A new regulation now determines the method of investment abroad of pension companies and supplementary pension funds’ assets in Bulgaria. Not more than 10% of the assets may be invested in government securities, municipal bonds or other securities issued by foreign governments and municipalities, international financial organisations and other issuers – foreign entities, which are registered for trading at foreign regulated markets. The prudent man approach will be applied to investment abroad policies of the pension companies. The State Insurance Supervision Agency will register and control the investments, according to the law.
The new regulation recommends that the pension companies invest in instruments issued by countries which have concluded agreements with Bulgaria for promotion and mutual protection of investments. Nevertheless, pension companies can invest in regulated markets such as those of the OECD countries.
The regulation determines how the investments abroad shall be done:
1. Up to June 30, 2003: in debt securities with an investment credit rating: long-term not lower than A- from Standard&Poor’s or A3 from Moody’s, or in securities with a short-term credit rating not lower than A-1 from Standard&Poor’s or P-1 from Moody’s;
2. From July 1, 2003: in debt securities with an investment credit rating: long-term not lower than BBB+ from Standard&Poor’s or Baa1 from Moody’s, or in securities with a short-term credit rating not lower than A-2 from Standard&Poor’s or P-2 from Moody’s;
3. Shares from indexes of regulated securities markets, in accordance with the chart shown, as well as in index securities registered for trade on the same markets (with the exception of individual shares of NASDAQ 100).
This regulation opens up new investment opportunities and ensures relatively low risk investment instruments which will increase the reliability and profitability of the funds. Before the regulation on investments abroad was adopted, the funds had not invested in foreign instruments. But as the capital market in the country is not well developed, it is expected that they will take advantage of the opportunities offered by these changes promoting legislation providing bigger opportunities to invest abroad, for up to 25% of the assets of the funds.
The new Bulgarian pension system is two years old, but some of the private pension funds are older, they were established in 1994.
In 2000, the State Insurance Supervision Agency (SISA) licensed nine pension companies, each one with three different pension funds – one voluntary and two different mandatory funds: an occupational for workers from I and II labour category and a universal fund for workers, born after 1959.
Currently, eight pension companies are operating in the market, as one withdrew. Shareholders in all of them are big companies such as Allianz, ING, Bulgarian American Investment Fund, Newton, Lukoil and TBI.
Last year was an indicative year for the development of the new pension system and for the first serious steps of the private part of it. The official results recently disclosed by the SISA show a successful and very quick start in the process of introducing the ‘three-pillared’ pension system in Bulgaria.
In the voluntary pension funds the number of the investors insured persons is 480 000 and over 60% of them are contributing regularly. The assets of the voluntary pension funds in Bulgaria are BGN145m (E75m).
The participants in the eight occupational funds number some 147,000 with total assets accumulated during the first year of operation about BGN60m.
In January of this year, 1.6m workers started to contribute for supplementary pensions in the universal pension funds, where most of the citizens were on a mandatory base. Under the current legislation, 2% from the pension contribution is transferred to the universal funds and is accumulated in personal accounts.
The private pension companies insist that the government should make a clear plan for increasing the portion of 2% contribution to the mandatory universal funds. The pension companies request that in 2007 the contribution ratio for the universal funds should reach 7% from the contribution. As a discussion preparing some amendments of the legislation is ongoing, the Association of the PICs hopes that the law will clarify this issue.
The accumulated assets in the privatised part of the pension system is total about BGN200m. It is expected that by 2005 the total accumulated assets in the pension funds will grow to BGN1.4bn.
All these numbers show that the first challenge of the pension reform in Bulgaria to involve the working population in the new system was successfully overcome.
But the maturity test for the managing pension companies is just coming and its subject is ‘investment policy’.
Though the average investment income for 2001 in all funds of 8.5% seems quite satisfactory, as the annual accumulated inflation was 7.4%, it is obvious that in terms of creating balanced, profitable and prudent investment policy there is much still to be done. The managing pension companies may immediately respond that the capital market in the country is still under developed. But one may answer using the paraphrased question about the chicken and the egg – which is first – the demand or the offer? And in Bulgaria the demand is already satisfied by some new investment instruments such as mortgage bonds, issued by almost all the big banks, and by municipal bonds.
Briefly, it is a pension market already. And the big test of the pension companies is round the corner. Will the pension companies pass the test successfully?
Ludmila Videnova is a senior adviser in public education at Carana Company – Bulgarian Pension project of USAID, in Bulgaria