Sofia’s giant step to multi-pillar system
Bulgaria has moved to its new pension system. Nickolai Slavchev Stoikov reports
It was only five months after the Supplementary Voluntary Retirement Provision Act, governing voluntary third pension pillar, passed Parliament on 7 July 1999 that Bulgaria made the next giant pension reform step: adoption of legal framework for compulsory second-pillar pension fund establishment.
Legal regulation was provided under the Compulsory Social Security Code which passed the Parliament in December 1999. Along with the basic social benefits, chapter one of this code also deals with first pension pillar reform measures typical for a public PAYG system. They are aimed at establishing a more direct link between the contributions made during the whole working career and the benefits paid. A greater social security contribution burden is being shifted from employer to employee.
The most highly valued feature of the Compulsory Social Security Code is provided for in Chapter Two. It laid the foundation of a supplementary compulsory second pillar of retirement provision. A distinguishing feature is that a pension fund and a pension fund management company are defined as separate legal entities.
Under second-pillar arrangements, private pension providers have the following three functions:
o accumulation of supplementary
compulsory pensionable contributions;
o management of supplementary compulsory pension funds and
o payment of supplementary pensions and early retirement pensions
Second pillar funds are based on defined contribution principle and individual capitalisation accounts. There are two types of supplementary compulsory second-pillar pension funds: occupational and universal.
As from 1 January this year, employees working in some occupations, enumerated in a government decree for labour categorisation, are obliged to individually choose a second-pillar pension fund called ‘an occupational fund for early retirement’. They are required to submit an individual participation request to a licensed pension fund management. Also from 1 January this year, every person born after 1 January 1960 and covered under chapter one of the Compulsory Social Security Code, will be obliged to choose a second-pillar pension fund, called a ‘universal fund’, for supplementary retirement provision, regardless of occupation.
Universal pension funds will provide for a supplementary pension for life, whereas occupational pension funds will provide for an early retirement pension for a certain time period.
In view of these dates and deadlines, the public is obviously focusing its attention on the first type of second-pillar funds: the occupational ones.
Third-pillar retirement provision is implemented through participation in voluntary pension funds, whereas second-pillar retirement provision will be implemented through participation in compulsory universal and/or occupational pension funds. Both voluntary, third pillar and compulsory second pillar supplementary pension funds will be established and managed by pension fund management companies registered as joint-stock companies under the Commercial Act and licensed under the Supplementary Voluntary Retirement Provision Act.
The only scope of business activity of a pension fund management company is retirement provision regulated by law. Constitutors and shareholders of pension fund management companies may be Bulgarian or foreign entities.
Foreign entities may be constitutors of a pension fund management company. This is provided that they are registered as social benefit providing insurance or financial institutions under their national legislations and as long as they present bank references issued by a first-class foreign bank and confirmed by the Bulgarian National Bank. The minimum shareholders’ capital requirement of a pension fund management company is 3m Bulgarian leva (E1.5m).
Under second-pillar arrangements pension fund management companies may collect two types of fees: compulsory and additional.
o maintenance fee – up to 5% of every contribution paid into a second-pillar pension fund and
o investment fee – up to 1% of second-pillar pension fund assets under management.
o transfer fee – when the individual account accumulation is transferred from one second-pillar pension fund to another;
o information fee – for every statement of account provided the second-pillar pension fund member requires information more than once per annum.
As from the start of this year, occupational pension fund contributions are paid by employers for the benefit of their employees as follows:
o for the benefit of persons working under first labour category is 12%;
o for the benefit of persons working under second labour category, 7%.
As from 1 January 2002, payment of universal pension fund contributions is required. They will be shared between an employer and an employee with a gradual increase of the ratio of employees’ contribution burden to employers’ one, until it is equally shared between them in 2007. The actual contribution amount is provided for in the Public Social Security Budget Law.
Second-pillar pension fund contributions are paid together with the public social security contributions. They are collected by the National Social Security Institute which forwards them for management to the respective second-pillar pension fund within 10 days of their receipt.
Employers’ contributions paid into second-pillar pension funds – currently occupational and from 1 January 2002, universal as well– are treated as business expenses under the Corporate Income Tax Law. Employees’ contributions paid into second-pillar pension funds – only universal as from 1 January 2002 – are treated as tax deductible under the Personal Income Tax Law. Second-pillar pension fund asset investment income, credited to members’ individual retirement accounts is not taxed under the Personal Income Tax Law.
