The Bulgarian pension modelThe Bulgarian pension model: : regulatory and supervisory regulatory and supervisory

practices practices

Bisser PetkovBisser PetkovDeputy chairperson of the Financial Supervision Deputy chairperson of the Financial Supervision CommissionCommission, , head of the Social Insurance Supervision Divisionhead of the Social Insurance Supervision Division

Evolution of pension reforms: Bulgaria’s experience andEvolution of pension reforms: Bulgaria’s experience andregional perspectivesregional perspectives, , February February 16-1716-17, , 20052005 - Sofia - Sofia

ContentsContents

Regulatory framework of Regulatory framework of supplementary supplementary pension insurance in pension insurance in BulgariaBulgaria

Evolution of the institutional Evolution of the institutional organization of organization of pension supervisionpension supervision

Main characteristics of the Main characteristics of the supervisory supervisory approach that is being approach that is being implemented and implemented and methods for supervision methods for supervision over PICs and PFsover PICs and PFs

Challenges facing the regulation and Challenges facing the regulation and supervision of supplementary pension supervision of supplementary pension

insurance insurance in Bulgariain Bulgaria

Main characteristics of the Main characteristics of the Bulgarian pension modelBulgarian pension model

SECURITY THROUGH DIVERSIFICATION AND COMPETITIONSECURITY THROUGH DIVERSIFICATION AND COMPETITION:: THREE-PILLAR PENSION SYSTEM FOLLOWING THE WORLD BANK MODELTHREE-PILLAR PENSION SYSTEM FOLLOWING THE WORLD BANK MODEL REFORMED PUBLIC SOCIAL INSURANCE SYSTEM ADMINISTERED REFORMED PUBLIC SOCIAL INSURANCE SYSTEM ADMINISTERED BY THE NSSI BY THE NSSI ((PILLAR ONEPILLAR ONE)) SUPPLEMENTARY MANDATORY PENSION INSURANCE SUPPLEMENTARY MANDATORY PENSION INSURANCE ((PILLAR PILLAR TWOTWO))

MANDATORY NATURE OF PARTICIPATIONMANDATORY NATURE OF PARTICIPATION;; DEFINED CONTRIBUTIONS ACCUMULATED IN INDIVIDUAL ACCOUNTSDEFINED CONTRIBUTIONS ACCUMULATED IN INDIVIDUAL ACCOUNTS;; OPEN-TYPE FUNDS OPEN-TYPE FUNDS ((OCCUPATIONAL AND UNIVERSALOCCUPATIONAL AND UNIVERSAL)) ADMINISTERED BY PRIVATE PICs ADMINISTERED BY PRIVATE PICs;; CENTRALIZED COLLECTION OF SOCIAL INSURANCE CONTRIBUTIONS BY THE NSSICENTRALIZED COLLECTION OF SOCIAL INSURANCE CONTRIBUTIONS BY THE NSSI..

SUPPLEMENTARY VOLUNTARY PENSION INSURANCE SUPPLEMENTARY VOLUNTARY PENSION INSURANCE ((PILLAR PILLAR THREETHREE)) PUBLIC CONTROL OVER THE AVTIVITY OF PICs PUBLIC CONTROL OVER THE AVTIVITY OF PICs ((TRUSTEE AND TRUSTEE AND ADVISORY BOARDSADVISORY BOARDS)) GOVERNMENT SUPERVISION OVER SUPPLEMENTARY PENSION GOVERNMENT SUPERVISION OVER SUPPLEMENTARY PENSION INSURANCE INSURANCE ( ( SISASISA FSCFSC ) )

Stages in the development of the Stages in the development of the regulatory framework regarding regulatory framework regarding

supplementary pension insurance in supplementary pension insurance in BulgariaBulgaria

19991999 Adoption of the new pension legislation Adoption of the new pension legislation (SVPIA(SVPIA and MSIC)and MSIC)20002000 Establishment of SISA as a specialized Establishment of SISA as a specialized supervisory body for control over the supervisory body for control over the supplementary social insurancesupplementary social insurance:: pension, health pension, health and unemploymentand unemployment20032003 Unification of the supervision over the Unification of the supervision over the non-banking financial sectornon-banking financial sector:: creation of the FSC creation of the FSC20032003 Codification of the pension legislation into Codification of the pension legislation into a unified Social Insurance Code (SIC)a unified Social Insurance Code (SIC)

