EXPERIENCE FROM IMPLEMENTING VOLUNTARY FULLY FUNDED PENSION INSURANCE

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EXPERIENCE FROM IMPLEMENTING VOLUNTARY FULLY
FUNDED PENSION INSURANCE IN THE COURSE OF
COMPLIANCE WITH EU DIRECTIVES IN BULGARIA
Bisser Petkov, Deputy Chairman, Financial
Supervision Commission, Bulgaria
Skopje, 22 February 2007
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AGENDA

• DESIGN AND PRACTICE OF THE VOLUNTARY PENSION
  SYSTEM IN BULGARIA
• RECENT MEASURES AND STEPS IN COMPLIANCE WITH EU
  DIRECTIVES

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THE BULGARIAN PENSION SYSTEM
First Pillar Mandatory, Contributory,
Earnings-rel.
Second Pillar Supplementary Mandatory Pension
Provision
Third Pillar Supplementary Voluntary Pension
Provision
PAYG System NSSI

• Universal Pension Funds
• Fully funded
• Personal schemes
• Open

• Professional
• Pension
• Funds
• Fully funded
• Personal schemes
• Open

• Voluntary
• Pension
• Funds
• Fully funded
• Personal
• Open

• Voluntary
• Pension
• Funds with
• Occupational
• Schemes
• Fully funded
• Occupational
• Closed

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LOOKING BACK AT VOLUNTARY PENSION PROVISION

• 1994 - Establishment of voluntary pension
  provision
• 1999 - Legal regulation of the activity (Adoption
  of the Law for Supplementary Voluntary Pension
  Provision )
• 2000 - Establishment of the State Agency for
  Social Insurance Supervision and licensing of the
  first pension insurance companies
• - Separation of the voluntary
  pension funds as legal entities
• 2007 Entry into force of the legal framework
  for IORPs operations in Bulgaria (Social
  Insurance Code, 2006)

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PRINCIPLES OF VOLUNTARY PENSION PROVISION

• Separate legal personality of the pension
  insurance company and the supplementary voluntary
  pension fund
• Voluntary participation
• Defined contributions schemes
• Personal participation individual accounts
• Capitalization of the resources, accumulated in
  the personal accounts
• State regulation
• Mandatory periodic reporting and disclosure of
  information

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ESTABLISHMENT AND MANAGEMENT OF PENSION FUNDS

• Pension funds are established by licensed pension
  insurance companies
• The licensed company may establish only one of
  each type of the pension funds in the second and
  third pillars (i.e. one of each type of the
  supplementary mandatory and one of each type of
  the supplementary voluntary pension funds)
• The supplementary pension fund authorization is
  issued by the Deputy Chairman of the Financial
  Supervision Commission
• The district court according to the headquarters
  of the company enters the fund into the register
  within 6 months from granting the authorization

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INSURED PERSONS AND INSURERS

• Insured persons each person, older than 16
• Insurers
• - Employers
• - Insured persons (individual contributions)
• - Other contributors (a natural person or a
  legal entity for the benefit of the insured
  person).

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CHOICE OF FUNDPENSION INSURANCE CONTRACT

• Choice of fund
• by an insured person, by an insurer (employer),
  by another contributor
• Pension insurance contract - regulates the
  relations between
• The pension insurance company and the insured
  person, the employer or another contributor
• The pension insurance company and the sponsoring
  undertaking in an occupational scheme of a VPF
• The contract between the insurer and the pension
  insurance
• company is for the benefit of the insured person.

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VOLUNTARY PENSION PROVISION DEVELOPMENT
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VOLUNTARY PENSION PROVISION DEVELOPMENT

• 1 EUR 1.95583 BGN (Exchange rate pegged to EUR
  in currency board)

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THE CURRENT SCOPE AND ROLE OF VPFs IN THE
BULGARIAN FULLY FUNDED PENSION SYSTEM (as of
31.12.2006)

• ?Number of Licensed PICs 9
• ?Number of Pension Funds 24(3)
• - incl. 8 (1) voluntary pension funds (VPFs)
• ?Total number of insured persons 3 201 308
• - incl. 565 782 in VPFs
• ?Total size of PFs assets 1 517 412 th. BGN
  (805 852 th. Euro)
• - incl. 495 222 th. BGN (253 960 th. Euro) in
  VPFs.

