The second and third pillars of Bulgariarn retirement provision are expected to increase eight fold by 2010. While the assets under management will exceed BGN4bn (E2bn), the number of pension fund members will increase slowly, because of the declining population trend.
Currently, the total number of pension fund members’ individual accounts with pension funds is about 2.3m. It is expected to reach 3m by the end of the decade. The ratio of pension fund assets to GDP is 1.5% and is expected to reach 8.5% by 2010. The retirement savings of the population will increase due to the contributions and the relatively high rate of investment return - the average return for 2003 being about 11%.
Statistics show more and more experts are being tempted to concentrate on the growth of the pillars. This is understandable given the unprecedented transformation from PAYG to full funding.

Second pillar
The second pillar was given the necessary legal framework at the beginning of 2000. Participation is compulsory and provides supplementary retirement benefits. Second-pillar pension funds are not employer-based but are employee-related and operate as saving and investment vehicles. They offer fully funded defined contribution retirement schemes with individual capitalisation accounts. They are established and managed by special legal entities (private sector pension companies), which also manage third-pillar pension funds.
The minimum capital requirement for a pension company is BGN5m(E2.5m) allowing for establishment and management of second- and/or third-pillar pension funds. A second pillar pension fund and a pension company are separate legal entities. A pension company may establish and manage only two second-pillar pension funds – one universal and one occupational. There is personal choice of a second-pillar retirement provider. An individual pension fund member has to submit an affiliation application and complete a contract with the pension company chosen.
Two types of second-pillar retirement provision are legally regulated: ‘universal’ – for the working persons born after 31 December 1959, provided they are covered under Chapter One of the Social Security Code/first pillar; and occupational – for workers under first and second labour categories.
The universal second-pillar pension fund assets at the market are BGN93.7m as of 30 September 2003, which is 20.7% of all the second- and third-pillar pension fund assets under management. The universal pension fund members number 1,518,398 or 69.7% of the second- and third-pillar market.
The occupational second-pillar pension fund assets at the market are BGN131.45m as of 30 September 2003, or 28.9% of all the second and third pillar pension fund assets under management. There was a 60.2% increase of the occupational second-pillar assets under management in comparison to 30 September 2002. The occupational pension fund members come to 161,901 or just 7.4% of the combined second and third pillars.

Third pillar
A third pillar of retirement provision has been in existence since 1994. Participation is voluntary and provides supplementary retirement benefits. Third-pillar pension funds are not employer-based but employee related, and operate as saving and investment vehicles. They offer fully funded defined contribution (DC) retirement schemes with individual capitalisation accounts. They are established and managed by the pension companies mentioned earlier. A third-pillar pension fund and a pension company are separate legal entities. There is a personal choice of a third-pillar retirement provider. An individual pension fund member completes a contract with the chosen pension company.
The third-pillar pension fund assets at the market are BGN228,424m at the end of September 2003, which is just over 50% of all the second- and third-pillar pension fund assets under management. This represents an increase of 34% over the previous year. These voluntary pension fund (VPF) members come 497,161 and make up just over 22% of the marketplace.
The structure of the investment portfolios varies according to which of the three pillars is being considered. The three graphs highlight their differences.
Government bonds have the largest share of pension fund portfolios, with 84.5% being long-term government bonds of more than five-year maturity. Government bonds with a maturity of one to five years constitute 15.1% of pension funds portfolios, whereas those with up to 1 year maturity amount to just 0.4%.
There is a fairly liberal foreign investment regime with regard to second and third-pillar of retirement provision.
A maximum of 15% of second-pillar pension fund assets may be invested abroad in foreign securities. Third-pillar pension funds may invest in foreign securities up to a maximum limit of 20% of their assets.
However, actual pension fund foreign investments are far below the permitted limits, as table 1 shows.
The different limits imposed by national governments on pension fund asset investment abroad, are not the decisive reason for the low number of pension funds implementing international moves.
It could be said that pension companies are dubious about investing abroad because of the international financial market instability and the satisfactory investment return at home.
The average pension fund investment income, allocated by the pension companies to members’ individual accounts for the period 1 January 2003 – 31 December 2003, is 9.9% (VPF), 11.2% (UPF) and 11.0% (OPF). It seems pretty good compared to the average interest rate of 5.4% on BGN deposits with banks and the annual average inflation of 2.3% for 2003.
An individual capitalisation account with a pension fund based on a fully funded DC model follows the individual account holder, ie the pension fund member. Therefore one of the basic reasons for pension companies’ unwillingness to implement international activities is the limited cross-border affiliation. However, there are already a good number of Bulgarian emigrants who work abroad, as well as employees who work for foreign companies in Bulgaria, who receive their pay from abroad. Given the Bulgarian private pension fund performance, it is not surprising that such potential members are interested in keeping their third-pillar retirement savings in the country. The advantages for the Bulgarian financial market are not in doubt. Of course, some further legal incentives would be of much help.
Based on third-pillar members’ demands, pension companies feel that further legislative solutions are needed in two directions: keeping the individual account accumulation in a foreign currency, such as euros and management of individual investment portfolios.
Keeping the individual account accumulation in euros, not just in BGN, will meet the needs of those paying contributions from the Euro-zone as well as those who intend to spend their retirement years in the EU. In view of the Bulgarian accession to the EU in 2007, it is probably just about time the proper solution were found.
Besides members, pension funds are already Euro-oriented. A good indicator is the currency exposure of the pension fund investment portfolio, as table 2 shows.
Unlike the compulsory funds (second-pillar), where the investments in BGN exceed those in euros, voluntary pension funds (third-pillar) show a higher percentage of investments in euros.
DC retirement schemes, where retirement payments are based on the individual account accumulation from contributions paid and investment income earned, have put forward the question about the balance between members’ rights and responsibilities. Unlike PAYG, fully funded second- and third-pillar DC schemes are teaching people that they are predominantly responsible for their own retirement income.

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