The Challenges before the
Bulgarian Pension Funds
Pawel Pelc
Deputy President of
Capital Market Association
The Challenges
• Implementation of the Social Security Code
solutions (2004)
• EU enlargements and Eurostat role
• Currency risk
• Pay out phase and annuity issue
• Reserves
• Assets of pension fund (real estates issue)
• Competition
• Contributions
Bulgarian Pension System
• Implementation of the Social Security
Code solutions in 2004:
Valuation
Units
Transparency
Bulgaria as a future EU Member
• Lack of common regulations related to
pension funds
• Directive related to occupational pension
• Tran border portability
• Eurostat and pension funds statistical
classification
Eurostat
• ESA 95 doesn’t recognize Chilean type
pension funds
• Chilean type pension funds are present
only in new EU Member states as well as
in accession countries
• Eurostat decision from March 2004 (just
before enlargement the EU) excludes fully
funded DC arrangements from social
security
Eurostat (cont.)
• Poland strong opposition against interpretation
of Eurostat from March 2004
• Negative consequences for ability to join Euro
zone (3% deficit and 60% debenture):
if pension funds are not a part of the social
security – are not a part of the public finance and
all expenses related to them increases the
budgetary deficit and debt
Eurostat (3)
• If pension funds are not a part of the social
security and are not a part of pubic finance
in the consequence the pension funds are
also a subject of free movement of capital
rule and are exposed to the risk related to
international competition and currency
risk.
Currency risk
• Before Bulgaria is a Member of European
Monetary Union there is huge currency
risk related to foreign investments
• The currency may be stronger based of
expectations of EU and than EMU
Membership (example of Poland)
Pay out phase
• Annuity should be backed by pooled
assets
• Individual account in the pay out phase
should be related to programmed
withdrawal
• Usually pension funds are responsible for
programmed withdrawal, annuity is treated
as insurance product offered by life
insurance industry.
Reserves
• If reserves are invested in the way the rest
of assets is invested, reserves should be
treated as a part of pension fund assets to
limit costs and increase transparency and
security of the system. It allows to avoid
double transaction costs during investment
phase as well as to avoid not necessary
transactions when reserve is used.
Assets
• Pension assets should be invested only in
financial assets.
• In case of investments in real estates
there are important problems with daily
valuation, and limits, also role of custodian
is limited as not all assets are safe kept by
the custodian. Also transparency of the
system is limited.
Competition
• Huge concentration
• Issue of incentives for better investment
results
• Units crucial for transparency and
comparisons between pension funds
• Fees
• Investment decisions’ concentration
Contribution
• Increase of the level of contribution allows
to achieve: higher replacement ratio based
on higher amount of invested money,
better relation of stable costs to invested
assets
• Space for competition
• The issue of the size of capital market.
Conclusions
• The main challenges before the Bulgarian
Pension Funds are related to
Bulgarian Membership in the UE and EMU,
Development of the Bulgarian Capital
Market
Competition and transparency of the Market
Conclusions (cont.)
• Very important role of strong state
supervision and daily control of
transactions
• Important role of self-regulation of the
pension managers
• Corporate governance development to
secure interests of financial investors
Conclusions (3)
• Market should be developed with common
understanding of the role of any participant
and regulator
• Interests of pension funds participants are
subject to special care of the State
• Pension funds investment differ from any
other investments
Thank you for your attention
• Pawel Pelc
• p.pelc@radca.lex.pl
• www.pelc.net.pl