The Ministry of Finance has introduced controversial lobbying changes for multi-funds and a reduction in the number and value of lifetime pensions paid by supplementary pension insurance funds.
The least controversial thing is that the changes in the phase of payment of lifetime pensions are being introduced by the Ministry of Finance, not the Ministry of Social Affairs. The phase of payment of pensions was prepared, regulated and adopted by the Ministry of Social Affairs years ago and is not the responsibility of the Ministry of Finance. And in order for the changes to happen in the dark, the Law on Amendments and Supplements to the Social Security Code (LSS Code) is being introduced after the resignation of the cabinet, with the 30-day period for public discussion being chosen during the 10-day holidays for Christmas and New Year, without an analysis of the pension system and the so-called “roadmap“ being made and presented, as promised.
What will the changes to the Social Security Code lead to?
In the payment phase, the proposed changes will reduce the number of lifetime pensions and their value paid by pension companies, which is not in the people's interest. In the accumulation phase, the introduction of so-called “multi-funds“ is envisaged. Without a significant lag in profitability in Bulgaria, and such a model in Croatia was taken as an example. The essential difference between the two countries is not taken into account, namely that in Bulgaria banks mainly change the company in about 400,000 batches and transfer over 1 billion euros each year between funds, which could lead the implementation of this model in Bulgaria to the grotesque. In Croatia, such influence of banks on the activities of pension funds has been eliminated.
According to economist Dr. Lyubomir Hristov, the proposed amendments and supplements to the Social Security Code must be withdrawn and fundamentally revised, because they are inadequate, counterproductive, primitive and morally outdated. The number of sub-funds must be increased so that it fully covers the spectrum of risk appetite of the insured, he tells “Trud News“. The risk profile of the sub-funds must be better defined by adding lower limits for investing in shares and other speculative assets. Otherwise, the multi-fund system creates the prerequisites for misleading and deceiving the insured regarding the risk profile of investing their contributions.
“It is necessary to introduce a smoother trajectory for changing the level of risk in the sub-funds. Requirements should be introduced for the questionnaires to determine the appropriate sub-fund for each insured, with the minimum requirement being that these questionnaires be certified as psychometric, i.e. valid and reliable“, explained Hristov.
According to him, it is necessary to simplify and drastically reduce the fees of pension funds, such as the initial fee and the fee calculated on the investment income, being abolished, and the annual investment fee being limited to 0.20% of the assets of the respective sub-fund from January 1, 2027, in accordance with good practices in Sweden. In addition, the official distribution of insured persons between pension companies should be abolished, and those who have not explicitly chosen a pension fund should be directed to a single pension fund, publicly managed at minimal fees in accordance with the progressive and proven Swedish experience over the past 30 years.
Lyubomir Hristov believes that the technical interest rate in the formula for calculating the initial amount of a pension from a pension fund should be maintained in accordance with actuarial mathematics and actuarial practice.
In his words, the multi-fund system can increase, but it can also decrease the profitability of insured persons in pension funds - a matter of chance. The multi-fund system, as proposed, is not able to bring sufficient profitability to equalize two pensions with one from the state social security. Even if profitability increases in the future, the pension from the same accumulated amount will be reduced compared to the current Social Security Code. For me, the conclusion remains that both before and after multi-funds, two pensions are less than one. Therefore, at the first opportunity, I submit an application to the National Revenue Agency to refuse the UPF and transfer my insurance only to the state social insurance (unless I am insured continuously on a minimum insurance income), he further commented.
Dr. Lyubomir Hristov has over 30 years of experience as a manager, researcher and lecturer in the public and private sectors. He was the executive director of the Central Depository, advisor to the executive director of the World Bank, chief economist and member of the Governing Council of the Bulgarian National Bank.