Svobodka Kostadinova and Dr Nickolai Slavchev deliver an overview of the dynamic Bulgarian pension system
Situated in the EU's south-eastern corner, there is a relatively-unknown, small, but modern pension market - the Bulgarian one.
It offers four supplementary retirement vehicles: mandatory universal pension funds (MUPFs), mandatory occupational pension funds (MOPFs), voluntary pension funds (VPFs) and voluntary pension funds with occupational schemes (VPF-OPS). MUPFs are for the employees born since 1960; MOPFs cover the early retirement of those working in hazardous occupations, while VPFs offer additional voluntary pension saving. VPF-OPS, which started in 1994, allow for IORP Directive occupational provision.
Mandatory contributions were carved out from the PAYG contribution a decade ago. MUPF contributions are 5% (2.8% employer and 2.2% employee). The contribution is fixed at 7% from 2017. MOPF contributions are paid only by the employer, depending on the risk in particular occupations: 12% for the riskiest. Voluntary contributions enjoy tax incentives for both employer and employee.
All private vehicles are fully funded, DC, with individual capitalisation accounts. The assets are managed through pension companies which fall under stringent daily supervision by the national Financial Supervision Commission (FSC). According to recently published FSC data (at 30 September 2011), total net pension AUM is €2.2bn (growth of 16.3%). The majority is in mandatory funds: 87.21%. Participation in private funds of almost four million (84.8% in mandatory) against the total population of seven million, is a good start. Member growth stands at 2.56%. The market weighted average performance for the latest 24-month period on an annual basis ranges between 2.04% (for VPFs) and 2.93% (for VPF-OPS). Performance was 2.19% for MUPFs and 2.31% for MOPFs.
Is this Bulgarian pension industry overview indicative of the future or will we look to a pension future entrapped in pension deficits, economic downturns and financial crises?
Two events happened in Bulgaria in December 2010 and May 2011, which may help predict the future of its pension system.
First, a 2010 legal amendment required MOPFs transfer to the National Social Security Institute (NSSI). Those were the assets of the members who were expected to opt for early retirement within the next three years (women born between 1955 and 1960, and men born between 1952 and 1960). The actual transfer of €55m took place in March 2011.
Second, the Bulgarian Constitutional Court Ruling of 31 May 2011 declared the said transfer unconstitutional. The resulting legal amendment reads that the transferred capital is to stay with NSSI. The individual accounts with MOPFs were reopened for new contributions from 18 June 2011.
The rationale of any pension system - pay-as-you-go (PAYG) or fully funded - may be summarised in a simple question: what will I get in exchange of what I have paid? Everything seems right as long as each financing mechanism uses its own principles in justifying the link between contributions and benefits - solidarity in the PAYG and individuals' independence in the capital-funded segment.
Myths were engendered when those principles were displaced by the pension asset transfer exercise - of public claims for solidarity in MOPFs and of a legal requirement to keep the individual accumulation of the funds transferred to NSSI. The fictionalisation of the contribution-benefit link generated a misperception that the same assets transferred from the capital-funded to the PAYG segment will immediately secure pensions of an amount several times higher. On the other hand, the ideal long-term fund accrual inherent in the capital-funded segment created personal myths for those who considered it a constant and an unconditional short-term process and cashed individual downturns upon fund withdrawal during the financial market decline.
In November 2011, ruling party MPs filed a proposal for a one-year increase in the retirement age across the sexes as from 1 January 2012. The proposal states the retirement age should not increase again until 2015 when it will increase by four months a year until it becomes 65 for men (currently 63) and 63 for women (currently 60). This dismayed the public and trade unions because in compliance with the fragile consensus at the end of 2010, the current law provides for a gradual increase by six months a year starting from 31 December 2020. The opposition reacted, saying it will oppose it in the Constitutional Court because the new amendments refer to a period after 2015, but are nevertheless introduced by a budgetary draft-law applicable for 2012 only.
After street protests and a midnight Parliamentary session on 7 December 2011, the final vote took place the following day. The retirement age will increase by four months a year starting from the end of 2011, until it reaches the new limits. Is Bulgaria entering a winter of legal amendments followed by constitutional court rulings?
In the aftermath of absolute solidarity, Bulgaria, like the rest of EU, faces a retirement concept fundamental transformation analogous to the Renaissance which refocused on man against then sacred dogmas. In pensions, the transformation is from the almighty pay-as-you-go immateriality to immediately vested, fully funded, and portable individual property rights. This modern intellectual movement is inspired by the merits of individual freedom and personal choice in retirement provision. It represents a European retirement renaissance.
For 17 years, the pension industry in Bulgaria has developed in line with historical precedent and without haste, especially as the burden is carried by plan sponsors, and members. Bulgaria can now claim that it is no longer catching up among EU states. As some of them might be in front of others on the track, and yet lagging others one or two rounds behind, the right formula for a single pension market is: running in the same direction, not catching up.