Continued…
- Ms. Yordanova, in your opinion, why does the second pillar continue to be the subject of such sharp political disputes more than 20 years after its creation?
- Indeed, the introduction of a multi-fund model is not a new topic for the sector, as the first attempt at legislative proposals in this direction dates back to 2009. For all experts, the need to introduce a multi-fund model has long been a clear necessity. However, it should be emphasized that this is an extremely large-scale reform that requires broad public support. It should not be forgotten that over the past decade the supplementary pension insurance sector has gone through a number of challenges - the review by the Temporary Inquiry Committee in the National Assembly, completed in 2015, and the subsequent regulatory change regulating the right to change insurance only in the state social insurance, the two reviews of the funds' assets in 2016 - 2017, the subsequent large-scale changes from the end of 2017, further developing the investment regime of the funds and the management system of the pension insurance companies, and last but not least, the settlement of the payout phase in 2021. All these actions cost significant efforts and were accompanied by a wide public debate, due to the social significance of insurance in the capital pillars of the pension system. The industry has developed significantly, gained significant experience, going through several serious market shocks, and successfully launched the payout phase. This has shown that it is stable and can successfully perform the function for which it was created, namely to manage the funds of the insured persons and pay pensions.
The suggestions and speculations that the funds are “hollow structures“, that they will never pay pensions, etc., were also refuted.
However, the facts speak differently - over the past ten years, the funds from the universal pension funds, paid in one go or in installments to insured persons or their heirs, have amounted to nearly 450 million leva, and since the beginning of the payment phase in 2021 to the present, the pensions paid and installments from the funds for making payments have already exceeded 400 million leva. At the same time, in recent years, the state has had to respond immediately to problems of importance to the entire society, such as measures to counter COVID-19 and overcome its consequences, the war in Ukraine, etc. In the complex and dynamic situation, it was not possible for multi-funds to be at the top of the political agenda, given more principled and pressing issues, including the formation of a regular government, on which it was difficult to form a majority. Last but not least, at the end of 2024, for the first time in the 25-year history of the three-pillar model, upon assignment by the Chairman of the National Assembly, Mr. Rosen Zhelyazkov, the Analysis of the Current Pension System adopted by the Economic and Social Council was developed and presented - a comprehensive and expert review of the current model with specific recommendations and proposals for the development of pension insurance in the country in the context of demographic challenges and the growing pressure on public finances. As a result of our long-term efforts, hard work and intensified dialogue with the industry, competent ministries, politicians, social partners, together with professional organizations, they were convinced of the advantages of the multi-fund model and today we have implemented the next step in the development of capital pension insurance. I am convinced that these changes, first of all, enable insured persons to actively participate in the processes of managing their pension savings in accordance with their personal investment horizon, life needs and risk tolerance, and not to be passive users or observers whose expectations are based solely on conjunctural decisions. Secondly, the adopted changes will improve the competitive environment, which is conducive to achieving higher results in fund management.
Therefore, the introduction of the multi-fund model is an extremely important moment for the industry and especially for insured persons and pensioners,
which will ultimately increase public confidence in supplementary pension insurance and its importance. I attribute a significant role in the reform reaching the current stage to the successfully completed 2024 review of capital pension insurance and the subsequent recommendations for its improvement by the Organization for Economic Cooperation and Development (OECD) in the context of the country's accession to the international organization. In the period 2024 - 2025, we worked hard on studying foreign experience (we conducted a comprehensive analysis of countries with similar pension models) and participated in various professional forums in order to present the results of our work. We can summarize that the topic of pension is a topic for young people, not for the elderly. Because while you work, you need to take care of your income in old age. And in this context, I am very glad that it is precisely young people who are most interested in the possibilities of multi-funds - both in the second and third pillars.
- It is claimed that the adopted changes are an “upgrade“, and not a classic reform. What are the key elements of this upgrade and why do you think it has been delayed for so long?
- The sustainable increase in life expectancy combined with the persistent trends of decreasing birth rates is a prerequisite for the rapid pace of population aging, which disrupts the cohesion of society, solidarity between generations and new insoluble problems for future generations, the result of which are the current economic, budgetary and social challenges. In this regard, the attractiveness of private pension funds should be considered as a long-term strategy and a tool for adequately planning the future of citizens. Stimulating the development and participation in supplementary voluntary pension insurance through a variety of financial and non-financial incentives, as well as awareness and financial education campaigns through public campaigns to raise awareness about the importance of pension savings and provide financial education are goals that guarantee the future financial adequacy and sustainability of pension payments:
-- providing the opportunity for insured persons to choose how to manage their pension savings, taking into account the different risk tolerance of individual categories of persons in different phases of their life cycle;
-- developing the requirements for pension fund investments and their management
-- reviewing the current guarantee mechanism, which creates prerequisites for “herd“ behavior when investing the funds of the supplementary mandatory pension insurance funds
-- reducing the fees and deductions collected in the supplementary mandatory pension insurance and creating incentives for better management of the universal and professional pension funds by introducing a two-component fee that takes into account the achieved investment results
-- developing the regulation of the payout phase from the head. item better coverage of the risks assumed by the pension insurance companies
The changes envisaged in the CSR significantly improve the regulation of the activities of the funds, considering:
1. - Introducing investment choice
2. - Providing opportunities for better profitability by developing the instruments where the funds can be invested
3. - Stimulating more active management through the profitability comparison indicator and through the investment fee
4. - Reducing the fees and deductions collected in the second pillar
5. - Introducing a guarantee for gross contributions to the PPF (similar to the guarantee in the UPF)
6. - Guaranteeing the initial amount of pensions based on the full amount of funds in the account (without using a risk coefficient)
7. - Improving the regulation of the rights of heirs
8. - Better securing the rights of individuals by increasing the requirements for the capital and reserves of companies.