Perfecting the pension legislation Perfecting the pension legislation in the process of model in the process of model

implementationimplementation

Introduction of daily valuation of the PF Introduction of daily valuation of the PF assets and keeping of the individual accounts in assets and keeping of the individual accounts in units as of July 1, units as of July 1, 20042004

Additional legal guarantees regardingAdditional legal guarantees regarding:: the security of pension assetsthe security of pension assets the achieving of minimum return the achieving of minimum return from investment of the resources of the from investment of the resources of the supplementary mandatory social insurance supplementary mandatory social insurance funds (SMSIF)funds (SMSIF).. Regulation of the potential ‘conflicts of Regulation of the potential ‘conflicts of

interests’interests’

Effective regulatory frameworkEffective regulatory framework

Social Insurance CodeSocial Insurance Code

Financial Supervision Commission Act Financial Supervision Commission Act

Secondary legislation acts adopted bySecondary legislation acts adopted by:: the Financial Supervision Commission the Council of Ministers Other bodies – BNB, MF, NSSI

Institutional organization of the Institutional organization of the supervision: transition from the supervision: transition from the

specialized model to the partially specialized model to the partially integrated pension supervision model integrated pension supervision model

Greater institutional independence of the Greater institutional independence of the supervisory bodysupervisory body

Expansion of the regulatory powersExpansion of the regulatory powers

Sharing of good supervisory practices in Sharing of good supervisory practices in the field of the non-banking financial the field of the non-banking financial sectorsector

Organizational integration with Organizational integration with preservation of the sectoralpreservation of the sectoral//subjective subjective approachapproach

Institutional environment of Institutional environment of pension supervision in Bulgaria pension supervision in Bulgaria

Ministry of Labor and Social PolicyMinistry of Labor and Social Policy

National Social Security InstituteNational Social Security Institute

Ministry of FinanceMinistry of Finance

Bulgarian National BankBulgarian National Bank

Coordination Coordination –– Financial Stability Financial Stability Consultative CouncilConsultative Council

Institutional independence of the Institutional independence of the FSCFSC

Autonomous institution created under a Autonomous institution created under a special legislative actspecial legislative act

Reports to the Parliament Reports to the Parliament

Mixed fundingMixed funding

Selection of the FSC members by the Selection of the FSC members by the Parliament with a different term in officeParliament with a different term in office

Organizational chart of the FSCOrganizational chart of the FSC

Chairperson of the FSC

Deputy chairperson Investment Activity

Supervision

Deputy chairperson Insurance Supervision

Deputy chairpersonSocial Insurance

Supervision

FSC member

FSC member FSC member

Controlling activity Regulatory regimes and risk evaluation

Regulatoryregimes

Risk evaluation

Off-site supervision

On-site supervision

Powers of the FSC related to the Powers of the FSC related to the supervision of supplementary pension supervision of supplementary pension

insuranceinsurance

Adopts secondary legislationAdopts secondary legislation

Issues guidelines in writing regarding the Issues guidelines in writing regarding the implementation and interpretation of implementation and interpretation of legislative actslegislative acts

Issues licenses and permits upon Issues licenses and permits upon proposal of the deputy chairperson in proposal of the deputy chairperson in charge of the Social Insurance charge of the Social Insurance Supervision DivisionSupervision Division

Powers of the deputy chairperson in Powers of the deputy chairperson in charge of the Social Insurance charge of the Social Insurance

Supervision Division Supervision Division

Issues decisions provided for in the SICIssues decisions provided for in the SIC

Approves documents and defines the Approves documents and defines the requirements to them requirements to them

Approves methodological manuals, Approves methodological manuals, sample documents, etc. sample documents, etc.

