11

THE NEED AND POSSIBILITY OF THE NEED AND POSSIBILITY OF INTRODUCTION OF INTRODUCTION OF MULTIFUND SYSTEM IN THE SUPPLEMENTARY MULTIFUND SYSTEM IN THE SUPPLEMENTARY

RETIREMENT PROVISION ACTIVITY IN BULGARIARETIREMENT PROVISION ACTIVITY IN BULGARIA

ConferenceConference ““Development of Supplementary Retirement Provision in EU and the Development of Supplementary Retirement Provision in EU and the challenges for the joining countrieschallenges for the joining countries” ”

Sofia, Bulgaria, October Sofia, Bulgaria, October 1313,, 2006 2006

Milen MarkovMilen MarkovChairman of Investments and Capital Markets Committee of BASPSCChairman of Investments and Capital Markets Committee of BASPSC

BULGARIAN ASSOCIATION OF BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION SECURITY SUPPLEMENTARY PENSION SECURITY

COMPANIESCOMPANIES

22

І. THE NEED OF INTRODUCTION OF MULTIFUND SYSTEM IN THE SUPPLEMENTARY PENSION PROVISION

ІІ. POSSIBLE METHODS OF APPROACH AND NECESSARY ACTIONS FOR THE INTRODUCTION OF MULTIFUND SYSTEM IN BULGARIA

33

І. THE NEED OF INTRODUCTION OF MULTIFUND SYSTEM IN THE

SUPPLEMENTARY PENSION PROVISION

Fundamental reasons for introduction of a multifund system in countries Fundamental reasons for introduction of a multifund system in countries with Pension Systems based on fully funded principal. (Chile, Peru, with Pension Systems based on fully funded principal. (Chile, Peru, Mexico)Mexico)::

1. 1. Achieving higher profitability through investing in portfolios with Achieving higher profitability through investing in portfolios with predominantly variable income assets and higher riskpredominantly variable income assets and higher risk; ;

HIGHER PROFITABILITY = HIGHER PENSION

HIGHER PROFITABILITY = HIGHER RISK

2. 2. Conforming the life cycle of the insured person with the risk of change of Conforming the life cycle of the insured person with the risk of change of the indexes of the capital marketsthe indexes of the capital markets;;

3. 3. Granting the insured persons the right to determine the level of risk of the Granting the insured persons the right to determine the level of risk of the portfolio in which they are insuredportfolio in which they are insured; ;

4. 4. Clear definition of the different investment portfolio’s profiles;Clear definition of the different investment portfolio’s profiles;

44

Motives forMotives for the introduction of the multifund system in the introduction of the multifund system in BulgariaBulgaria

1. 1. Development of the capital marketsDevelopment of the capital markets- - high growth of the high growth of the “ “Bulgarian Stock Exchange-Bulgarian Stock Exchange-

Sofia capitalizationSofia capitalization;;- - development of the Corporate bonds marketdevelopment of the Corporate bonds market

2. 2. Successful start and development of the Collective investment Successful start and development of the Collective investment schemesschemes– – Investment Companies and Unit TrustsInvestment Companies and Unit Trusts

3. 3. Liberalization of the investment limitationsLiberalization of the investment limitations

4. 4. Achieving a mature stage in the development of the Achieving a mature stage in the development of the Supplementary Pension Provision System – successful Supplementary Pension Provision System – successful implementation of a daily evaluation of the assets of the implementation of a daily evaluation of the assets of the pension funds, effective control by the Finance Supervision pension funds, effective control by the Finance Supervision Commission, clear rules for investment in the capital Commission, clear rules for investment in the capital markets of countries members and non members of the EU.markets of countries members and non members of the EU.