To assess the effect of the proposed changes to the Social Security Code (SSC) for the introduction of multi-funds, a model that examines the change in the replacement rate of the Universal Pension Funds (UPF) when the investment profile changes according to the life cycle of the insured persons. The replacement rate shows what part of the last salary will be replaced by the granted pension. All other things being equal, the increase in the funds in the account leads to an increase in the amount of the pension and, accordingly, the replacement rate. When introducing a multi-fund model, the profitability is expected to increase significantly, which in turn will lead to an increase in the replacement rate by 8.99 percentage points (from 12.25% to 21.24%).
- One of the biggest fears of people is that the second pension will be too small. What are the realistic expectations for the amount of payments from the second pillar in the coming years?
- As already mentioned, the main goal of the adopted amendments is to increase the accumulated funds in the individual accounts of insured persons in the long term and, accordingly, improve the adequacy of supplementary pensions from the second pillar. We should not forget that the volume of funds in the accounts at the end of the accumulation phase is the result of several main factors:
-- amount of income on which insurance contributions have been made;
-- total duration of insurance;
-- fees collected and, of course, the realized investment income
Investment income, in turn, depends on the state of the capital markets and the breadth of the spectrum of investment instruments in which the funds can be invested. Since multi-funds provide companies with much broader opportunities to adapt the investment of individuals' pension savings in accordance with current market conditions and to make larger investments in equity instruments (e.g. shares), the expected effect of their introduction is to increase investment income.
Three more factors will additionally contribute to increasing profitability:
-- new investment opportunities
-- determining the investment fee based on profitability
-- introducing a benchmark for comparing investment results instead of the minimum profitability, which in practice encourages convergence of investment strategies and more conservative investing
An important circumstance is whether individuals are insured on real income, since their accumulations in the accounts also depend on the amount of contributions received and their regular payment, because expectations often exceed the actual contribution. According to our calculations, under conservative assumptions, the changes in the law show the potential to increase the income replacement rate to about 21% while maintaining the current contribution rate of 5%, which is an indicator of significantly higher adequacy of future supplementary pensions compared to the current model.
- If you had to explain to young people why they should be insured in the second pension pillar at all, what is the strongest argument in its favor?
- Everyone who starts working is insured for a pension by law, with part of the insurance contribution going to the State Social Insurance (NSI) to pay the pensions of current pensioners (e.g. your grandparents, etc.), and the other part being transferred to a private pension fund (Universal Pension Fund). Contributions to the Universal Fund are personal funds of everyone, a personal account is kept, called an individual account, and are invested on stock exchanges. Now everyone's funds – both those who start working and those who will soon retire are invested in the same way. The reform envisages that the universal fund will have sub-funds with different investment profiles:
-- dynamic (with a predominant share of investments in riskier instruments – e.g. stocks, etc.)
-- balanced (relatively equal share of riskier investments and those with low risk)
-- conservative (predominant share of investments in low-risk instruments – e.g. government securities and bonds)
This profiling of the sub-funds will allow young people to choose a more aggressive and higher-risk management of their pension savings (through a dynamic sub-fund), to receive a higher yield and, accordingly, a larger pension when they retire. In finance, the rule applies that higher risk implies higher expected yield. It is important for everyone to determine how much the risk is “worth it”, whether they want their pension savings to outpace inflation even with the risk of temporary losses. If the answers to these sample questions are positive and a young person has a long-term insurance horizon (more than 30-35 years), then the search for a higher return implies a riskier investment of pension savings. The choice of the company that will manage your money and the risk profile of the sub-fund can be made within 3 months of starting the first job.
- What if the young person does not choose a fund?
- If the young person does not choose a fund, depending on his age, he will be assigned to it ex officio – for example, in the dynamic sub-fund managed by one of the licensed pension companies.
In case a person is not satisfied with the way his pension savings are managed, the law gives him the right to change the fund or sub-fund after one year of joining it.
In reality, how each person's savings will be managed depends on personal choice - both which company will manage them and which risk profile subfund they will enter. If they are not active in the choice, then upon reaching the age of 50, each person will be automatically transferred to a balanced subfund, and 3 years before retirement - to a conservative subfund. It should be known that regardless of the person's will, 3 years before retirement, their savings go to a conservative subfund, so that the funds are "conserved" by being invested with lower risk. It so happens that while a person is younger, he will take more risks to achieve a higher return, and as retirement approaches, his money will be invested in a way that allows it to be preserved and bring moderate returns.
I recommend that people carefully inform themselves and make an active choice.
Full use of the possibilities of the multi-fund system is of great importance for how much money everyone will have for retirement. Here is a simple example - if 100 euros are invested at an annual return of 10%, after one year your account will have 110 euros. At the same return, after another year your account will already have 121 euros (one euro additional from investing the return achieved in the first year). Accordingly, after the third year we already have an accumulation of 133.10 euros. Although it may not seem impressive in the first few years, after 40 years at a 10% annual return, these 100 euros will have become 4,525.93 euros. That is why it is extremely important to invest the funds more actively in the first decades of insurance for higher returns. In summary, the funds from contributions are deposited in the person's personalized account, i.e. they are personal funds. In connection with the introduction of the multi-fund model, the person becomes an active participant in the management of his pension savings through his choice of a risk profile, sub-fund and pension insurance company, or the structure of the investment portfolio. It is also very important to note the fact that these funds are inherited, with the circle of heirs being expanded so as to cover a wide variety of life situations.