Pensioners with a “second” pension choose to receive BGN 300 per month for a certain period
Pensioners with a “second” pension choose to receive BGN 300 per month for a certain period. The motives to choose a pension, different from the standard are mainly two
17:02 28th of December 2021 Author: Alexandra Angelova 4212573
The past 2021 turned out to be an important year for the pension and insurance system of the country – the first women entitled to the so-called second pension, a number of changes to the Social Security Code (SSC) came into force. We are talking to the President of the Bulgarian Association of Supplementary Pension Security Companies (BASPSC) Evelina Miltenova about the most important events in the pension sector and the expectations of the industry for the coming year.
– What is your assessment – how did it affect the pension and insurance sector of Bulgaria during the past crisis year?
– 2021 was again a dynamic year under the sign of the pandemic situation, but at the same time more moderately critical and constructive for the pension insurance sector compared to the previous 2020, when the Covid crisis erupted with major market turbulence. The companies continued to successfully and responsibly manage the pension savings of the insured persons from the second and third pillars of the three-pillar pension system in Bulgaria. They achieved good average rates of return of over 5% in a difficult and unstable market environment in volatile markets, with imposed monetary policies at ultra low and negative interest rates by central banks. The funds managed to successfully position their portfolio investments in an environment of higher economic activity after major declines in 2020, improving market conditions and rising prices of financial instruments and commodities on international capital markets. The current year is marked by the important achievement for the entire pension system, namely the adoption of the long-discussed and developed legislation regulating the phase of payment of second pensions, as well as the smooth start of the next stage in the development of the pension model in Bulgaria. By April 2021, the previous parliament managed to adopt the necessary changes and amendments to the legislation through the approval of the SSC, which successfully settled the stage of payment of pensions by SMPS. The additions to SCS were the result of the intensive, three-year efforts of the interdepartmental working group, including MLSP, MoF, FSC, BASPSC, as well as the main employers ‘and trade unions’ organizations.
On September 1, 2021, all pension insurance companies (PICs) were fully prepared and began accepting applications to proactively inform their insured persons about the products when paying the second pensions from the accumulated accounts for UPF clients born after the total retirement age. January 1, 1960. The high dynamics and increased interest in the activity of supplementary pension insurance in Bulgaria, as well as the good prospects for development of the pension market were confirmed by the entry into this market in 2021 of the Belgian KBC Group, through the acquisition of all shares of one of the first proven international participants in the Bulgarian pension market, NN Pension Insurance and all assets and liabilities of NN Life Insurance.
Along with this major acquisition and merger deal, the FSC approved the establishment and licensing of a new pension insurance company, DallBogg Pension Company: Life and Health EAD, and its three pension funds – UPF, PPF and VPF ten participants.
– In 2021, pension funds began paying the so-called. “Second” pensions. What preferences do your customers express – how do they want to receive what they have accumulated in their accounts? What are the average accumulated amounts?
– With the start of the phase of payment of pensions from universal funds on September 1, 2021, a new stage in the development of the national pension system has begun. The nine pension companies were ready to sign new contracts and start paying pensions in September, after the changes were introduced in a very short time. The pension insurance companies complied with the leading regulations updated by the FSC as a result of the changes in CSR, investing in information systems and modernized technologies to service the new payout funds and creating appropriate pension payment processes for retirees. Depending on individual needs, insured persons can now choose between three types of lifelong pensions:
- lifetime pension without additional conditions,
- lifetime pension with a guaranteed payment period,
- lifetime pension with deferred payment of part of the funds until reaching the age chosen by the pensioner.
The second main product is a pension is a pension with pre-agreed deferred payment, while the third product for one-time payment is for persons with small accounts below BGN 900, which allows the full amount to be paid to the person once. Currently, a large part of the clients of the funds, who do not postpone their retirement, sign contracts based on the selected product and from the next months will start receiving pension payments on their bank accounts in Bulgarian levs. As we expected, they are targeting the second product with deferred payments, which is different from the lifetime pension. As we expected, they are targeting the second product with deferred payments, which is different from the lifetime pension. The preferred monthly amount is also not a surprise and amounts to BGN 300, which is the maximum allowed by law and corresponds to the minimum pension.
For the first 3 months of the start of the phase it is typical that in case of interest in lifelong pensions, the persons are oriented mainly to a lifelong pension with a period of deferred payment until reaching a certain age.
In this case, too, there is a trend towards the desired amount, which is the maximum by law for this period, namely, not less than BGN 300 per month, after which the pensioner will receive from the funds not less than the minimum monthly pension from the second pillar, which by law is 15% of the minimum pension from the National Social Security Institute – currently 45 leva. There are basically two reasons for people to choose a pension other than the standard one. The first is that both in deferred payment and in the guaranteed period there is an inheritance of unreceived amounts until the end of the period.
