURITY THROUGH DIVERSIFICATION AND COMPETITION:THREE-PILLAR PENSION SYSTEM FOLLOWING THE WORLD BANK MODEL REFORMED PUBLIC SOCIAL INSURANCE SYSTEM ADMINISTERED BY THE NSSI (PILLAR ONE) SUPPLEMENTARY MANDATORY PENSION INSURANCE (PILLAR TWO) MANDATORY NATURE OF PARTICIPATION; DEFINED CONTRIBUTIONS ACCUMULATED IN INDIVIDUAL ACCOUNTS; OPEN-TYPE FUNDS (OCCUPATIONAL AND UNIVERSAL) ADMINISTERED BY PRIVATE PICs; CENTRALIZED COLLECTION OF SOCIAL INSURANCE CONTRIBUTIONS BY THE NSSI. SUPPLEMENTARY VOLUNTARY PENSION INSURANCE (PILLAR THREE) PUBLIC CONTROL OVER THE AVTIVITY OF PICs (TRUSTEE AND ADVISORY BOARDS) GOVERNMENT SUPERVISION OVER SUPPLEMENTARY PENSION INSURANCE ( SISA FSC )

4. Stages in the development of the regulatory framework regarding supplementary pension insurance in Bulgaria 1999Adoption of the new pension legislation (SVPIAand MSIC) 2000Establishment of SISA as a specialized supervisory body for control over the supplementary social insurance: pension, health and unemployment 2003Unification of the supervision over the non-banking financial sector: creation of the FSC 2003Codification of the pension legislation into a unified Social Insurance Code (SIC)

5. Perfecting the pension legislation in the process of model implementation Introduction of daily valuation of the PF assets and keeping of the individual accounts in units as of July 1, 2004 Additional legal guarantees regarding: the security of pension assets the achieving of minimum return from investment of the resources of the supplementary mandatory social insurance funds (SMSIF). Regulation of the potential ‘conflicts of interests’

6. Effective regulatory framework • the Financial Supervision Commission • the Council of Ministers • Other bodies – BNB, MF, NSSI Social Insurance Code Financial Supervision Commission Act Secondary legislation acts adopted by:

7. Institutional organization of the supervision: transition from the specialized model to the partially integrated pension supervision model Greater institutional independence of the supervisory body Expansion of the regulatory powers Sharing of good supervisory practices in the field of the non-banking financial sector Organizational integration with preservation of the sectoral/subjective approach

8. Institutional environment of pension supervision in Bulgaria Ministry of Labor and Social Policy National Social Security Institute Ministry of Finance Bulgarian National Bank Coordination – Financial Stability Consultative Council

9. Institutional independence of the FSC Autonomous institution created under a special legislative act Reports to the Parliament Mixed funding Selection of the FSC members by the Parliament with a different term in office

10. Chairperson of the FSC Organizational chart of the FSC FSC member Deputy chairperson Investment Activity Supervision Deputy chairperson Insurance Supervision Deputy chairperson Social Insurance Supervision FSC member FSC member Controlling activity Regulatory regimes and risk evaluation Risk evaluation On-site supervision Off-site supervision Regulatory regimes

11. Powers of the FSC related to the supervision of supplementary pension insurance Adopts secondary legislation Issues guidelines in writing regarding the implementation and interpretation of legislative acts Issues licenses and permits upon proposal of the deputy chairperson in charge of the Social Insurance Supervision Division

12. Powers of the deputy chairperson in charge of the Social Insurance Supervision Division Issues decisions provided for in the SIC Approves documents and defines the requirements to them Approves methodological manuals, sample documents, etc. Organizes the operational control Applies enforced administrative measures and issues penal orders

13. Characteristics of the style and approach implemented in Bulgarian pension supervision Restrictive – license with strict requirements for stepping into the social insurance market Proactive – on-going monitoring and regular interventions Intensive – daily communication Legislatively oriented

14. Factorial preconditioning of the implemented supervisory approach Source: SUPERVISION OF PENSION FUNDS: THEORY AND PRACTICE by Richard Hinz; Supervising Private Pensions, OECD, 2004

15. Off-site supervision On-site supervision Supervisory measures Methods and processes of supervision Analysis, evaluation and priori- tising Supervision planning and strategy Approach and evaluation program Response from the management and follow-up activates Reporting Enforced admin. measures Examination function Organization and staff

16. Preliminary supervision. Licensing requirements for the PIC Regarding the capital Regarding the shareholders with significant participation Regarding the members of managerial and controlling bodies and the actuaries Regarding the internal control system Regarding the technical equipment, staffing and information provision

17. On-going supervision: areas and means for off-site supervision (1) On-going monitoring over the asset valuation of pension funds, the calculation of the unit value and the keeping of investment limits Information sources: Daily reports by the PICs and the custodian banks submitted electronically to the FSC Means for supervision: IT system for supervision (Е-fsc) through built-in filters Supervisory activities/measures: Requests for corrections Imposition of enforces administrative measures Imposition of property payments

18. On-going supervision: areas and means for off-site supervision (2) Analysis of the system of indicators (with levels that have been determined in regulations) Information sources: monthly reports by the PICs, received in an electronic format Supervision over the contents of the PIC’s WEB-pages

19. On-going supervision: on-site supervision in the PICs Planning of examinations Types of examination Integration of the off-site and on-site supervision

20. Challenges facing the regulation and supervision of supplementary pension insurance in Bulgaria (1) Regulation of the pay-out phase regarding the life-long pensions under the second pillar Expanding the investment choice opportunities of participants in the voluntary pension insurance Transition from the approach of quantitative portfolio limits to the prudent person investment approach Integrated regulation of the financial markets in keeping with the EU directives

21. Challenges facing the regulation and supervision of supplementary pension insurance in Bulgaria (2) Transition towards functional integration and consolidated supervision over the non-banking financial sector Change in the supervision approach and style: from traditional (static) to dynamic (risk-based)