A Conversation With Mr Biser Petkov, Deputy Chairman Of The Financial Supervision Commission, Head of The Social Security Department
Mr Petkov, how do you assess the passed year of 2006?
Last year was successful for the superannuation insurance. I am convinced that certain events will have a very positive impact on the further development of the business, a new stage is upon us
since two legislative amendments were made. First of all, the investment regime of the superannuation insurance was changed- the most important step towards liberalisation sine the launch in 1999/
2000. Second, the regulatory amendment was introduced, regarding the connected with the professional insurance schemes and the additional superannuation funding on professional schemes- a new
product the insurance business is to offer. Our expectations were fulfilled, but precise short- term prognosis are made easily; we expected the assets to come to more than a billion and it is like
this (net assets amounted BGN 1. 522 billion in the end of 2006); the number of insured individuals in on th erise as well (3. 2 million people, as some might be customers of two or three of the
funds). We announced the number of the newly insured for last year, for the first time- counting more than 248 thousand people. Most were enlisted in the universal funds; fewer were enlisted in the
professional funds, since their activity is more specified; the voluntary funds have 32 thousand new customers, showing that additional insurance is a competitive product.
You present the positive aspect, but the analysis shows that the expectations of the voluntary funds did not come true...
No, they did not. The Association had greater, more serious expectations for 2006. But the number of insured individuals increased, the assets of the companies augmented. We should not forget that
resources come in and out of the funds. Some 2000 people received pensions from the voluntary funds in the end of 2006, there is no ground for comparison between this great amount and the one
coming out of the universal funds making payments only to heirs. The payment smade by the voluntary funds come to BGN 51 million, BGN 18 million in pensions, BGN 31 million as single payments or
payments in installments. Th evoluntary funds accumulate money but make payments as well, in the long run, however, the balance is positive. BGN 103 million were deposited in the voluntary funds,
in 2006, BGN 8 million more as compared to 2005. The net assets are increased by BGN 80 million.
There was an important debate over the regime of voluntary insurance. The taxation relief „at the entrance“ was retained. The tax free pensions are an additional development impulse as well.
The superannuation companies were complaining that the range of investment instruments is poor and they would invest abroad. Is there such a „threat“?
It is true that greater freedom is greater choice, but I think that the investment opportunities range is various enough, at this stage. I would not recommend any changes for the current year. The
law allows activities no company has avail itself to. It is important to see what the long- term results of the liberalised investment regimes of the professional funds will be, because the annual
financial reports show great differences. This comes as a result to the greater investment freedom as well. On the other hand, though, such great differences affect the deposits of the citizens
clients of different funds who will receive very different pensions, then the politicians need to answer how such a thing can happen. That is why minimal profit and a top threshold were introduced,
once surpassed the excess is deposited in a special reserve.
What is the explanation for these great differences in profit amounts?
Analyses show that the different companies managed to make different profit. Stock investments were most profitable, while securities investments and investments abroad make one very insignificant
part of the total amount. The results achieved in 2006 cannot be representable, since this business is characterised with long- term results and it takes tens of years to actually have these. Most
figures are reassesments, 80% of the profit is reassesment. Meaning, stocks seeling at BGN 20 were bought for BGN 10, so teh profit comes to BGN 10; but tomorrow they may be sold for BGN That is
why no actual assesmet is possible to make, it is too early for that.
Let us speak about liberalisation again...
My opinion is that greater liberalisation is not needed at this very stage. I think that more topical issues need to resolved, for
example, the superannuation funds being able to enlist socks at initial public offer on the stock market etc. The law imposes no restriction on the allocation of different types of assets; as far
as the compulsory funds are concerned, they are allowed to invest up to 40% of their assets in stock exchange or similar instruments. It is true that the world's superannuation funds which finished
2006 with EUR 18 trillion have 60%of their assets in stocks. We should not forget that our social security system is conservative in nature and it should remain conservative to a certain extent.
