1. Adequacy and Expected Replacement Ratio of Mandatory Pension Funds in Bulgaria Albena Ivanova Actuary Financial Supervision Commission Bulgaria Workshop on Private Pension Provision – Tallinn, September 6-7 th 2007

2. 2 Ist Pillar Mandatory social insurance PAYG 2nd Pillar Supplementary mandatory pension insurance DC pension scheme managed by Pension Insurance Company (PIC) 3rd Pillar Supplementary voluntary pension insurance DC pension scheme managed by PIC A Three-Pillar Model Universal Pension Funds (UPF) – mandatory participation for persons born after 31.12.1959 (as of 01.01.2002) Professional Pension Funds (PPF) – for persons working under heavy or harmful conditions category І and ІІ (as of 01.01.2000) Voluntary Pension Funds (VPF) (as of 1994) VPF under occupational schemes (as of 01.01.2007)

3. 3 Factors Affecting Replacement Ratio from 2nd Pillar Continuance and type of contributory period Continuance and type of contributory period –age of entry in the pension system –retirement age and early retirement age –interruption in the working career Contributions in individual accounts Contributions in individual accounts –contributory income and rate of increase –contribution rate Fees paid by contributors Fees paid by contributors Rate of return Rate of return Demographic factors for life long pensions or the period for the term payments Demographic factors for life long pensions or the period for the term payments Actuarial assumptions Actuarial assumptions

4. 4 Parameters and Assumptions for Replacement Ratio Forecast - UPF contributory income – average wage contributory income – average wage contribution rate – 5 % in 2007; contribution rate – 5 % in 2007; fees – 5% from each contribution, fees – 5% from each contribution, 1% investment fee; rate of return – 6% per year from 2007; rate of return – 6% per year from 2007; contributory period – full period of contributions: contributory period – full period of contributions: – male – 40 years; – female – 37 years; – uninterrupted work carrier

5. 5 Replacement Ratio for Pension System Entrants in 2010 (full contributory period) SexMaleFemale Age of entry in pension system 23232323 Retirement age/early retirement age 63586055 Gross replacement ratio (%) 15,411,011,08,2 Net replacement ratio (%) 19,313,813,810,3

6. 6 Dynamics of Replacement Ratio - UPF Retirement Age – male: 63 years (*60 years ), female: 60 years (different contributory periods) Replacement ratio (%) 2020202520302035204020452050 Gross replacement ratio- male *5,47,38,610,211,813,615,4 Gross replacement ratio- female 4,85,86,98,29,510,511,8 Net replacement ratio- male 6,89,110,712,714,817,019,3 Net replacement ratio- female 5,97,38,610,311,813,214,8

7. 7 Sensitivity Test of Replacement Ratio-UPF ParametersLimits Gross replacement ratio (%) malefemale Contributory income min -max 10,7 - 15,4 8,3 - 11,0 Social insurance contribution 5% - 10% 15,4 - 30,8 11,0 - 22,1 Fees 5%/1% - 3,5%/0,6% 15,4 - 16,8 11,0 - 12,0 Rate of return 3% - 10% 9,6 - 33,2 7,1 - 22,2 Interval 9,6 - 33,2 7,1 - 22,2 ParametersLimits Net replacement ratio (%) malefemale Contributory income min -max 11,9 - 22,0 9,2 - 15,8 Social insurance contribution 5% - 10% 19,3 - 38,6 13,8 - 27,6 Fees 5%/1% - 3,5%/0,6% 19,3 - 21,0 13,8 - 14,9 Rate of return 3% - 10% 12,0 - 41,6 8,9 - 27,8 Interval 11,9 - 41,6 8,9 - 27,8

8. 8 Parameters and Assumptions for Replacement Ratio Forecast - PPF contributory income – average wage for labor categories I and II - working under heavy or harmful conditions contributory income – average wage for labor categories I and II - working under heavy or harmful conditions contribution rate– 12 % for I category and 7 % for II category; contribution rate– 12 % for I category and 7 % for II category; fees – 5% from each contribution, fees – 5% from each contribution, 1% investment fee; rate of return – 6% per year from 2007; rate of return – 6% per year from 2007; contributory period – minimum contributory period: contributory period – minimum contributory period: – I category – 10 years; – II category– 15 years; – uninterrupted work carrier

9. 9 Dynamics of Net Replacement Ratio-PPF * Incomplete contributory period Labor categories Replacement ratio 20102020203020402050 I category GRR16,30%15,37%15,44%16,21%17,19% NRR20,38%19,21%19,30%20,26%21,49% II category GRR22,89%30,27%30,68%33,27%36,19% NRR * 28,61% 37,84%38,34%41,59%45,24%

10. 10 Thank you for your attention! Albena Ivanova Ivanova_a@fsc.bg http://www.fsc.bg