The Bulgarian Industrial Capital Association supports the submitted draft law on amendments and supplements to the Pension Insurance Act (PICA) and welcomes the efforts of the representatives of the executive branch and all stakeholders to improve the pension model in Bulgaria.
The submitted draft law is the result of many years of efforts, expert work and dialogue between the competent state institutions, the financial regulator (Financial Supervision Commission) and stakeholders (including members of the BADDPO).
We support the main changes in the pension model such as reducing fees, further improving the payout phase and the use of the already successfully functioning payout funds, increasing the requirements for insurance intermediaries, the capital base and reserves of pension companies, as well as expanding investment opportunities, which are aimed at increasing the protection of the interests of insured persons and the stability of supplementary pension insurance. The introduction of the multi-fund model is extremely important for us. Such a position was supported by all nationally representative organizations of employers and employees, as well as organized civil society in a special “Analysis of the current pension system and proposals for its improvement” prepared by the Economic and Social Council of the Republic of Bulgaria (https://esc.bg/document/analiz-na-dejstvasthata-pensionna-sistema-i-predlozheniia-za-nejnoto-usavarshenstvane/).
By introducing sub-funds with different investment and risk profiles, PICs will be able to develop new investment models and products tailored to the insurance period. The multi-fund model is the possible good combination of profitability and security, taking into account age differences and related risks.
In our opinion, in order to fully achieve the goals set out in the bill, it is of utmost importance that when calculating the individual coefficient IC, the reduction is not applied after 31.12.2026, and that the entire transfer from the state budget is taken into account in the pension formula, which is why we propose supplementing the bill as follows:
1. A new § 1 of the ZIDKSO Act is created
1.1. Art. 70, para. 10, item 2 and para. 11 are amended as follows:
a) "2. when calculating the individual coefficient under para. 8, the insurance income for each month during which the person was insured in a universal pension fund is reduced by the income determined on the basis of the ratio for the relevant month between the amount of the insurance contribution for the universal pension fund and the amount of the weighted average required contribution for the "Pensions" fund for the third category of labor, calculated and announced by the National Social Security Institute for each calendar year.
b) In para. 11, the following sentence is added at the end:
"The person's insurance income shall not be reduced after 31.12.2026."
Reasons:
The existing reduction does not take into account the full contribution to the provision of a pension from the first pillar, provided through transfers from the budget. Thus, in practice, only the nominal amounts of contributions under the law for the two pillars are compared, which completely distorts the result, and as a consequence creates a misleading prerequisite for insured persons for an uninformed choice.
One of the arguments for the existence of the reduction is related to the claim that the non-participation of persons in the first pillar with the full amount of the insurance contribution implies a proportional reduction in the pension from the DOO, as the pension from the UPF should cover at least this reduction. Such a claim presumes that the pension from the UPF is of a defined amount, which contradicts the model for UPF pensions with defined contributions set out in the law.
The deduction of part of the contribution for the first pillar and its redirection to the UPF at the start of the reform was not done with the aim of financing part of the cost-covering pension with capital mechanisms. The latter is untenable due to the possibility of the state, through subsidies, to supplement the pensions from the first pillar, regardless of the amount of insurance contributions made for the purpose.
The contribution allocated for the UPF in individual accounts is actually compensation for the insured persons who finance the first pillar through the tax system regardless of the insurance contributions made by them.
The choice of the specific date (31.12.2026) is related to the fact that insured persons born after 31.12.1959 will have reached the age of 67 (which is necessary for acquiring the right to a pension under Art. 68, para. 3 of the Social Insurance Code). Obviously, upon reaching this age, they may not have acquired the right to a pension if they do not have the required insurance experience, but during the entire period they will have been within the scope of the DOO and the SMPO, i.e. will not have periods of possible insurance before 31.12.1959.
According to the actuarial report of the National Social Security Institute, the required contribution is about 21 percentage points higher than the average. The amount of 37.5% of the required contribution, calculated by the actuaries of the National Social Security Institute, represents the sum of the amount determined by law plus the amount of the required state subsidy. The proposed mechanism will create fairness in the calculation of the reduction. The annual calculation and announcement of the weighted average required contribution to the Pension Fund for the third category of labor can be attributed as an obligation of the National Social Security Institute with the Budget Act of the Social Security Institution.
The justification of the existing reduction mechanism with the inherent solidarity of the first pillar is overexposed. Solidarity assumes that workers pay the pensions of pensioners, but it turns out that (through transfers from the budget) everyone, including the pensioners themselves, pays additional pensions for which they were insured. The effect of self-solidarity (with oneself) is obtained.
In case legislative changes regarding the reduction are not undertaken, the populist thesis that two pensions are less than one will continue to be instilled in society, despite the negative consequences of such a thesis, namely:
- Rivalry is created between pension financing mechanisms that should complement each other, not compete;
- A mechanical sum of cost-covering and capital parameters is advertised, without taking into account that capital parameters are a multiplier for economic development;
- Incentives for saving are undermined by encouraging speculative behavior among individual economic entities in the social sphere, which will be to the detriment of everyone.
We believe that the above proposal for a supplement will be taken into account and we declare a clear position for continuing constructive cooperation with all competent institutions to prepare and implement the necessary reforms to improve the three-pillar pension model in the Republic of Bulgaria.
Read the full text of the opinion here.