The second is related to the possibility of monthly payments in the period of deferred payment to be higher, and can reach up to BGN 300 per month. After the increase of the minimum pension from BGN 300 to BGN 370, the necessary accumulated amount in the account will be increased in order to obtain the right to a lifelong pension.
After the increase of the minimum pension from BGN 300 to BGN 370, the necessary accumulated amount in the account will be increased in order to obtain the right to a lifelong pension. All other things being equal, it can be expected that the required amount for a lifelong pension will increase to levels of BGN 11,000 – 12,000, while the minimum lifelong pension will increase from BGN 45 at the moment to BGN 55.50.
When choosing a deferred payment, the maximum amount of the monthly payment will increase from BGN 300 to BGN 370, while with the one-time payment, the amount will increase from BGN 900 to BGN 1,100.
From the beginning of September until now, all companies have seen a gradual but steady increase in interest, but the number of contracts is still relatively low and in view of the interest of many first ladies with a second pension to wait to apply, the total number of concluded contracts is expected to reach 1000-1200.
The report on the concluded contracts for supplementary pensions is sent monthly by the pension companies to the FSC, which summarizes and publishes them on its website, allowing this information to be monitored by all interested parties on a quarterly basis.
– Do you think that it is necessary to “refine” CSS in this direction? And what problems have not yet been solved with it, in your opinion? What is the real income from the pension savings in our country over the last 20 years?
– Along with the successful start of second pillar pension payments, BASPSC and employers’ organizations will continue to insist on making the remaining changes in CSS, in order to completely eliminate the injustice of reducing the state pension, now by a lower percentage, but not completely accurate reduction factor.
In determining the contribution to the Pension Fund of the Social Security Fund, all subsidies from the state budget must be taken into account, regardless of what their formal name is in the law. This specificity has not yet been addressed and should be taken into account.
Definitely the profitability of the companies, both in nominal terms and in real terms, has been positive since the beginning of the activity of the private pension funds in 2004, when the price of shares was published until now.
This is evidenced by official information from the FSC and the websites of pension companies, which shows that the shares of all funds – UPF, PPF and VPF have almost doubled with small differences between the funds depending on the return of each company. On average for the same period the return on pension funds is over 5.25%, which is close to the average performance of external similar funds that manage pensions in Europe and with comparable investment constraints.
– At the moment, however, we are witnessing inflationary processes. How is this expected to affect the real return on funds?
– Inflationary processes are an extremely new phenomenon that has emerged in recent months as a result of many macroeconomic factors, such as the gradual exit from the Kovid crisis, rising commodity prices, electricity, economic recovery and disrupted global supply chains. Let us recall that we have had many years in the last decade of deflation, and that funds are still investing in times of negative interest rates that central banks plan to manage and adjust to the new reality.
Let us recall that we have had many years in the last decade of deflation, and that funds are still investing in times of negative interest rates that central banks plan to manage and adjust to the new reality.
Precisely because of these indisputable conjunctural and unpredictable processes in the money and capital markets, we believe it is important to apply a correct approach and take into account that the comparison between profitability and inflation in pension insurance must take into account the fact that money in pension funds is long-term and the correct comparison is for long periods (35-40 g) and not for 1 year or months. In general, the concept of real return or the difference between return and inflation for a pension fund is just one of many benchmarks that, for various reasons, was introduced only for pension funds. We draw your attention to the fact that to this day, when measuring the profitability of any other financial product for mass savings (bank deposits, insurance, mutual funds, etc.), such an indicator is not taken into account.
In this sense, if this approach is followed, the reported temporary higher inflation for this particular period will negatively affect the measure of real return purely mathematically and temporarily, but in view of the specific nature of the pension product, which is based on the so-called. “Long” money, this value will not affect the performance of pension funds in the long run, because the funds will have time to catch up over the years.
We will remind you again that it would be a mistake to draw conclusions based on such a short period – for example, the last quarter. Pension insurance is a long-term process and what is important for every person is how profitable it is for his entire insurance period, not just for a given year.
It is normal to have one year with a higher yield, another with a lower one, it may even be negative, but this is a temporary measure and changes daily. What is important is how much the profitability is for all years of insurance, and for each individual.
– What trend do you see with regard to future retirees – do they prefer to keep their money for a second pension in a private fund or are they more inclined to move it to the state fund?
– After the start of the payout phase, people began to inform and analyze even more deeply their own situation, carefully assessing their interest, including whether their two pensions are less than one. It is important for them to be aware that the precise determination of whether the UPF pension compensates for the reduction from the NSSI is strictly individual for each insured person.
