What kind of pension can you expect one day is a question that becomes more and more relevant as you get older? In order to gain a more realistic idea, it is important to inform yourself about how the pension system in our country functions and what are the main factors that influence the formation of retirement income.

Contributions to the State Social Insurance (SSI) and to the Supplementary Mandatory Pension Insurance (SMPI) are based on the insured income, with maximum and minimum insurance thresholds introduced. The higher the income on which you are insured, the greater the accrued rights under the first pillar and the amounts in the individual account in the second pillar, and the higher the expected pension, respectively.

However, the funds in pillars I and II are managed differently.

The first pillar is managed on a cost-covering (solidarity) basis/principle. In the system of the State Social Security, the pensions of current pensioners are paid from the contributions of the current employees. In other words, the main weight is given to factors such as the number of employees and the amount of insurance contributions paid into the State Social Security, as well as the number of pensioners at the relevant time. The lack of individual accounts, limitation of the maximum amount of pension and granting pensions to persons with insufficient insurance contributions are also characteristic of the State Social Security. Due to demographic and other reasons, the amount collected from insurance contributions is insufficient to pay pensions, which is why the State Social Security budget is supplemented by the state and funds from collected taxes are used for this purpose. This mechanism, in the conditions of deteriorating demographics, suffers from shortcomings that should, according to the design of the Bulgarian pension model, be overcome through the pension pillars II and III, which operate on capital-based (capital-covering) principle.

In the case of a Supplementary Mandatory Pension Insurance (SMPI), implemented through participation in Universal Pension Funds (UPF) and Professional Pension Funds (PPF), the funds of each insured person are accumulated in an individual account and invested by the pension insurance companies managing the respective funds. These funds are influenced by the number of contributions and the length of the insurance period, as well as the income from investments and the amount of fees and deductions collected for the respective fund. In other words, the pension of each participant is determined proportionally to his/her insurance pension contribution and is a function of good management by the pension insurance company of the funds accumulated in the individual account. Capital pension schemes were introduced with the aim of reducing the public sector deficit in the long term.

As an insured person, it is important for you to be aware of how your money in the pension fund is managed, how it is protected and what you can expect upon retirement.

The regulatory acts that regulate the State Social Security and supplementary pension insurance in Bulgaria are the Social Insurance Code (SIC) and its subordinate regulations. They determine the structure, management and supervision of pension funds. The institution responsible for the regulation and supervision of the supplementary pension insurance market is the Financial Supervision Commission (FSC).

 

1. Universal pension funds

The funds in these funds are managed by pension insurance companies licensed by the FSC and are invested in various financial instruments in compliance with the requirements and restrictions set out in the SIC. The investment restrictions are set out in the legislation for the purpose of reliability, liquidity, profitability and diversification of investments.

 

How are the UPFs managed?

When you insure yourself for a pension in UPF, your insurance contributions are accumulated in an individual account. The individual account is kept in monetary units and in shares. The amount of funds accumulated in it is determined as the product of the number of shares and the value of one share for the relevant working day.

Pension insurance companies deduct a fee from each insurance contribution, as well as a fee for managing the funds in the fund, the maximum amounts of which are legally limited (i.e. companies cannot set other fees or amounts higher than those specified in the law).

When managing the money collected in the funds, pension insurance companies exercise the care of a good husbandry and apply the following basic principles:

Reliability - the principle of reliability requires the joint work of several principles in order to guarantee stability and security in the management of pension savings. Its key aspects are: diversification of investments; conservative approach in choosing the investment strategy; professional management; regulation and supervision; transparency and accountability; actuarial calculations.

Profitability - the funds of insured persons are invested in various financial instruments in the long term in order to realize profitability, with the results of the investment (profitability) being reflected in the individual accounts of the persons. The fund's profitability is calculated for a certain period, using the values ​​of one share of the given pension fund at the beginning and end of this period. It can be both positive and negative, which is reflected respectively in the value of one share of the pension fund.

Liquidity - the instruments in which the funds can be invested are such that they can be bought or sold quickly and easily without loss of value due to low demand. That is why assets are invested mainly in regulated financial markets.

