Every person wants to enjoy a decent life after retiring. Pension insurance plays a key role in ensuring personal financial stability during this period of life.

There are different models of pension insurance - based on cost-covering schemes, capital accumulation or combinations of both principles, with the accumulated funds being managed and spent in a fundamentally different way. What does each of the known pension models represent?

• Cost-covering (solidarity) principle

A characteristic feature of the State Social Insurance is solidarity in the distribution of funds - the contributions of all workers are deposited in a common (depersonalized) account in the state budget and the pensions of current pensioners are paid from them. This mechanism is highly dependent on demographic processes. If today 100 workers support less than 80 pensioners, then in less than 30 years it is expected that 100 workers will support about 100 pensioners. A characteristic feature is the limited maximum pension amount, which provides pensions to citizens with insufficient insurance contributions, with inevitable subsidies from the state budget due to the deteriorating demographic situation.

• Capital principle (through participation in capital pension schemes)

The contributions of each insured person are deposited in his individual account in a pension fund. The funds are managed by a pension insurance company of which the person is a client. The money accumulated in the individual account is a personal property and can even be inherited. They are invested long-term in a wide range of financial instruments in order to generate returns and increase the funds. Therefore, in the future the insured individual will receive a pension funded by their own contributions, with the amount depending on the level of their personal insurance contributions. The company and the fund are separate legal entities, which guarantees additional security for the funds of the insured persons.

 

1. The three pillars of the pension system in Bulgaria

In Bulgaria, in 2000, a three-pillar model of pension insurance was introduced, which combines the advantages of the cost-covering (solidarity) and capital principles of insurance, i.e. the social function of the state and the individual contribution of the insured persons. The combination of different forms of insurance and management principles aims to ensure the stability and adequacy of pension income in the context of economic and demographic challenges such as population ageing and labour force dynamics.

The three pillars of our pension system are: State Social Insurance (SSI), Supplementary Mandatory Pension Insurance (SMPI) and Supplementary Voluntary Pension Insurance (SVPI). The aim is for these separate elements to build on and complement each other in order to ensure adequate and sustainable replacement income after retirement.

 

• FIRST PILLAR: State Social Security

The State social security operates on a cost-covering basis, and insurance is mandatory for all economically active persons. State Social Security is administered by the National Social Security Institute (NSSI), which is responsible for granting and paying pensions and other social security benefits in the event of temporary incapacity for work, maternity and unemployment. The NSSI grants and pays pensions related to work activity (personal and inherited pensions for insurance length of service and age, for disability due to general illness, for disability due to occupational accident and occupational disease, as well as personal pensions for civil disability and military disability, when calculated from wages, as well as supplements paid for a deceased spouse) and some pensions not related to work activity.

Persons engaged in work activity accumulate pension rights by paying insurance contributions, and upon reaching retirement age and length of service they are entitled to a pension. In other words, the pension is determined based on a formula whose components are:

- Contributory service for the respective labor category - first, second or third

- Severity of the contributory service, which is legally defined in the Social Security Code

- Individual coefficient, the value of which is determined as the ratio between the average insurance income of individuals for their entire contributory service after 31.12.1999 and the average insurance income for the country for the same period. For all individuals born after 31.12.1959, the coefficient is reduced due to the transfer of part of the pension contribution to the pillar II - Universal Pension Funds

- Average monthly insurable income for the twelve calendar months preceding the month of granting the pension.

The current values ​​of the listed parameters are available on the websites of the National Revenue Agency (NRA) and the NSSI.

On the NSSI website, you can calculate an estimated pension from the Social Security Insurance Scheme. Get to know in detail the restrictions laid down in the pension calculator of the NSSI!

The second and third pillars of the pension system are based on the capital principle. The pension insurance in them is individual and is carried out through contributions to the relevant supplementary pension insurance funds. Pension insurance contributions and the profitability of their investment are accumulated in the individual account of each insured person. The funds are established and managed by licensed pension insurance companies. Each company may establish only one universal, professional and voluntary fund, as well as a voluntary fund under professional schemes. The activity of supplementary pension insurance is regulated in the Social Insurance Code and is supervised by the Financial Supervision Commission.

 

• SECOND PILLAR: Supplementary Mandatory Pension Insurance (SMPI)

The Supplementary Mandatory Pension Insurance (SMPI) is implemented by pension insurance companies through the Universal Pension Funds (UPF) and Professional Pension Funds (PPF) managed by them. These are defined contribution plans. Contributions are defined as a percentage of the income insured.

UPF is mandatory for persons born after 31.12.1959, if they are insured for a pension in the pension fund of the State Social Security. Among persons born after 31.12.1959, there are those who, by law, are excluded from UPF insurance. All persons working under the conditions of the first or second category of labor are subject to Additional Mandatory Pension Insurance in PPF, regardless of their age. Persons who have chosen to be insured only in State Social Security under the procedure of Art. 4c of the Social Insurance Code are not subject to PPF insurance.

