Bulgaria could be next in line for expropriation of funded pension assets, according to Barbara Ottawa

It seems bewildering when the deputy finance minister of a country says the lack of deals on the Bulgarian Stock Exchange is less of a concern than the market for cherries in a back-of-beyond province of Bulgaria – even if, cherries from Kyustendil are a household name.

But this is what Vladislav Goranov told one Bulagarian publication, adding: “What will we win as a society from having a stronger or a weaker exchange?”

In fact, the Bulgarian Stock Exchange, which had a market capitalisation of BGN12.5bn (€6.4bn) at year-end 2011, will be privatised with the Warsaw Stock Exchange and Vienna Stock Exchange rumoured as bidders.

At the same time, the government is trying to privatise state-owned companies like those in the energy sector via the exchange.

This ambivalent relationship towards the capital markets is evident in a capital gains tax proposal for investments on the local stock exchange. An additional tax will be levied on interest on bank deposits from January 2013, making Bulgaria one of the last countries in Europe to introduce such a levy.

However, experts expect this to yield much less than the government had in mind and believe it will need to search for different sources of additional income.

One direct attempt to take money from the second pillar has already failed – the government had tried to introduce a ‘one account per citizen’ programme for all contributions, including healthcare, taxes and first and second-pillar pensions.

One industry expert – who wished to remain anonymous due to ongoing negotiations and the growing ‘tension’ between the government and the industry – says officials could have used this unified tax account to divert second-pillar contributions to the first pillar or the tax system, as they would no longer have been ‘earmarked’.

The source said the idea to include the second pillar in this unified account was now off the table after “tough negotiations”, but that the industry anticipated fresh attempts to extract money from the second pillar, as “it is always easier to take money from pension funds than impose new taxes before an election” which will be held next year.

The source claims that the government has incited groups to fuel criticism in the second-pillar system via the media by arguing Hungary, Chile and Argentina are proof that funded pension systems do not work.

However, looking at the Bulgarian economy, the figures do not look too bad: in November, the European Commission increased its projection for Bulgaria’s 2012 growth level to 0.8%. At the end of September, it reported a general government debt of just 19% of GDP.

Additionally, Bulgaria has set up a so-called silver fund, a buffer vehicle to guarantee sustainability in the pay-as-you-go system currently comprising assets of BGN2.1bn which are part of the general fiscal reserve and can be tapped by parliament in case of a structural deficit.

So why whould the government need to raid second pillar pensions? As the World Bank chief economist, Heinz Rudolph has argued, countries in Central and Eastern Europe have seen their income to the first pillar systems drop after the introduction of a second pillar, and are not credited for their reform efforts by EU government accounting rules.
The unnamed Bulgarian source is not criticising possible cuts to second pillar contributions as much as he is condemning the method. “In other countries, like Poland or Latvia, the government openly said it is cutting contributions to the funded pensions by amount x for a certain period – that is understandable.” In Bulgaria, on the other hand, no definite plan has been communicated and the industry is in the dark about government plans. Further, citizens might be allowed to opt out of the second pillar altogether, as officials have been increasingly critical of “badly managed” pension funds.

Government statistics, however, show an annualised 6% average long-term return for the largest pension fund Doverie since 2000 – to give only one example. Additionally, statistics published by the pensions regulator for the whole of the industry show an average 18.7% asset increase, both from contributions and returns on investment, for 2012, bringing total assets to more than BGN5.4bn.

At the moment, funded pensions are still playing a major role in Bulgaria’s retirement system as 5% of wages are going into the funded sector compared to 24.8% contributions to the first pillar.

The DC approach is softened by guarantees, such as a binding minimum return calculated quarterly based on the return average achieved by all other pension funds. Any shortfall has to be covered from buffers pension companies are legally obliged to fund on their own account.