1. 1 INTRODUCTION OF MULTIFUNDS IN THE BULGARIAN PENSION SYSTEM. READINESS FOR THE START! БАДДПО Nikola Abadjiev Chairman of BASPSC International Conference “Multifunds - Implementation and Prospects in the Pension Systems of the Central and Eastern European Countries”, 18 September 2009, Sofia, Bulgaria

2. 2 CONTENTS Introduction. The Bulgarian Pension Model Motives and objectives of the implementation of multifunds/investment portfolios Stages of preparation Introduction strategy Philosophy and basic principles Design and legislative framework Expectations and challenges

3. 3 Bulgarian Pension Model PILLAR I Mandatory social security Pay-as-you-go system NSSI PILLAR II Supplementary mandatory pension provision Fully-funded system with individual accounts PILLAR III Supplementary voluntary pension provision Fully-funded pension system with individual accounts Occupational pension funds – early retirement Launch 2001 Universal pension funds/ Persons born 31.12.1959 2002 Voluntary pension funds Launch 1994 Voluntary pension funds with occupational schemes Launch 2007

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6. 6 Motives and Objectives of Implementation (1) Further development of the fully-funded schemes Good results from their implementation in other countries Involvement of fund members in the management of their funds and in their future retirement Providing alternatives to fund members concerning risk and return in relation to their age Opportunities for the fund member to define more clearly the level of risk in pension fund participation

7. 7 Motives and Objectives of Implementation (2) Free choice not only of pension company but also of investment portfiolio. Switching opportunities Strengthen the competition among pension funds Establish conditions for more effective investment activity to the benefit of the fund members Influence on the stabilization and development of the Bulgarian capital market Lower management and investment fees

8. 8 Stages of Preparation Studying the international experience - legislation and results from the implementation of multi-funds /2004/; Development and adoption of a paper on the economic, actuarial, accounting and legal conditions and possibilities for implementation of multi-funds in the Bulgarian pension system /2005/; Development and adoption of a concept paper for the introduction of multi-funds in the supplementary pension funds /2006/; Development of specific legal norms and submission of a first draft law on multi-funds to the MLSP /2007/ Establishment of a joint working group between the FSC and BASPSC for the development of a draft law for amendment and supplement to the Social Insurance Code /2007/; Proposing to the Bulgarian Council of Ministers a draft law for amendment and supplement to the Social Insurance Code /2008/ Adoption of the draft law by the Council of Ministers and submission for discussion and adoption by the Bulgarian Parliament /April 2009/

9. 9 Introduction Strategy Gradual and smooth introduction of multi-funds/ investment portfolios: Stage one: introduction only in Pillar III of the pension system - voluntary pension funds - Start with three types of investment portfolios - Decrease of the number of investment portfolios after a practical examination of the legal norms and proved efficiency to the benefit of the fund members Stage two: introduction in Pillar II - supplementary mandatory pension funds. Strategic objective: increase the amount of retirement income.

10. 10 Design and legislative framework (1) Philosophy and basic principles The investment portfolio is not an independent legal entity - it is a separate part of the assets and liabilities of the fund which is a separate legal entity The company keeps separate accounting and reporting for each separate protfolio, and calculates and announces unit values for each one of them The custodian bank opens and maintains a separate current account for each investment established in the supplementary voluntary pension fund Each pension company may register and manage in each supplementary pension fund one investment portfolio of each type where the registration and management of a balanced fund is mandatory Each fund member may choose from one to three investment portfolios in one fund and to conclude the respective contract, whereby the funds in the member’s individual account will be managed in accordance with the respective investment policy.

11. 11 Design and Legislative Framework (2) Types of investment portfolios The type of investment portfolios is determined depending on: - the relative share of the variable income financial instruments in the total assets of the respective fund - the risk profile defined according to the investment policy, objectives and limitations on the investment activity of the respective fund, in force at the time of establishing of the portfolio. The manner and criteria for determining the risk profile and the type of portfolio are indicated in the law. The investment portfolio may be aggressive, balanced or conservative. The relative share of the investment in variable income financial instruments compared to the total assets in the respective investment portfolio should be as follows: - aggressive portfolio - not less than 50 per sent and not more than 80 per cent for the aggressive portfolio; - balanced portfolio - not less than 15 per cent and not more than 50 per cent; - conservative portfolio - not more than 15 per cent. Variable income financial instruments are indicated in the law.

12. 12 Structure of Investment Portfolios AggressiveBalancedConservative variable return fixed return Min 50%

13. 13 Design and Legislative Framework (3) Permit for portfolio registration and management The permit for registration and management of an investment portfolio is issued by the Financial Supervision Commission based on an application filed by the company and accompanied by: - decision of the General Meeting of the company shareholders; - investment policy of the investment portfolio and its key characteristics; - rules for risk management of the investment portfolio; - agreement between the company and the custodian bank regulating the conditions for maintenance and safekeeping of assets in the investment portfolio; - data concerning the information that the company collects from the persons, as well as the manner in which they are advised to allow them to make the most suitable choice of an investment portfolio; - other documents and data determined by the regulation by the Commission.