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VPFs contribution structure in 2006
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TAX REGIME OF CONTRIBUTIONS IN VOLUNTARY PENSION
FUNDS

• Contributions at the expense of the employers -
  tax concession of up to 20 Eur (as of 2007 30
  Eur) per person per month
• Contributions at the expense of the insured
  person - tax concession of up to 10 of taxable
  income
• Contributions by other contributors no tax
  concessions

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TAX TREATMENT OF PENSION BENEFITS AND INVESTMENTS

• Investment Income
• Not taxable (according to the SIC and the Income
  Taxes on Natural Persons Act)
• Withdrawals before retirement
• One-time tax
• In case the person has used the right to tax
  concessions beforehand, the withdrawn
  contributions are levied with one-time final tax,
  collected at the source (12 in 2006, 15 in
  2007)
• Benefit payments after retirement
• Not taxable (as of 2007)

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TYPES OF INVESTMENT RESTRICTIONS

• Ceilings only
• Limits on certain types of investment instruments
• Limits on ownership concentration

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DYNAMICS IN THE INVESTMENT STRUCTURE OF VPFsfor
the period from 31.12.2005 to 31.12.2006
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FEE STRUCTURE IN VOLUNTARY PENSION FUNDS
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AMOUNTS OF FEES COLLECTED BY VPFs in 2005 and
2006
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PENSION BENEFITS SIC guarantees the right of
withdrawal of personal contributions in voluntary
pension funds with no additional conditions

• Acquiring the right to pension benefits
• Retirement under the Statutory PAYG system
• Invalidity - above 50
• Age - up to 5 years before retirement age
  according to the SIC (63 - 5 years for men, and
  60 - 5 years for women)
• Pension benefits
• Lump sum
• Phased withdrawal
• Term payments
• Life-long pensions (4 out of 9 pension insurance
  companies)

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Total number of pensioners at VPFs as of
31.12.2006
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Amounts credited and paid out to fund members and
pensioners (01.01.2006 - 31.12.2006)
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• Structural (dis)similarities between the
  Bulgarian and EU Pension System Models

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IORP Directive the way of transposition in the
Bulgarian legislation (1)

• There were two approaches (views) in the
  implementation of IORP directive across the
  countries which havent pension institutions
  falling under the scope of the directive
• 1. Transposing the directive to the extent that
  pension institutions established in another
  member state should be allowed to provide their
  services in the country.
• 2. Transposing the directive in its entirety
  and establishing a legal framework which would
  enable pension institutions to be set up even
  though they do not exist currently in the country

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IORP Directive the way of transposition in the
Bulgarian legislation (2)

• Important questions
• The Depth of Change to preserve and enrich the
  current pension model or to change pension
  models architecture
• The Role of Employers to set up and govern IORP
  institutions or establish and sponsor
  occupational schemes only
• - DC or DB schemes?

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IORP Directive the way of transposition in the
Bulgarian legislation (3)

• Legal framework
• ?Acc. Bulgarian legislation the Occupational
  scheme is rules of supplementary voluntary
  pension insurance, negotiated in a collective
  agreement or a collective labour contract between
  the sponsoring undertaking and the workers.
• ?The employer and employee may pay contributions
  in the new type of pension fund. Each pension
  insurance company can establish only one
  occupational pension fund
• ?Closed pension funds support only pension
  schemes that are limited to certain employees
• ?The pension insurance company is the IORP.

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IORP Directive the way of transposition in the
Bulgarian legislation (4)

• Pension benefits design
• ?Equal retirement age for men and women-60 years
• ?Programmed withdrawal
• ?Lump sums.
• - In case of managing DB occupational scheme as
  part of cross-border activities, IORP has to
  build technical provisions and regulatory own
  funds (art.15-17of IORP directive)

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Bulgarian voluntary pension provision Main
challenges

• The implementation of new pension legislation in
  the scope of occupational schemes
• IORP cross-border activities
• Introduction of investment choice by insured
  persons (multifunds)

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Thank You !

• Contact Information
• ( 359 2) 9404
  575 E-mail bpetkov_at_fsc.bg