Investment diversification – pension insurance companies invest the funds raised in different types of assets and issuers in order to avoid concentration of risk. In order to protect the interests of insured persons, the SIC has introduced requirements regarding the type of instruments in which funds can be invested and the maximum investment limits in the fund's overall portfolio.

Data on the specific distribution of assets, profitability and other relevant information about the UPF can be found on the FSC website, as well as in the information materials of your pension fund.

 

How are pensions paid from the UPF?

There are three possible ways to pay out UPF funds upon retirement, which are tied to the amount of funds accumulated on the pensioner's individual account. These are a lifetime pension, deferred payment and lump sum payment.

Lifetime pension

A lifetime old-age pension is paid upon reaching retirement age (meaning the age for receiving a pension from the State Social Security for contribution service and age), if the amount of funds in the account at the time of retirement allows for the granting of a lifetime pension in a monthly amount not less than 15% of the minimum pension for contribution service and age, which is determined each year in the Public Social Insurance Budget Act. In the event that the funds in the individual account are sufficient to grant a lifetime pension, the person is not entitled to receive them in full in installments or in a lump sum.

You can choose between three types of lifetime pension:

-          Lifetime pension without additional conditions

With this type of pension, the person receives monthly payments of equal amount for life. It is without the right to inheritance.

-          Lifetime pension with a guaranteed payment period

With this type of pension, the person receives monthly payments of equal amount for life, by choosing a guaranteed payment period between 2 and 10 years. Within the guaranteed payment period, the present value of the remainder of the payments due until the end of this period is inherited.

-          Lifetime pension with deferred payment of part of the funds

With this type of pension, the person receives a lifelong pension after the deferred payment period has expired. The duration of the deferred payment period is chosen by the person, subject to the condition that the monthly amount of the amount paid is not lower than 15% and higher than the amount of the minimum pension for insurance length of service and age. The right to inheritance is on the current value of the payments due until the end of the period of deferred payments.

Deferred payment

In the event that the amount of funds in the individual account at the time of retirement is not sufficient to grant a lifetime pension, but exceeds three times the minimum pension for insurance length of service and age, as of the date of determining the value of the funds in the account, the insured person has the right to deferred payment. The duration of the deferred payment period is chosen by the person, subject to the condition that the monthly amount of the paid amount is not lower than 15% and higher than the amount of the minimum pension for insurance length and age. The right to inheritance is on the remainder of the payments due.

Lump sum payment

In case the amount of funds in the individual account at the time of retirement is less than three times the minimum pension for insurance length of service and age, the person is entitled to a lump sum payment.

 

What information are insured persons entitled to receive in the UPF?

During the accumulation of funds in the UPF, you have a number of rights as an insured person, including the right to information about:

• the insurance contributions made, the realized profitability and the withheld fees through a statement on your individual account - free of charge, annually and upon request

• the value of one share of the pension fund

• the conditions for transferring your personal account to another pension fund or LLC

• the conditions for retirement and the types of pensions offered by the fund

Both during the accumulation and upon retirement, you are entitled to information regarding the fund's rules and inheritance options.

 

2. Occupational pension funds

In a Professional Pension Fund (PPF), the employer must provide insurance for people working in difficult or harmful working conditions - first or second category.

Insurance in the PPF gives the right to a fixed-term occupational pension for early retirement upon fulfillment of the age and insurance period conditions for the respective category of work. This type of pension is received until the moment of acquiring the right to a pension under Art. 68, para. 1 of the SIC. The amount of the pension from the PPF depends on a number of conditions such as the amount accumulated in the individual account, the mortality table and the average life expectancy published by the NSI and the technical interest rate approved by the FSC under Art. 169, paras. 9-12 of the Social Insurance Code.

The funds collected in the PPF are invested by the pension insurance companies in compliance with the same principles specified in relation to universal pension funds. The investment rules and investment restrictions in the Social Insurance Code are observed.

 

Useful links:

Law on the State Social Security Budget

Social Insurance Code

Financial Supervision Commission

Your Finances