Bulgaria’s government looks set to follow in the footsteps of Hungary and Poland by raiding the mandatory second-pillar pension system to patch up public finances.
It recently signed a five-point memorandum of understanding with trade union representatives that allowed members of the currently mandatory second system to decide whether, from 2015, part of their social security contribution should be transferred to the privately run funds.
This weekend, president Rosen Plevneliev confirmed on local radio that he had no plans to veto the proposed amendment.
The government’s controversial decision has shocked the pensions industry and given the country’s Parliament only a handful of working days to vote the 2015 Budget through.
Sofia Hristova, chief executive and chairman at Allianz Bulgaria Pension Company, was critical of the move.
“By forcing the Bulgarian citizens to re-choose their private pension provider for the mandatory portion of the social security contribution, which has been accumulating in individual member accounts since the beginning of the century, the government is trying to give a deceitful sugar coating to their ambition to move privately owned money into a publicly used pot to ease up the financial burden on the public PAYG system,” she said.
“This time, the effort is under the disguise of ‘personal choice’.”
Unlike the 2014 Polish pension changes, the decision, once made, would be irreversible, with members’ entire accounts transferred to the first pillar within six months of the decision.
Furthermore, unlike Poland, Bulgaria’s first pillar does not run individualised accounts, so the funds would be swallowed up in the PAYG system.
There is no deadline for current members to make this decision, but Miroslav Marinov, executive director at Pension Insurance Company Doverie, part of Vienna Insurance Group, believes many workers may perceive that the future benefits offered by the PAYG system would be better than those from the second pillar.
These include those in the large ‘grey’ economy, whose official wages are far lower than what they actually receive, and who thus pay little in social security contributions.
He also fears the 500,000-odd workers in state-run companies would come under employer pressure to make the switch.
“This is an artificial competition and very frustrating for us,” Marinov said. “The first and second pillar should be working together to provide sustainable pensions.”
Current first-pillar contributions are insufficient to maintain PAYG and require annual supplements from the state budget, partly because of the low average retirement age, of 56 years.
Yet the memorandum of understanding included a freeze in 2015 on raising the retirement age.
Additionally, under an amendment to the law, in 2015 new entrants to the labour force will have a year to decide whether to have a part of their social security contribution invested in a privately run pension scheme or have all their contributions in the PAYG first pillar.
The PAYG system is the irreversible default for those who fail to make a choice, while those who choose the second pillar can subsequently make another, irreversible, decision to opt fully into the first pillar.
The one-year countdown starts when an individual signs a labour contract, even if it was only a holiday or part-time student job.
“We expect new labour members to be indifferent and default to the PAYG system,” Marinov said.
“Young people in Bulgaria lack any education in financial planning and are not interested in pensions.”
The changes affect both of Bulgaria’s second-pillar schemes, occupational and universal.
The occupational (professional) pension funds cover those working in the so-called ‘first’ and ‘second’ labour categories, with members entitled to early retirement.
According to the Bulgarian Financial Supervision Commission, these had some 267,000 members and BGN675m (€345m) in investments as of end-September 2014.
The universal funds, with 3.4m member and BGN5.8bn in investments, cover the remaining ‘third’ category, for those born after 1959.
Recent events intensified the pressure on public finances.
In June, the collapse of Corporate Commercial Bank (KTB), the country’s fourth-largest lender, followed by a run on First Investment Bank (FIB), the third-biggest, required some BGN3.3bn in budget support.
It was accompanied by the suspension of EU funds in mid-2014 because of alleged mismanagement.
As a result, the private pension system has become a tempting target to offset a rising deficit, and not for the first time.
Prime minister Boyko Borisov previously targeted the second pillar in 2010.
“The government is trying to evade the Constitutional Court Ruling of 2011, when the first nationalisation attempt failed,” Hristova said.
“The current move represents a breach of the agreement concluded among the same prime minister, the trade unions and the employers’ organisations in 2010.”
The pensions industry is fighting back.
The Bulgarian Association of Supplementary Pension Security Companies has issued a declaration, supported by employers’ organisations, and investment and asset management organisations, which has been submitted to Parliament, the media and all relevant stakeholders.
“Meetings are scheduled with the key political parties, parliamentarian commissions, ministries and the Financial Supervision Commission, while individual pension fund members are actively defending their private pension accounts in all the social media,” Hristova told IPE.
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