supervision of pension systems – current trends and issues. international experience

Warsaw, 19 September 2006

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FinancialSupervisionCommissionBulgaria

SUPERVISION OF PENSION SYSTEMS – CURRENT TRENDS AND ISSUES. INTERNATIONAL EXPERIENCE.

PENSION FUNDS REGULATION AND SUPERVISION IN BULGARIA

BISSER PETKOVDeputy Chairman of Financial Supervision Commission Head of Social Insurance Supervision Division

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Agenda

1. Development and Regulation of Funded Pension Provision

2. Institutional Organization of Pension Supervision

3. Supervisory Approach

4. Challenges Facing Regulation and Supervision of Supplementary Pension Provision

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1. Development and Regulation of Funded Pension Provision (1/12)

Background

1994 – Voluntary pension funds launched - fully funded basis,individual accounts.

1999 – Legal regulation of pension provision activity (Adoption of the Law for Supplementary Voluntary Pension Provision and the Mandatory Social Insurance Code).

2000 – Establishment of the State Agency for Social Insurance Supervision and licensing of the first pension insurance companies. – Professional Pension Funds launched.

2002 – Universal Pension Funds launched.

2003 – Integration of supervision authority over the non bank financial sector Establishment of Financial Supervision Commission (FSC) Social Insurance Code adopted

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I. Mandatory Pay-as-you- go-system.

• National Social Security Institute

• National Revenues Agency

II. Mandatory supplementary retirement provision.

• Universal and Professional Pension Funds*

III. Voluntary supplementary retirement provision.

• Voluntary Pension Funds

* Universal Pension Funds - mandatory participation for all born after 31.12.1959Professional Pension Funds - for workers in hazardous work conditions (1st and 2nd category of labour) Centralized collection of social insurance contributions by NRA. Public control over the activity of PICs (Trustee and Advisory Boards)

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2004 2005

Net Replacement Ratio 51.0 % 51.6 %

Pensions / GDP 9.1% 9.0 %

Pensioners 2 320 444 2 301 669

Dependency Ratio 93.4 % 91.6 %

Bulgarian Pension System Current Characteristics

Contributions (2006): 23 % 4% supplementary pensions

19 % state pensions

65 : 35 contributions are divided betweenemployer and employee; to be 50:50 in 2009

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Number of Funds

24 (8 pension fund management companies, each managing 3 types of funds; 1 more PIC to start operation of 3 more funds s by the end of the year)

Types Fully funded, DC accumulated in individual accounts;Open-type funds (universal and professional) administered by private Pension Insurance Companies

Market Value(in th EUR)

645 371 of net assets, as of 30.06.2006

Foreign Participants

Substantial share of foreign companies shareholders participation in pension management companies

Concentration High concentration over past years; as of 30.06.2006 the two major pension fund management companies have 67% of assets and 63% of insured persons

Main Characteristics of Funded Pension Provision Market

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Regulatory framework Social Insurance Code Financial Supervision Commission Act Secondary legislation acts adopted by:

Financial Supervision Commission Council of Ministers Bulgarian National Bank, Ministry of Finance, NSSI

Recent Regulatory Changes Introduction of occupational pension schemes (transposition

Directive 2003/41) Liberalisation of pension funds investment regime

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Structural (dis)similiarities between the Bulgarian and EU Pension System Models

EU BulgariaApplicable EU Regulations

Statutory retirement provision schemes 1st pillar

PAYG scheme, publicly managed 1st pillar (I-A by OECD concept)

Regulation 1408/71Regulation 574/72

Capital retirement provision, privately manages schemes 2nd pillar(I-B by OECD concept)

Regulation 1408/71

Regulation 574/72Occupational retirement provision schemes 2nd pillar

Directive 1998/49Directive 2003/41Directive 86/378

Individual voluntary retirement provision schemes 3rd pillar

Voluntary retirement provision through individual or occupational contributions/or contributions from a third party 3rd pillar

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2001 2002 2003 2004 2005

Market Capitalisation of Bulgaria Stock Exchange – Sofia

3,7 4,3 7,9 10,5 20,1

Insurance and Health Companies Premium Income

1,6 1,9 1,9 2,2 2,6

Pension Funds Net Assets

0,6 1,0 1,4 2,1 2,7

Bank Assets 41,1 45,0 50,2 65,0 78,3

Depth of Financial Market - Assets as Share of GDP in %

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Evolution of PF Investment Portfolio Structure %

31.12.200431.12.200

5 30.06.2006

Securities issued or guaranteed by the government

56 52 42

Shares 3 7 13

Corporate bonds 7 10 13

Municipal bonds 1 1 1

Bank deposits 19 19 22

Mortgage bonds 11 9 7

Investment property 2 1 1

Investments abroad 0,5 1 2

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Investment Restrictions (%)

MandatoryPension Funds

Voluntary Pension Funds

Government issued or backed securities

no limit no limit

Shares and RightsShares andUnits in Mutual Inv Schemes

Shares in Special Purpose Investment

2015

( 5 in MIS managed by one company)

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5 single issuer10 in MIS managed

by one company

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Municipal Bonds 15 5 single issuer

Bank Deposits 25 5 single bank

Bonds (corp and mortgage) 55 5 single issuer

Investment property 5 10 (up to 5% in single property)

