site.btaMulti-Fund System to Increase Returns on Capital-Funded Pension Pillar, FSC Chair Golemanski Says

The introduction of the multi-fund model (in supplementary pension insurance) will significantly improve and increase returns on the funds accumulated in the capital-funded pillar of the pension system, said Vasil Golemanski, Chair of the Financial Supervision Commission (FSC), at a briefing at the Council of Ministers on Monday, following a meeting of the National Council for Tripartite Cooperation.

Earlier in the day, representatives of the outgoing government, business organizations and trade unions discussed proposed amendments to the Social Insurance Code that envisage the introduction of a multi-fund system in both mandatory supplementary and voluntary pension insurance. Golemanski clarified that the changes concern the second and third pillars of the pension insurance system for citizens born after 1959.

According to the FSC Chair, the reform will ensure a significantly better second pension for those insured under the second and third pillars. The expansion of investment opportunities for pension funds is also expected to lead to a substantial improvement in Bulgaria’s capital market, he added.

Each of the existing pension funds in the second and third pillars will consist of three sub-funds with different risk profiles and levels of risk tolerance, Golemanski explained. The highest risk tolerance will apply to the so-called dynamic fund, intended for contributors up to the age of 50. Between the ages of 50 and 62, contributors will be placed in a balanced fund with moderate risk tolerance. Three years prior to retirement, between the ages of 62 and 65, funds will be fully conservative, the expert said. The aim is to strike a balance between higher returns, which are usually associated with higher investment risk, and the conservative approach appropriate for insured individuals once they reach retirement age, he added.

Calculations show that the introduction of such a model will lead to a significant improvement in the replacement rate, which currently stands at 12.5%, Golemanski said. Expectations are that the replacement rate will reach 21.5% within 10 years, which is close to the European Union average, he explained.

The bill also provides for a substantial reduction in the fees charged by pension insurance companies for asset management, as well as in the deductions from insurance contributions. Over the next 10 years, these deductions are expected to decrease from 3.75% to 2.1%, Golemanski said. These figures represent maximum fee levels, and pension insurance companies may choose to charge lower fees, he added.

The FSC has the capacity to ensure sufficient oversight of the entire process if the bill is approved by the National Assembly, Golemanski told BTA. He rejected claims that the reform is being rushed, saying that discussions on the introduction of multi-funds have been ongoing for years.

Several scenarios were tested during the preparation of the bill, with calculations carried out by experts from the FSC and the Finance Ministry, Golemanski concluded.