The Bulgarian Association of Supplementary Pension Security Companies (BASPSC) is to approach the European Insurance and Occupational Pensions Authority (EIOPA) to settle the association’s dispute with its regulator, the Financial Supervision Commission (FSC), over mandatory pension fund returns.
According to the FSC, for 2004-14, the universal pension funds, which manage mandatory second-pillar contributions from the so-called ‘non-privileged’ workers, returned an inflation-adjusted negative return of 0.16%, while BASPSC reported a positive return of 0.48%.
The discrepancies arise from the different methodologies used by the two parties.
According to Miroslav Marinov, executive director of Pension Insurance Company “Doverie”, part of Vienna Insurance Group, the BASPSC deploys the money-weighted return (MWR) approach, which takes into account all inflows and outflows and their exact timing.
Meanwhile, the FSC uses a simple time-weighted return (TWR), where the formula takes into account all investments accumulated since the beginning of the calculation period, irrespective of their length of time in the portfolio.
Sofia Hristova, chief executive and chairman at Allianz Bulgaria Pension Company, said: “The TWR approach greatly amplifies the effect of inflation. The MWR is equivalent to the internal rate of return. It incorporates the size and the timing of cash flows by finding the rate of return that will set the present values of all cash flows and the terminal values equal to the value of the initial investment. Thus, it is an effective measure for returns on a portfolio.”
The MWR is also the investment industry standard elsewhere in Bulgaria, being used by the CFA Society Bulgaria, the Bulgarian Association of Asset Management Companies and the Bulgarian Association of Licensed Investment Intermediaries.
What galls the BASPSC is that, having explained the measurements to the FSC, the regulator then presented only its own, unflattering calculations to Parliament’s budget and finance committee.
The discrepancies are among the issues being discussed by the ad-hoc committee overwhelmingly voted through on 17 February at an extraordinary parliamentary session.
The cross-party committee has a month to report on the financial status, supervision, regulatory compliance and legal shortfalls in the system.
The FSC, for its part, has unveiled its proposals for changes to the second pillar.
These include the introduction of multi-funds, reductions in fees, abolition of transfer fees, a more stringent application of the types of related parties into which pension fund managers can invest and payouts.
The most controversial proposal is a separately managed common guarantee fund.
Currently, pension funds set aside reserves, and there are concerns the better-run entities will end up paying for others’ shortfalls.
In the meantime, the controversial amendments to the Social Insurance Code that came into effect this year remain in place, while changes such as those recently proposed by the Finance Ministry remain on hold.
Second-pillar members have been unable as yet to opt out because the necessary documents have not been published.
At the same time, the funds are reluctant to enrol those new entrants to the labour market who want to join because of legal uncertainties over using the old system’s documents.