Forex 20 30

Derivatives established in FSC draft ordinance

established in FSC draft ordinance

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Fees Structure

Fund TypeFront-up Fee

On Each Contribution

Management Fee

Transfer Fee

Mandatory Pension Funds

Up to 5 %

Up to 1 % of fund’s assets on an annual basis

Up to 20 BGN*

Voluntary Pension Funds

Up to 7 %Up to 10% generated profit

Up to 20 BGN

*1 EUR = 1.95583 BGN exchange rate pegged to EUR under currency board

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Source: FSC, 2006

• Increased contribution amounts

•Lower social contribution evasion rates

0

1000000

2000000

3000000

4000000

5000000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Universal Professional Voluntary Total

PF Net Assets (in th BGN) 31.12.2002 - 31.12.2010 (estimated forecast)1 EUR = 1.95583 BGN exchange rate pegged to EUR under currency board

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0

10%

20%

30%

40%

50%

60%

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2052

2054

Total I pillar II pillar

Net Replacement Rate


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Agenda





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2. Institutional Organization of Pension Funds Supervision (1/7)

Bulgarian National Securities Commission (Since 1996) Staff: 125

Insurance Supervision

Agency (Since 1997) Staff: 45

State Insurance Supervision Agency (Since 2000)

Staff: 43

Financial Supervision

Commission (FSC)

(Since March 1, 2003)

Staff: 197

Transition from Sector Based to Integrated Supervision

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Institutional Environment of Pension Supervision

Financial Supervision Commission

Ministry of Labor and Social Policy

National Social Security Institute

Ministry of Finance

Bulgarian National Bank

Financial Stability Consultative Council (Coordination Body)

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Financial Supervision Commission Organisational Structure

FSC Chairman

Deputy ChairmanInvestment Supervision

Deputy ChairmanSocial Insurance

Supervision

Deputy ChairmanInsurance

Supervision

Supervision Activity

Regulatory Regimes and Risk Evaluation

On Site Inspection Unit

Off-site Inspection Unit

Regulatory Regimes Unit

Risk Evaluation Unit

3 Members

Supervisory measuresCourt representation

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FSC Objectives

Protecting the interests of the investors, insurance policy holders and pension insured persons;

Providing integrity, transparency and credibility of the financial markets

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Powers of the Financial Supervision Commission

Development of the regulatory framework Licensing regime Supervision Sanctions

Powers of the Deputy Chairman of FSC in Charge of Social

Insurance Supervision

Issues authorisations as provided in the Social Insurance Code Approves documents and defines the requirements thereof Approves methodological guidelines, document samples, etc. Orders on-site inspections Implements enforcement measures and issues penalty decrees

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Institutional Independence of FSC

Autonomous institution created under a special legislative act

Reporting to Parliament

Selection of the FSC members by the Parliament with a 6 year term in office

Mixed funding (State Budget/ Supervised entities)

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Cooperation and Consultation

FSC is member of: Committee of European Insurance and Occupational Pensions

Supervisors (CEIOPS) (observer status); International Organization of Pension Supervisors (IOPS); International Organization of Securities Commissions (IOSCO); International Association of Insurance Supervisors (IAIS).

Memorandums of Understanding and Exchange of Information signed with partner institutions.

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Agenda





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3. Supervisory Approach (1/5)

Characteristics of the style and approach implemented in Bulgarian pension supervision

Restrictive – license with strict requirements for stepping into the social insurance market

Proactive – on-going monitoring and regular interventions

Intensive – daily communication

Legislatively oriented (compliance based)

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ReportingApproach and

evaluation

program

Response from the

management and follow-up activities

Supervision

planning and

strategy

Examination function

Enforcedadmin.

measures

Analysis,

evaluation

and

priori-

tising

Organization and staff

Off-site supervision

On-site supervision Supervisory measures

Supervisory Methods and Processes

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Preliminary Supervision

Licensing Requirements for Pension Insurance Companies as regards:

Capital

Shareholders with significant participation

Managerial and controlling bodies and the actuaries

Internal control system

Technical equipment, staffing and information provision

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Off-site Supervision of Pension Insurance Companies (1)

On-going monitoring over Asset valuation of pension funds, Calculation of unit value Keeping of investment limits

Information sources: Daily reports by the PICs and the custodian banks submitted electronically to

the FSC

Supervision over the contents of the PIC’s WEB-pages Means of supervsion:

IT system for supervision (Е-fsc) through built-in filters

Supervisory activities/ measures: Requests for corrections Imposition of enforces administrative measures Imposition of property payments

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On-site Supervision of Pension Insurance Companies

Planning of examinations

Types of examination – planned (theme), and claims based

Integration of the off-site and on-site supervision

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Agenda




4. Challenges and Possible Solutions for Funded Pension Funds Supervision and Regulation

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4. Challenges in Private Pension Funds Supervision and Regulation (1/2)

Regulation of the pay-out phase regarding the life-long pensions under the second pillar

Expanding the investment choice opportunities of participants in the voluntary pension insurance

Transition from the approach of quantitative portfolio limits to the prudent person investment approach

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4. Challenges in Private Pension Funds Supervision and Regulation (2/2)

Integrated regulation of the financial markets in keeping with the EU directives

Transition towards functional integration and consolidated supervision over the non-banking financial sector

Change in the supervision approach and style: from traditional (static) to dynamic (risk-based)

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Q & A?

Thank you for your attention!

e-mail: [email protected]: (+359 2) 94 04 575 fax: (+359 2) 829 43 21

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