Organizes the operational controlOrganizes the operational control

Applies enforced administrative Applies enforced administrative measures and issues penal ordersmeasures and issues penal orders

Characteristics of the style and Characteristics of the style and approach implemented in Bulgarian approach implemented in Bulgarian

pension supervisionpension supervision

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

Proactive Proactive – – on-going monitoring and on-going monitoring and regular interventionsregular interventions

IntensiveIntensive – – daily communicationdaily communication

Legislatively oriented Legislatively oriented

Factorial preconditioning of the implemented Factorial preconditioning of the implemented supervisory approachsupervisory approach

Source: SUPERVISION OF PENSION Source: SUPERVISION OF PENSION FUNDS: THEORY AND PRACTICE by FUNDS: THEORY AND PRACTICE by Richard Hinz; Supervising Private Richard Hinz; Supervising Private Pensions, OECD, 2004Pensions, OECD, 2004

Methods and processes of Methods and processes of supervisionsupervision

ReportingReportingApproach Approach and and

evaluation evaluation programprogram

Response Response from the from the

management management and follow-up and follow-up

activatesactivates

SupervisioSupervisionn

planning planning and and

strategystrategy

Examination Examination functionfunction

EnforcedEnforcedadmin.admin.

measuresmeasuresAnalysis,Analysis,

evaluationevaluation

and and

priori-priori-

tisingtising

Off-site supervisionOff-site supervision On-site supervisionOn-site supervision Supervisory Supervisory measuresmeasures

Organization and staffOrganization and staff

Preliminary supervisionPreliminary supervision. . Licensing requirements for the PICLicensing requirements for the PIC

Regarding the capitalRegarding the capital

Regarding the shareholders with Regarding the shareholders with significant participationsignificant participation

Regarding the members of managerial and Regarding the members of managerial and controlling bodies and the actuariescontrolling bodies and the actuaries

Regarding the internal control systemRegarding the internal control system

Regarding the technical equipment, Regarding the technical equipment, staffing and information provisionstaffing and information provision

On-going supervisionOn-going supervision:: areas and areas and means for off-site supervisionmeans for off-site supervision (1) (1)

On-going monitoring over the asset On-going monitoring over the asset valuation of pension fundsvaluation of pension funds,, the calculation of the calculation of the unit value and the keeping of investment the unit value and the keeping of investment limits limits Information sourcesInformation sources:: Daily reports by the PICs and the custodian Daily reports by the PICs and the custodian banks submitted electronically to the FSCbanks submitted electronically to the FSC Means for supervisionMeans for supervision:: IT system for supervision IT system for supervision (Е-(Е-fscfsc)) through through builtbuilt--in filtersin filters Supervisory activitiesSupervisory activities//measuresmeasures::

Requests for correctionsRequests for corrections Imposition of enforces administrative measuresImposition of enforces administrative measures Imposition of property paymentsImposition of property payments

On-going supervisionOn-going supervision:: areas and areas and means for off-site supervisionmeans for off-site supervision (2) (2)

Analysis of the system of indicatorsAnalysis of the system of indicators ( (with with levels that have been determined in levels that have been determined in regulationsregulations) )

Information sourcesInformation sources::

monthly reports by the PICsmonthly reports by the PICs,, received in received in an an electronic formatelectronic format

Supervision over the contents of the PIC’sSupervision over the contents of the PIC’s

WEB-pagesWEB-pages

On-going supervisionOn-going supervision:: on-site on-site supervision in the PICs supervision in the PICs

Planning of examinationsPlanning of examinations

Types of examinationTypes of examination

Integration of the off-site and on-site Integration of the off-site and on-site supervisionsupervision

Challenges facing the regulation and Challenges facing the regulation and supervision of supplementary pension supervision of supplementary pension

insurance in Bulgariainsurance in Bulgaria (1) (1)

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

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

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

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

Challenges facing the regulation and Challenges facing the regulation and supervision of supplementary pension supervision of supplementary pension

insurance in Bulgariainsurance in Bulgaria (2) (2)

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

Change in the supervision approach and Change in the supervision approach and stylestyle:: from traditional from traditional ((staticstatic)) to dynamic to dynamic ((risk-basedrisk-based))