It is important for them to be aware that the precise determination of whether the UPF pension compensates for the reduction from the NSSI is strictly individual for each insured person. The reduction from the National Social Security Institute is different for everyone, and for a large number of people there is no reduction. After the increase of the minimum pension, the number of those who will not have any reduction from the NSSI will become higher and this will continue in the coming years. On the other hand, the amount of the lifelong pension from the UPF is different for everyone.
It is important to note and emphasize that for people who do not have to retire within 1, 2 or 3 years, the transfer to the National Social Security Institute is unprofitable.
This is because according to the law, the state pension is reduced regardless of the amount in the UPF. Both at BGN 5 and at BGN 20,000 transferred to the National Social Security Institute, the state pension is not reduced. Our insured persons are becoming more and more rational to realize the difference between the solidarity and capital pillar and to make adequate decisions, as well as due to the introduction of a much lower and fairer reduction rate from September 1, 2021.
Until September 2021, according to the current methodology, an incorrect reduction of about 25% of the state pension was applied, if the candidate-pensioner has an account in the SMPS. This reduction was introduced in 2015 and was incorrect because it did not take into account that in fact these persons were insured only for a period of twenty years (with at least 35-40 years of regular contributions to the second pillar required) and that from the beginning SMPS has a weak dynamic, and a low contribution to the universal fund, starting at 2% and reaching only 5% in two decades.
The changed methodology for reducing the individual coefficient will undoubtedly lead to higher amounts of pensions granted by the Social Security Fund to the people who are insured in the second pillar. The reduction of their “state” pension will be approximately twice less, and at the same time, they are guaranteed to receive income from their universal pension fund.
It is possible that until June 30, 2021 there was interest from people with little experience and those who did not insure regularly or worked and received wages in the gray economy, but the number is not significant.
In fact, for almost all insured with personal accounts in the UPF is not profitable to transfer. The transfer of personal accounts to the NSSI in the last five years (about 1%) was insignificant and it is logical to analyze in comparison with the total number of insured persons in UPF, which as of September 30, 2021 exceeds 4,827,412 people.
– Do you think that the state’s policy towards private pension funds is too restrictive when it comes to investments?
– As in Bulgaria, the pension business and the management of pension savings around the world is a highly regulated business. This is crucial for the stability of pension funds and the control of the investment process. Taking into account the current investment restrictions that have been in effect for most of the period from 2004 to the present, the maximum exposure to dynamic and variable assets is limited to 35% (20% of shares and 15% in collective investment schemes – CIS).
Together with the possible investments in SCIP (Joint Stock Companies with Special Investment Purpose) and real estate – 46% is actually reached, which is not a small exposure to more dynamic instruments. For the third quarter of 2021, exposure to such dynamic assets increased to 38% as a result of pandemic measures and anti-crisis policies of central banks, after pension portfolio managers had conservatively reduced the share of risky assets to 25% in the initial market correction in March 2020.
Investment policy could be upgraded and supplemented, of course, with new investment opportunities, for example in raw materials, the development of more precise guidelines for investing in alternative funds and the admission of private companies to be part of pension portfolios.
But at the same time it would be more strategically important for the state to support pension funds to enter the multi-fund market, as developed in a working group with representatives of the FSC, MoF and BASPSC in 2007-2008, but not was carried out. The creation of multi-funds with different risk profiles within VPF and UPF will correspond most adequately to the different age composition of the insured persons, their attitude to risk and will be key to the proper management of our clients’ funds that will be able to participate in management. of their funds by choosing a multi-fund.
– What are your expectations for the dynamics in the sector next year?
– We anticipate that next year many more people will want to receive their second pension, as they will reach the required age. The numbers will grow faster than the first contracts concluded after September 1, 2021 and due to the growing experience and knowledge of insured persons and organizational and technological improvements in the processes in the pension companies themselves.
Most likely, the increase of the minimum pension to BGN 370, which is expected from the insured persons to enter into force on December 25, 2021, will also have an impact and will motivate many more clients of the funds with retirement age to take advantage. of his right to a supplementary pension from the UPF. New changes in SSC will be envisaged at the beginning of 2022, which are currently being worked on by a working group led by the Ministry of Finance in order to ensure legal conditions for implementation in Bulgaria of the European Regulation for providers of voluntary Pan-European Personal Pension Product (PEPP).
BASPSC actively participates in the discussion with a firm opinion that it would be most appropriate for the new product VPF under PEPP to introduce the already developed texts for the introduction of a multi-fund mechanism within UPF and VPF.
Along with the successful start of second pillar pension payments, BASPSC and employers’ organizations will continue to insist that the remaining changes in CSS be made in order to completely eliminate the injustice of reducing the state pension by a lower percentage, but not applying entirely accurate reduction factor.
In determining the contribution to the Pension Fund of the Social Security Fund, all subsidies from the state budget must be taken into account, regardless of what their formal name is in the law.