55

Development of the capital market in BulgariaDevelopment of the capital market in Bulgaria

2000 2001 2002 2003 2004 2005 2006*

4,81% 3,72% 4,25% 7,88% 10,54% 20,11% 21,13%

Market capitalizationMarket capitalization of of ““BSE-SofiaBSE-Sofia””

More thanMore than 9 9 time increase time increase

2000 2001 2002 2003 2004 2005 2006*

(BGN billions) 1,286 1,104 1,375 2,722 4,033 8,434 9,914

(EUR billions) 0,658 0,564 0,703 1,392 2,062 4,312 5,069

Market capitalizationMarket capitalization / / Gross domestic productGross domestic product

20020022 2006 2006 **

SharesShares 328328 341341

BondsBonds 1212 6262

Number of shares and bonds tradedNumber of shares and bonds traded onon “ “BSE-SofiaBSE-Sofia””

66

Successful start and development of theSuccessful start and development of theCollective investment schemesCollective investment schemes

Number of local Investment Companies and Number of local Investment Companies and Unit TrustsUnit Trusts

2000 2000 20022002 20042004 20052005 20062006 **

Investment CompaniesInvestment Companies 33 44 88 1010 1111

Unit TrustsUnit Trusts -- -- -- 99 2525

Funds managed by local Investment Companies and Unit TrustsFunds managed by local Investment Companies and Unit Trusts as of as of 30.06.200630.06.2006

- - Investment CompaniesInvestment Companies - 92 147 - 92 147 BGN thousandsBGN thousands. (47 114 . (47 114 EUR thousandsEUR thousands))

- - Unit TrustsUnit Trusts - 72 474 - 72 474 BGN thousandsBGN thousands. (37 055 . (37 055 EUR thousandsEUR thousands))

Foreign Foreign Collective investment schemesCollective investment schemes offered in Bulgaria as ofoffered in Bulgaria as of 30.06.2006 – 30.06.2006 – 4 4 Management Companies offer a total ofManagement Companies offer a total of 37 37 different Unit Trusts, using the different Unit Trusts, using the

branch network of 4 banksbranch network of 4 banks. .

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Aggregated structure of the assets of the Collective investment schemes as of 30.06.2006

Assets (BGN)IC total UT total CIS total

Value (BGN) Share Value (BGN) Share Value (BGN) Share

Cash, including 20 792 923 22,56% 24 768 623 34,18% 45 561 546 27,68%

Bank deposits 16 707 535 18,13% 21 123 996 29,15% 37 831 531 22,98%

Shares 31 412 032 34,09% 25 069 895 34,59% 56 481 927 34,31%

Corporate bonds 22 367 979 24,27% 15 054 130 20,79% 37 422 109 22,73%

Mortgage bonds 5 074 070 5,51% 2 013 036 2,78% 7 087 106 4,31%

Municipal bonds 783 451 0,85% 438 226 0,60% 1 221 677 0,74%

Compensatory notes 181010 0,20% 0 0,00% 181010 0,11%

Government bonds 6 600 574 7,16% 915 500 1,26% 7 516 074 4,57%

Euro bonds 581 292 0,63% 0 0,00% 581 292 0,35%

Foreign securities 2 116 461 2,30% 1 023 062 1,41% 3 139 523 1,91%

Receivables 2 049 647 2,22% 3 094 974 4,27% 5 144 621 3,13%

Non financial assets 2 049 647 2,22% 3 094 974 4,27% 5 144 621 3,13%

Others 188 071 0,20% 96 692 0,13% 284 763 0,17%

Total assets 92 147 510 100% 72 474 142 100% 164 621 652 100%

Profit 1 996 036 2,17% 749 698 1,03% 2 745 734 1,67%

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Liberalization of investment limitations Liberalization of investment limitations

Investment instrument

Limitations for the Mandatory Pension

Funds

Limitations for the Voluntary Pension

Funds

Up to 24.02. 2006

After 24.02.200

6

Up to 24.02. 2006

After 24.02.200

6

min. %

max. % max. % min. %

max. % max. %

Government bonds 50 100 100 30 100 100

Shares admitted to trading on a regulated market

  10 20   10 100

Shares of Special Investment Purpose Companies

  - 5   - 10

Stocks and/or shares of collective schemes

    15   - 100

Corporate bonds on a regulated market

  20 25   20 100

Secured Corporate bonds   - 5   - 10

Municipal bonds   10 15   10 100

Bank deposits   25 25   25 100

Mortgage bonds   30 30   30 100

Investment Estate   5 5   10 10

Derivatives of securities   2,5 *   2,5 *

Investments in foreign securities   15 **   20 **

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ІІ. POSSIBLE METHODS OF APPROACH AND NECESSARY ACTIONS FOR THE INTRODUCTION OF

MULTIFUND SYSTEM IN BULGARIA

Introduction of multifunds only in the Introduction of multifunds only in the Supplementary Voluntary Pension FundsSupplementary Voluntary Pension Funds

