Bulgaria’s pension fund asset review, finally published by the Financial Supervision Commission (FSC) after months of delay, has given the sector a relatively clean bill of health but has forced a downward readjustment of some funds’ asset values.

The review covered all 18 supplementary obligatory (universal and professional) pension funds and all nine supplementary voluntary funds, while excluding the voluntary occupational scheme.

The asset valuation required a total downward adjustment of BGN33m (€16.9m), equivalent to 0.3% of the total asset value across all schemes in the review as of end-June 2016.

Overall, the system was judged sustainable, with no issues identified regarding the location of assets, which were kept in custodian banks as required by law. Corporate governance was deemed appropriate, but the review identified some accounting and IT deficiencies.

One cause of the asset writedown was the use by some pension insurance companies of a less conservative risk premium in their discounted cash flow valuations of corporate bonds, resulting in overstated values.

Another centred on investment properties. While the independent external reviewers used the market approach, the pension companies’ own valuers used either income, or a combination of income and market, or did not use comparable properties for valuation.

In the case of investment in related parties, the reviewers concluded that there were none as defined by Bulgaria’s Social Insurance Code (SIC). However, they recommended that the SIC be expanded to include those parties defined in IAS (International Accounting Standard) 24. These include close family members of key management staff.

Some pension companies should implement procedures to identify close family members of the board of directors of the pension companies and their parent bodies, the reviewers added.

While no concerns came up concerning excessive credit, interest rate, liquidity, or foreign exchange risk exposure, the review noted that some companies have invested close to the investment limits laid down in the SIC, making them vulnerable to small changes in prices, and recommended bigger buffers

The review was initiated following recommendations by the European Commission’s “Country Report for Bulgaria” in February 2015. It was overseen by a steering committee that included representatives from the finance ministry, the central bank, FSC, European Commission, and the European Insurance and Occupational Pensions Authority (EIOPA).

The scope of the exercise, carried out by three independent external reviewers, was to verify the existence of the assets under management, value them, and assess whether the valuation methodologies and other principles used complied with the legal framework.

The review threw up some issues specific to Bulgaria, including the differences between the FSC’s Ordinance 9 rules for valuing pension assets and liabilities, and the international standard, IFRS 13, regarding fair-value measurement.

The definitions of “active” and “inactive” markets also proved problematic given the thin trading and small number of active investors on the Bulgarian Stock Exchange.

The FSC has told pension funds to adjust their net asset valuations as of, and since, 30 June 2016. The funds must confirm this by audit in accordance with IFRS principles, and reflect the changes in their financial statements.

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