New Bulgarian Multi Pillar Pension System:

Legislative Development

Bulgaria, Sofia, February 16th and 17th, 2005

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New Pension Legislation: Goal

Build a financially sound and sustainable system that will provide better pension protection by diversifying the sources of retirement income.

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Main Principles reflected in the Legislation

SECURITY, PLURALISM AND DIVERSITY:

Public and Private pension providers

Mandatory and Voluntary components

Universal and occupational pension funds

Pay-as-you-go and fully-funded (solidarity + personal responsibility)

Defined Contribution and Defined Benefit

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Phases of legal development

DESIGN : Reflect broad working group views Actuarial Model results Government Pension Reform Strategy

DEVELOPMENT:

Supplementary Voluntary Pension Insurance Act Mandatory Social Insurance Code (2000) Bylaws

IMPLEMENTATION:

Active working groups : industry and regulators and Nssi Permanent dialogue regarding key issues

CONSOLIDATION:

Harmonization and optimisation Social Insurance Code ( 2003)

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Legislative Process Approach

Active involvement of all stakeholders in working groups

Evaluation of other pension reforms: lessons learned/ tailored solutions

EU requirements fulfilled

Best international practices and standards taken into account

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Main outcomes of the basic pension laws

Diversification of risk of old age security

Private pension system organized to minimize conflicts, maximize security and facilitate supervision

Increase choice by allowing switching pension funds

Proactive supervision, regular reporting, frequent inspections and early intervention

Development of new financial instruments

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Nature of pension contracts

Long term

Like all financial contracts, strong reliance on trust

Require effective supervision

People should make informed decisions

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Objectives of private pension supervision

Increase long term security

Promote good governance

Provide freedom of choice

Education

Promotion of pension savings culture

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Prudential and protective rules

“Fit & proper” test

Asset segregation, diversification and valuation

Checks and balances (Fund governance, custodians, auditors, actuaries)

Extensive disclosure and high transparency

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Proactive supervision

Clear rules on financial soundness and good conduct

Regular reporting in electronic form

Strong capability for financial analysis and frequent inspection

Clear powers of intervention to avoid losses and protect members

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Challenges

Public education

“Rights are meaningless unless adequately disclosed and understood”

Disclosure

sufficient information – content, timing, manner of delivery (limited information restricts alternatives)

information should be easily understandable to target audience

standardized and comparable information

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Challenges

Flexible investment rules

Reduce the pension fund herd behavior on investments.

Allow investment portfolios to vary according to life cycle.

Allow involvement of the consumers.

give consumers a role to play regarding retirement

increase incentives to search for information

increase the expected value of pension benefits

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Lessons

A competitive market may not necessarily wait for well defined rules. Product developments have outpaced legislation. Proactive legislative process is required.

Legal rules should frame the extent of and manner in which disclosure and education are provided. These safeguards are important to ensure accuracy and objectivity.

Legislation should not hamper market efficiency and development.

Stakeholders active participation in legislative process is beneficial.

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