Limitation of the number and types of risk Limitation of the number and types of risk portfolios to 3 different levels of risk, with portfolios to 3 different levels of risk, with respect to the share of variable income respect to the share of variable income securitiessecurities

- - ConservativeConservative up to up to 20 % 20 %- - StandardStandard up toup to 60 % 60 %

- - Aggressive up toAggressive up to 80 % 80 %

1010

Portfolio composition of VPF as of 30.06.2006

   

№ Investment instrumentsBGN thousand

EUR thousand

%

1Securities issued or guaranteed by the

Government 160 317 81 969 38,64

2Securities admitted to trading on a

regulated market 109 281 55 875 26,34

2.1 Shares 55 707 28 483 13,43

2.2 Corporate bonds 53 574 27 392 12,91

3 Municipal bonds 1 787 914 0,44

4 Bank deposits 96 098 49 134 23,16

5 Mortgage bonds 34 695 17 739 8,36

6 Derivatives of securities 0 0 0,00

7 Investment Estate 7 047 3 603 1,70

8 Foreign investments 5 634 2 880 1,36

  Total investments 414 858 212 114 100,00

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NECESSARY ACTIONS FOR THE INTRODUCTION OF A MULTIFUND SYSTEM IN BULGARIA

1. Changes in the Normative Framework – 1. Changes in the Normative Framework – common initiative of FSC and BASPSCcommon initiative of FSC and BASPSC

2. 2. The Pension companies should developThe Pension companies should develop:: - - Investment strategy for the portfolios Investment strategy for the portfolios with different risk levelswith different risk levels

- - Fund rulesFund rules

3. 3. Licensing of every investment schemeLicensing of every investment scheme

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MAIN ISSUES , WHICH SHOULD BE SLOVED BY THE CHANGES OF THE NORMATIVE FRAMEWORK

1. What should be the legal form of the mutlifunds1. What should be the legal form of the mutlifunds::– – one legal person with separate portfolios one legal person with separate portfolios

with different level of risk with different level of risk – – each portfolio should be a separate legal each portfolio should be a separate legal

personperson

2. 2. Should the law include maximum and minimum Should the law include maximum and minimum quantitative limitations for the different portfolios quantitative limitations for the different portfolios or should this be defined in the Fund rules. or should this be defined in the Fund rules.

3. 3. Should there be limitations of the number of funds Should there be limitations of the number of funds managed by a single Pension companymanaged by a single Pension company

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MAIN ISSUES , WHICH SHOULD BE SLOVED BY THE CHANGES OF THE NORMATIVE FRAMWORK

4. Status of the already existing funds – determining 4. Status of the already existing funds – determining their risk profile. Determining the type of fund for their risk profile. Determining the type of fund for people who have not made a choice and for people who have not made a choice and for unpersonified contributions unpersonified contributions

5. The right to change funds managed by a single 5. The right to change funds managed by a single pensions company – taxes and how often it can be pensions company – taxes and how often it can be donedone

6. Binding the right to participate in a higher risk fund 6. Binding the right to participate in a higher risk fund to the life cycle of a personto the life cycle of a person

7. The amount of taxes collected by the different funds7. The amount of taxes collected by the different funds8.8.MethodMethod of the of the differentdifferent portfolioportfolio’s asset valuation’s asset valuation and and

calculation of the calculation of the value of unitsvalue of units

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POSSIBLE OBSTACLES AND PROBLEMS DURING THE INTRODUCTION OF THE MULTI FUND SYSTEM

1. 1. Not enough interest and difficulties in choosing a Not enough interest and difficulties in choosing a specific risk portfolio by the insured personsspecific risk portfolio by the insured persons

2. 2. Not enough customers for the formation of a Not enough customers for the formation of a portfolio of a particular kind and difficulties with its portfolio of a particular kind and difficulties with its effective managementeffective management

3.3. Not enough actively traded shares on BSE-SofiaNot enough actively traded shares on BSE-Sofia4.4. The Pension Companies and FSC having The Pension Companies and FSC having

difficulties with the administration of a larger difficulties with the administration of a larger number of fundsnumber of funds

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THANK YOU FOR YOUR ATTENTION

QUESTIONS ?QUESTIONS ?