- How and when to start insuring in UPF or PPF?

When starting work, i.e. when the obligation to insure arises, you must submit an application to the pension insurance company of your choice within three months for participation in the UPF or PPF managed by it. For this purpose, on the website of the Financial Supervision Commission, find out which are the licensed pension insurance companies and the funds managed by them. If you do not make a choice within the specified three-month period, you will be automatically assigned to one of the pension funds managed by the pension insurance companies. In case you do not know where you are insured, you can check with the NRA.

- Can you change your UPF or PPF with another?

You have the right to transfer the accumulated funds in your individual account from one UPF or PPF to another UPF or PPF managed by another pension insurance company after one year from the date of conclusion of your first pension insurance contract, respectively from the date of your official assignment. In order to change it again, one year must have passed since the conclusion of the next insurance contract.

- Changing the social insurance from UPF or PPF to the Pension Fund of the State social security and vice versa

According to the current legislation, UPF insured persons can transfer their insurance from UPF to the State Social Security or restore their social insurance from the Pension Fund of the State Social Security to UPF. This is done within certain terms and conditions, which you can read about here.

Still, it is good to know that:

- accumulation in UPF makes sense if it is carried out from the beginning of your working career and continues throughout the full insurance cycle (your entire working period), which is about 40 years;

- in UPF, personal participation is essential for a long period of time, in which the funds of the insured persons are invested and generate profitability, and not from time to time;

- the funds are actively managed through investment in a wide range of financial instruments and within limits set by law in order to reduce risk.

Persons insured in the PPF have the right to change their social insurance from this fund to the Pension Fund of the State Social Security once.

 

• THIRD PILLAR: Supplementary Voluntary Pension Insurance (SVPI)

The Supplementary Voluntary Pension Insurance (SVPSI) provides the opportunity to accumulate additional pension funds through voluntary insurance in private Supplementary Voluntary Pension Insurance Funds (SVPI) and Supplementary Voluntary Pension Insurance Funds Under Occupational Schemes (SVPIUOS).

Every person over the age of 16 can insure themselves or be insured in a voluntary pension fund – through personal contributions, through contributions from their employer (the so-called social insurance contributor) or through contributions from a third party (the so-called other insurer). If in the case of insurance in mandatory pension funds the amount of the contribution is tied to income, then in the case of SVPI there are no restrictions on the amount. In case you make personal contributions, there are no requirements for their periodicity (monthly, for another period or one-time contributions) and you can withdraw them from your account partially or completely even before acquiring the right to a pension.

 

2. Mandatory pension insurance and social security contributions

Employed persons must be insured under the State Social Security Fund (pillar I), and those born after 1959 must also be insured under the UPF (pillar II). Thus, one day their pension will be formed from both types of funds, the aim being to complement and build on each other. If a person has chosen to transfer their funds from the UPF only to the State Social Security, they will receive a pension only from the pillar I (State Social Security). Those working under the conditions of the first and second categories of labor are insured under the PPF.

The amount of the social security contribution to the State Social Security is legally defined as a percentage of the insured income of the insured persons. There are thresholds for minimum and maximum social security income, which change over the years. You can find out about their current values ​​here.

Provided that you have an employer, the contributions to both the State Social Security and the UPF are usually distributed between the insurer (employer) and you as an insured person in legally determined proportions. Contributions to PPF are entirely at the expense of the employer. In case you are a self-insured person, you fully assume the payment of social insurance contributions at your own expense.

 

3. Inheritance pension under mandatory insurance

Children, the surviving spouse and the parents of a deceased insured person or a deceased pensioner are entitled to an inheritance pension from the relevant State Social Security funds, and the specific conditions are specified on the NSSI website. In the case of voluntary pension insurance in a Supplementary Pension Fund, inheritance may also be at the personal choice of the insured person.

With regard to the pension from UPF, the conditions for inheritance differ in the insurance stage and in the pension payment stage, and after retirement depend on the type of pension received:

- Before retirement, the funds in the insured person's account are inherited.

- In the case of a lifelong pension contract without additional conditions, the pension is not inherited.

- In the case of other possible pensions from the UPF (lifetime pension with a guaranteed payment period and lifetime pension with deferred payment of part of the funds), there is inheritance of the funds under certain conditions.

- For the possibility and conditions for receiving the different types of pensions from the UPF and which one would be inherited - in full or in part, you should contact your UPF. In the case of the PPF, the funds in the individual account are inherited and are paid in full or in instalments.

 

Useful links

National Social Security Institute

National Revenue Agency

Social Insurance Code

Financial Supervision Commission

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