Challenges to supplementary pension insurance system

Data published in 2007 by the Bulgarian Association of Supplementary Pension Security Companies and the Financial Supervision Commission show that, following a critical point in 2006, pension insurance companies started producing profits and improving their financial status. Moreover, new legislation was introduced to bring Bulgarian legislation in line with the EU body of legislation.

Progress of supplementary pension insurance system

In 2006, given the stable and ascending market development of the supplementary pension insurance (SPI) system in recent years, the scale of SPI business continued to expand. Year-end results for 2006 show that the number of people insured under the three types of pension funds reached 3,201,308 persons, of whom 248,776 were newly insured. Moreover, revenue from social insurance contributions in 2006 were higher than those in 2005 for the three types of pension funds. As of 31 December 2006, the accumulated net assets of the SPI system amounted to BGN 1,517,412 (€778,923 as at 9 July 2007) and registered an annual growth rate of about 36%. These data, published in 2007 by the Bulgarian Association of Supplementary Pension Security Companies (Българската асоциация на дружествата за допълнително пенсионно осигуряване, BASPSC) and the Financial Supervision Commission (Комисията за финансов надзор, FSC), illustrate the dynamic development of the industry, as reflected by its high and stable growth rate.

In 2006, major progress was made towards liberalisation of the pension fund investment regime. However, the expectations that the extended opportunities, as provided for by law, for the diversification of investment portfolios would lead to a higher yield for companies are not clearly confirmed by the results achieved through the system in 2006. Some companies were able to apply the more liberal investment regulations faster and more efficiently in order to raise their level of yield, while others were late to restructure their portfolios, with the result that their profit margins dropped. The entire industry underwent an extensive period of restructuring, which led to major shifts in the ranking of pension insurance companies (PIC) in terms of profits and to a major extension of the yield margins.

Legislative changes in 2006

Two major amendments were made in 2006 to the Code on Social Insurance (CSI), which aimed to harmonise Bulgarian legislation with the acquis communautaire (EU body of legislation) in the field of capital-based pension insurance.

• First, the investment regime for pension funds (PF) underwent a major change, thus altering the investment behaviour of PIC and leading to a fundamental restructuring of PF investment portfolios. A new, more equitable regime was introduced for the investment of Bulgarian pension funds nationally and in the markets of other EU Member States.

• A second amendment introduced into Bulgarian legislation involved the transposition of three European directives in the field of supplementary pension insurance. This amendment came into force from the beginning of 2007.

It was necessary to adopt a law amending and supplementing the CSI. This was required since Bulgarian legislation needed to incorporate the provisions of the following three European directives:

• Directive 86/378/EEC on the implementation of the principle of equal treatment for men and women in occupational social security schemes;

• Directive 98/49/EC (43.9Kb PDF) on safeguarding the supplementary pension rights of employed and self-employed persons moving within the Community;

• Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision.

National legislation also had to take into account the texts of Articles 43–49 of the Treaty establishing the EC.

Developed by the Ministry of Labour and Social Policy, these significant changes to the CSI have been supported by the nationally representative employer organisations and trade unions within the National Council for Tripartite Cooperation and the Advisory Board of the National Social Security Institute (Националния осигурителен институт, NSSI).

New occupational pension insurance scheme

The most significant of these changes concerns the detailed regulation on occupational pension insurance schemes, which are a type of collective social security scheme that supplements the existing individual retirement schemes of voluntary insurance in Bulgaria.

According to the agreed definition under Article 4, paragraph 1 and paragraph 3, items 3 and 5 of the CSI, an ‘occupational scheme’ refers to rules for voluntary supplementary pension insurance, defined in an agreement for the corporate pension fund or a collective employment agreement between the company-insurer and the employees. This definition reproduces the main features of an occupational scheme, as specified in the definition stipulated under Directive 98/49/EC (Article 3, letter ‘b’) and Directive 2003/41/EC (Article 6, letter ‘b’).

The funds raised by occupational schemes shall be accumulated and managed by individual type funds, such as voluntary supplementary retirement provision funds under occupational schemes. These funds shall be organised and function on the basis of the same principles as the current voluntary supplementary retirement provision funds and shall be managed by the current retirement social security companies. Accordingly, companies shall be considered institutions for occupational retirement provision, within the meaning of Article 6, paragraph 1, letter ‘a’ of Directive 2003/41/EC.

The procedures for obtaining a management permit and for registration by the court, as well as the licensing procedures for the new funds, will be identical to those in place for the current voluntary supplementary retirement provision funds.

The rights of persons insured under an occupational pension scheme will differ from those of persons insured under the present voluntary supplementary retirement provision funds. The law provides for: the right to an old-age pension for a specific term; a one-off or deferred payment of the funds accumulated on the individual account; a one-off or deferred payment of funds to the heirs of a deceased insured or retired person. The right to a lifetime old-age pension, disability pension and survivor pension is excluded.

Commentary

The Bulgarian pension model is continuously developing. The SPI industry is likely to be amended further in 2007 with the introduction of ‘multi-funds’. The aim is to introduce these funds within the voluntary pension insurance regulations as a first step, and later to include these also in the supplementary compulsory pension insurance regulations. The multi-fund project is now beyond its concept phase and the FSC and BASPSC have jointly started drafting the regulations for the provision of such funds.

Ivan Neykov, Balkan Institute for Labour and Social Policy (BILSP)