An occupational pension fund provides for:
o an early retirement occupational pension for a certain period of time – for those working in the prescribed occupations;
An early retirement occupational pension is paid until the person acquires the right to an insured-years-of-employment-and-age pension under first-pillar retirement arrangements of Chapter One of the Compulsory Social Security Code.
o A personal lump-sum withdrawal or a personal withdrawal for a certain time period of the individual account accumulation provided there is a resolution of the district expert medical commission certifying decreased labour capacity;
o A legal-heir-at-law-lump-sum withdrawal or a legal-heir-at-law withdrawal for a certain time period of the deceased pension fund members’– retirees’ individual account accumulation.
Second-pillar pension amount is calculated on the basis of the individual account accumulation and the biometrical tables approved by the Government Social Insurance Supervisory Agency (GSISA).
Under second-pillar pension arrangements, the persons covered are entitled to:
o Change individually second-pillar pension funds, established and managed by different pension fund management companies, not earlier than a year after initial membership.
o Transfer the individual account accumulation from a universal and/or an occupational pension fund to another universal and/or occupational pension fund respectively, established and managed by another pension fund management company, once per annum and with no limitation – in case they disagree with pension fund regulation changes;
o Receive upon retirement a lump-sum withdrawal of the individual account accumulation with an occupational pension fund or transfer it from an occupational pension fund to a universal pension fund provided they are not entitled to an early retirement occupational pension under Chapter Two of the Compulsory Social Security Code;
o Obtain information about the individual account accumulation, the respective investment returns and the pension entitlements acquired, free of charge at least once per annum;
o Notify the board of trustees and the GSISA of wrong-doing observed in the activity of their pension fund management company;
Second-pillar pension fund members’ interests are represented by a board of trustees. These members are representatives of the nationally recognised employees’ and employers’ organisations in equal numbers and one representative of the pension fund management company. Proposals and resolutions of a board of trustees are recommendatory to a pension fund management company.
Members with a universal pension fund shall not be less than 30,000 whereas members with an occupational pension fund shall not be less than 15,000 – two years after the respective second-pillar pension fund registration with the court. A pension fund management licence is suspended on condition that members with a certain third-pillar pension fund are less than 10,000 two years after licensing date.
Second-pillar pension fund assets may be invested only in:
o securities issued or guaranteed by the government;
o securities tradable at regulated stock exchanges; municipal bonds; bank deposits and
o real estate and mortgages.
Not less than 50% of second-pillar pension fund assets shall be invested in securities issued or guaranteed by the government and/or bank deposits. Not more than 5% of second-pillar pension fund assets may be invested in real estate. A pension fund management company may invest up to 5% of second-pillar pension fund assets in securities issued by a single company.
A pension fund management company may invest not more than 5% of second-pillar pension fund assets abroad in the respective country’s government bonds and municipal bonds and not more than 5% in securities tradable at the country’s stock exchanges. Investments abroad will follow procedures prescribed by the Minister of Finance in accord with the Governor of Bulgarian National Bank. More elaborate legislation is expected in this respect.
A minimum level of investment returns, which a pension fund management company is required to achieve from second-pillar pension fund investment shall be prescribed by the GSISA.
For six years now the liberal legislation on pension fund management companies has been more or less inspired by the “laissez-faire” approach where supply and demand for retirement products were mainly driven by the “invisible hand” of peoples’ fear of retirement poverty. The role of the government was limited to adopting a tax-favoured regime for third-pillar voluntary pensionable contributions and to selling government bonds to pension companies. In view of the latest legislative amendments providing for private management of compulsory pensionable contributions under second-pillar arrangements, licensing procedure was considered necessary for management of both voluntary -third-pillar- and compulsory -second-pillar- funds.
It is that licensing procedure which makes the picture different. There are two aspects here: licensing is perceived by the common public as a certain guarantee for excellent performance of pension fund management companies. However, a more precise economic analysis will show that the mere fact of imposing a licensing regime is indicative of a direct administrative interference with the economy. The GSISA has not had sufficient operational experience yet. That is why it is difficult to comment on how much the market will be regulated or controlled by the government. However, the legislative amendments of 1999 providing for private management of compulsory second-pillar pensionable contributions are believed to be a crucial landmark on the Bulgarian way to a multi-pillar pension system.
Nickolai Slavchev Stoikov is chief retirement schemes analyst at Allianz Bulgaria Voluntary Pension Fund in Sofia