site.btaRegulator Proposes Higher Pension Fund Reserves, Stronger Safeguards for Insured Persons

Bulgaria's Financial Supervision Commission (FSC) has approved at first reading draft ordinances on higher reserve requirements for pension insurance companies and stricter rules for protecting insured persons' funds, the regulator said on Tuesday.

The changes follow up on amendments to the Social Insurance Code and concern the introduction of multi-funds in supplementary pension insurance.

Higher reserves to guarantee contributions

The most significant change concerns higher capital coverage requirements due to the continued growth of assets managed by pension funds. Currently, the gross contributions to the largest universal pension funds (UPFs) are guaranteed by reserves amounting to only 0.5% of net assets. The increasing number of people exercising their right to retirement requires larger reserves to guarantee the gross amount of contributions. The new provisions envisage doubling, and in some cases tripling, this buffer to between 1% and 1.5% of the respective fund's net assets.

The FSC is also proposing stricter reserve requirements for guaranteeing pension payments. Until now, guarantees mainly covered lifelong pensions. Following the amendments to the Social Insurance Code, their scope will be broadened to include fixed-term pension payments as well. The reserve requirement will increase substantially, from the current 1% to between 4% and up to 6% of the capitalized value of pensions and deferred payments.

Stricter control of financial buffers

Companies will have to allocate significantly more funds during the accumulation phase to ensure timely coverage of their liabilities so as to guarantee gross contributions and maintain reserves during the payout phase, the FSC said.

The regulator will monitor compliance with a mechanism for continuous adjustment of financial buffers. Pension companies will be required to recalculate reserves on a monthly basis. If reserves fall below the minimum level, the company will have to replenish them immediately with its own funds. If reserves exceed the maximum permitted threshold, part of the funds may be released. According to the FSC, this will ensure both stability and more flexible capital management.

In the explanatory notes to the draft, the regulator stressed that the changes are aimed at limiting the risk of deficits building up in the system. The argument is that under unstable market conditions and increased volatility, pension companies must maintain sufficient buffers to meet their obligations to insured persons and pensioners.

New organization of pension payments

The FSC is also proposing a major reform of the rules governing pension payments from the Second and Third Pillars through a completely new Ordinance No. 70.

To ensure a better spread of biometric risk among a larger group of individuals, the amendments to the Social Insurance Code envisage that lifelong pensions from universal and voluntary pension funds will be paid from a common lifelong pension payment fund. Similarly, deferred payments from universal and voluntary pension funds and fixed-term pensions from occupational pension funds will be paid from a common fixed-term payment fund.

Existing lifelong pension payment funds linked to universal pension funds will also be used to pay pensions from voluntary pension funds. Deferred payment funds established for universal pension funds will be transformed into fixed-term payment funds from which all such payments, including fixed-term occupational pensions, will be effected.

The FSC argues that the common infrastructure created through these shared payment funds will allow pension savings from universal and voluntary pension funds to be combined for the purposes of granting a joint pension and making unified transfers for payments with the same maturity date. This, the regulator said, will improve risk management and provide a clearer organization of funds.

Technical interest rate to be abolished

The draft also changes the method for calculating pensions from universal, occupational and voluntary pension funds by abolishing the technical interest rate. Under the current framework, in force until December 31, 2026, this rate reflects expected future investment returns from the lifelong pension payment fund and is subject to change depending on market conditions.

This results in different groups of pensioners within lifelong pension payment funds whose pensions were granted at different technical interest rates, leading to varying annual adjustment despite their funds being invested jointly.

From January 1, 2027, pension companies will guarantee the initially determined pension amount rather than only the amount accumulated in the individual account. According to the FSC, this will lead to upward adjustments of payments and stronger protection for insured persons.

Higher guarantees for insured persons

Under the effective Social Insurance Code, supplementary lifelong old-age pensions from universal pension funds are guaranteed by the gross contributions made by the individual. This means that if the funds accumulated in the individual account exceed the gross contributions, the initially agreed pension amount may still be guaranteed through the application of a risk coefficient reducing the payment amount.

From January 1, 2027, pension insurance companies will guarantee pensions based on the full amount transferred from the individual account into the lifelong pension payment fund. This follows the abolition of the technical interest rate and the rule that only part of the investment return generated by the lifelong pension payment fund will be used to increase pension payments, while the remaining part will be set aside in an analytical account to cover potential shortfalls if necessary. According to the FSC, this will significantly improve guarantees provided to insured persons.

The draft ordinances will be published for 30-day public consultation, while the new rules are due to enter into force on January 1, 2027.