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New Bulgarian Multi Pillar Pension System:
Legislative Development
Bulgaria, Sofia, February 16th and 17th, 2005
© 2002 BearingPoint, Inc. 2
New Pension Legislation: Goal
Build a financially sound and sustainable system that will provide better pension protection by diversifying the sources of retirement income.
© 2002 BearingPoint, Inc. 3
Main Principles reflected in the Legislation
SECURITY, PLURALISM AND DIVERSITY:
Public and Private pension providers
Mandatory and Voluntary components
Universal and occupational pension funds
Pay-as-you-go and fully-funded (solidarity + personal responsibility)
Defined Contribution and Defined Benefit
© 2002 BearingPoint, Inc. 4
Phases of legal development
DESIGN : Reflect broad working group views Actuarial Model results Government Pension Reform Strategy
DEVELOPMENT:
Supplementary Voluntary Pension Insurance Act Mandatory Social Insurance Code (2000) Bylaws
IMPLEMENTATION:
Active working groups : industry and regulators and Nssi Permanent dialogue regarding key issues
CONSOLIDATION:
Harmonization and optimisation Social Insurance Code ( 2003)
© 2002 BearingPoint, Inc. 5
Legislative Process Approach
Active involvement of all stakeholders in working groups
Evaluation of other pension reforms: lessons learned/ tailored solutions
EU requirements fulfilled
Best international practices and standards taken into account
© 2002 BearingPoint, Inc. 6
Main outcomes of the basic pension laws
Diversification of risk of old age security
Private pension system organized to minimize conflicts, maximize security and facilitate supervision
Increase choice by allowing switching pension funds
Proactive supervision, regular reporting, frequent inspections and early intervention
Development of new financial instruments
© 2002 BearingPoint, Inc. 7
Nature of pension contracts
Long term
Like all financial contracts, strong reliance on trust
Require effective supervision
People should make informed decisions
© 2002 BearingPoint, Inc. 8
Objectives of private pension supervision
Increase long term security
Promote good governance
Provide freedom of choice
Education
Promotion of pension savings culture
© 2002 BearingPoint, Inc. 9
Prudential and protective rules
“Fit & proper” test
Asset segregation, diversification and valuation
Checks and balances (Fund governance, custodians, auditors, actuaries)
Extensive disclosure and high transparency
© 2002 BearingPoint, Inc. 10
Proactive supervision
Clear rules on financial soundness and good conduct
Regular reporting in electronic form
Strong capability for financial analysis and frequent inspection
Clear powers of intervention to avoid losses and protect members
© 2002 BearingPoint, Inc. 11
Challenges
Public education
“Rights are meaningless unless adequately disclosed and understood”
Disclosure
sufficient information – content, timing, manner of delivery (limited information restricts alternatives)
information should be easily understandable to target audience
standardized and comparable information
© 2002 BearingPoint, Inc. 12
Challenges
Flexible investment rules
Reduce the pension fund herd behavior on investments.
Allow investment portfolios to vary according to life cycle.
Allow involvement of the consumers.
give consumers a role to play regarding retirement
increase incentives to search for information
increase the expected value of pension benefits
© 2002 BearingPoint, Inc. 13
Lessons
A competitive market may not necessarily wait for well defined rules. Product developments have outpaced legislation. Proactive legislative process is required.
Legal rules should frame the extent of and manner in which disclosure and education are provided. These safeguards are important to ensure accuracy and objectivity.
Legislation should not hamper market efficiency and development.
Stakeholders active participation in legislative process is beneficial.
© 2002 BearingPoint, Inc. 14