14. 14 Design and Legislative Framework (4) Selection of an investment portfolio Each fund member may choose one or more (up to three) investment portfolios in correspondence with whose investment policy they would like to have their funds managed. In order to allow the fund member to make the most suitable initial or consecutive choice, the company is obliged to: - inform them of the main (key) characteristics of the investment policy of each investment portfolio; - based on the information provided by the person, evaluate the degree of allowable investment risk, and present this evaluation to the person and advise them; In the event that the person fails to make a choice, the company manages the person’s funds in accordance with the investment policy of the fund’s balanced investment portfolio.

15. 15 Design and Legislative Framework (5) Switching right The fund member has the right to transfer the funds accrued in their individual account or a part thereof to another investment portfolio in the same fund or in another supplementary voluntary pension fund. The right to switch to another fund may be used not more than once in a calendar year. Switching funds from one investment portfolio to another portfolio in the same fund up to twice per year is free of charge; in case of more transfers, the company may charge a fee of up to BGN 10 (EUR 5).

16. 16 Design and Legislative Framework (6) Individual account Contributions and funds transferred from another fund or from another investment portfolio of the same fund are accrued in the individual account of each person from the date of their crediting to the current account of the respective portfolio; Each fund member may only have one individual account in each portfolio selected by them. Records of the contributions, transferred amount and deductions are made. The individual accaunt is kept in levs and in units. Each unit represents a proportionate part of the net asset value of the fund as segregated in the respective portfolio. The units in one portfolio are equal in value, determined and announced in accordance with a regulation by the Commission.

17. 17 Design and Legislative Framework (7) Individual account Each unit is a proportionate part of the net asset value of the fund as segregated in the portfolio. The units in one portfolio are equal to each other and their value is determined and announced in accordance with a regulation by the Commission. The unit of all units and parts of units in the investment portfolio is equal to the net asset value of the fund as segregated in the portfolio The return on investment of the assets segregated in a portfolio of the fund is included when determining the value of one unit of this portfolio

18. 18 Design and Legislative Framework (8) Investments and investment policy The company invests the assets of the funds under its management in observance of the principles of reliability, liquidity, profitability and diversification to the benefit of the fund members. It is obliged to: - implement the investment policy of each portfolio established under the funds in order to achieve its investment objectives, as well as to observe the investment limits in the policy, in the law (SIC) and in the regulations on its implementation; - to comply with the risk management rules determined in the law; - to manage the risk related to each portfolio by constantly monitoring and assessing the risk of each investment and its influence on the risk profile of the entire portfolio; The company adopts the investment policy of each portfolio, which is reviewed every three years, and immediately after any substantial change in the market conditions and/or the investment objectives of the members of the respective portfolio; The company may invest the assets in an investment portfolio only in financial instruments and investment estate determined by the law.

19. 19 Design and Legislative Framework (9) Accounting and reporting For the purposes of the supervision the Company prepares separate reports on the voluntary pension funds under its management, the investment portfolios therein and the technical reserves; Monthly reports. The company prepares such reports for each fund, each investment portfolio and the technical reserves and presents them to the Financial Supervision Commission within 20 days following the end of each month; Annual reports. Separate annual financial statements, annual reports for supervision purposes and annual reports on the management of each fund, the portfolios therein and the technical reserves, which are presented to the Commission within three months following the end of the financial year; The Company is obliged to publish those reports and statements simultaneously on its web-site by 31 March of the year following the report year.

20. 20 Expectations and Challenges Bulgaria has a draft law on introduction of multifunds based on the international experience which also takes into account the existing pension system in the country. Readiness to adopt the law by the end of 2009 The adopted strategy for smooth and gradual introduction of multifunds creates opportunities for approbation of the adopted legal norms in real practice which will justify possible decisions for amendments to the legislation and practice and for moving toward an expanded multifund system

21. 21 Expectations and Challenges The introduction of multifunds should be accompanies by the preparation and implementation of a national educational program for social security and financial awareness of the population – start 2010 The introduction of multifunds should take place in close cooperation between the pension companies, BASPSC, respectively, and the supervisory body (FSC) in order to achieve effective management and control of the functioning of the investment portfolios to the benefit of the fund members. Possible start for introduction of multifunds in Bulgaria, 2010

22. 22 THANK YOU FOR YOUR ATTENTION Bulgarian Association of Supplementary Pension Security Companies /BASPSC/ e-mail: baspsc@cablebg.net; www.assoc.pension.bgbaspsc@cablebg.net; БАДДПО