There is another side of the issue, if the overall economy situation of the state allows the funds to invest in domestic projects, for mutual benefit. The expertise of the funds of the countries of
Latin America show that most invest in infrastructural projects, i.e. have an actual impact on the economy. The leading investment criteria should be safety and profitability, of course. In
the mean time, if additional projects can bring positive results, as greater GDP for instance, these chances should be taken as well. And, yes I agree our market does not give so many chances. But
the companies can always invest abroad. The restrictions for investment amount are not in power since the beginning of last year, so hypothetically, the funds can invest everything in the EU or
third countries. The market factors remain (e.g. higher profitability level) or the specified state policy that most resources should stay in Bulgaria.
Has the time of the multifunds come, the time of the different investment risks with lower or higher profitability?
We and the superannuation funds think that everything that can promote the multifunds have to be done this year, in terms of legislation and practice. The Association of the Additional Funding
Companies addressed the Commission with a statement and Insurance Control has a response. We stand on very similar grounds. We have to only decide on the organisation of these bodies. There are two
options- as a specified property or a superannuation fund. We can prepare legal texts which grant investment initiation to the insured individuals.
The additional funding companies can operate on professional schemes since the beginning of 2007. Allianz Bulgaria has already declared their will to establish a fund. Are there any
official applications?
Other companies have as well manifested their will to manage such funds, but no official applications have been submitted.
Do you think that there will be interest towards this fourth type of funds?
It is hard for me to tell, but I know there will be such funds. As a matter of fact we introduced the professional schemes not in view of some practical benefit, but to unify our legislation with
the one of the EU countries. We introduced it so it affects the pension system in the least. We will see if the insurers will be interested to work on professional terms. But if we examine the
mechanisms of deposit and assets we will notice that most resources come from payments made by employers.
Does the law allow transfers from additional fund to professional funds and vice versa?
The law was not meant to allow transfers of employment contracts from the additional funds into the new funds operating on professional schemes. The new funds need to work with new clients or
enterprise- insurers.
It was made clear that the foreign companies are interested in our insurance market. Is there any interest in our superannuation funding market as well?
The pension market is more specified. The social security market is not as developed as the other financial markets. What is more the systems of the different countries have different structure.
The only common market is the one of the professional pension schemes and the companies managing these. It is the dawn of the first attempts for transborder activity. That is why I think we cannot
expect any invasion on the Bulgarian superannuation funding market. The Bulgarian enterprise- insurers may allow their professional schemes to be managed by Philips, Siemens or Shell, since these
are multinational companies and will most probably be the first to establish paneuropean funds. But everything is in its initial state.
Is there any need of new superannuation funding companies?
As a rule- yes- our market is open and the companies can manage two types of the additional funds. What is more the
entrance requirements are not as harsh as they used to be. In the same line of thinking I can say that licensing regime changes should be taken into consideration.
In what way?
In a way of modernisation, the current texts were written in 1999 and the situation now is different. There must be more sustainable evidence where the capitals come from, how trustworthy the
institutions and the individuals establishing funds are.
Any other resolutions?
In brief, an overall up- dating of whole passages of the Social Security Codex has to be done, i.e. we should examine all problems that occurred during the last 4 years and take advantage of the
experience we gained. The amendments made during the last 2 years we in view of the unification with the EU. Now we should know if we need a fine adjustment or a change. Some regulations we never
fully completed. For example, the requirement for minimum profitability never had a complete guarantee mechanism. The only requirement was that the companies need to have reserve funds to
compensate deficiency, but what happens when these reserves depleted and who takes the responsibility. One new debate, after 8 years of operation, has to focus on the impact of the reformations
made in regard of the first pillar, but the target parametres and accounts have to be taken in consideration and the fulfillment of these in the second pillar as well.
What is your estimate of the pension model?
My personal opinion is that the pension plan is modern and adequate. It does not need any radical changing, but needs some clarifications on the terms of compulsory additional funding, so its
advance be actual and provide stable pensions for the people.
Mr Biser Petkov is a deputy chairman of the Financial Supervision Commission, head of the Social Security department since March 2003, when the Commission was established. He was the chairman of the State Agency for Social Security in the January 2002- March 2003 period. He has a number of publications about finance and trade. He is lecturer at the University for Domestic and World Economy, teaching Stock Market Operations and Financial Management.
