Bulgaria

SURVEY: SITE ONLY - BULGARIA: Savers begin to think about their retirement Markets are starting to open up as awareness of private pension provision rises and technology eases its administration, Theodor Troev reports. Financial Times; Nov 20, 2001 By THEODOR TROEV

A long-delayed pension reform moved ahead this autumn. More than 1.2m or 85 per cent of those targeted met the government's deadline to register with the universal pension funds.

The aggressive campaign to attract a bigger share of this emerging market was staged by eight universal pension funds, many of them set up with foreign shareholding from world leaders in insurance and banking, such as Allianz, ING, Deutsche Bank and Munich Re.

"For the first time, Bulgarians became got well informed about the various services and products of the pension funds," says Nikolay Stoykov, executive director of the ING Group- Bulgaria pension fund. "This has a positive effect in itself as it widens the market for such products."

The successful start of the pension reform brings Bulgaria in line with the modern pension systems in European Union countries.

Apart from mandatory state social insurance, the three-pillar system, adopted initially by the previous government and supported by the new government, headed by Simeon Saxe- Coburg, also includes supplementary mandatory social insurance and supplementary voluntary social insurance with private pension funds.

Pension insurers now hope for changes in the legislation to give them more possibilities for investment. The current Pension Insurance Act allows private pension funds to invest only in low-risk instruments such as municipal bonds, property, prime stocks, government securities, or bank deposits.

The goal is to enable retired people to receive pensions of at least 70 to 80 per cent of their average salaries. The three-pillar system is based on the freedom of choice to select and change pension insurance companies, to define the amount of the contributions and the type of benefits.

"People understood the meaning of the pension reform taking place in Bulgaria, and started realising what their rights are," says Sofia Hristova, executive director of Allianz Bulgaria pension insurance company.

Bulgaria is first in the Balkans and third in eastern Europe, after Hungary and Poland, to adopt a multi-pillar pension system.

Under the communist regime, Bulgaria's pension system was typical for centrally planned economies: a pay-as-you-go model, using the social insurance contributions of the workforce to finance the pension payments for the current pensioners.

Demographic changes, however, have resulted in a decreasing number of workers supporting an increasing number of pensioners. The state had to contribute the difference from the budget. This gradually led to a situation where most pensioners were reduced to poverty levels. "How would we survive the winter with an average pension of less than Lv90 a month, while we need Lv50 a month to pay for the central heating alone?," asks Lyuben Nedkov, a 75- year-old retired taxi driver, who has been forced to take another job to make ends meet. No wonder reform is badly needed in a country where there are more than 2.3m pensioners out of a population of some 8m.

"Living standards of the Bulgarians right now are extremely low, social problems are serious," says Lidia Shuleva, vice-premier and minister of labour and social policy. "But we will do everything possible to change the situation." In the budget for 2002, the new government envisages a considerable increase in social spending, compared with previous years.

Ex-king Simeon Saxe-Coburg won last June's election on a platform that included improvement of the miserable living standards and promises of pay and pension increases. In its recently presented policy programme to 2005, the new government announced plans for increases in social spending, including a 4.2 per cent rise in pensions.

However, such payouts are likely to disappoint the expectations of many retired Bulgarians who had hoped to see their incomes boosted more strongly. Mr Saxe-Coburg and his cabinet do not have much space for manoeuvring. They need to reach an agreement with the IMF that would endorse their economic policy and would open the doors for more investment.

The only way is to balance increased social spending with growth-promoting policies. This is why the success of the pension reform is so important for the longer-term plans of the government. One of the key factors for the success of the reform so far has been the efficient implementation of information technologies.

Bulgaria, once known as the Silicon Valley of the former east bloc, now experiences a boom in IT, which is one of the priority sectors of the young government of Mr Saxe-Coburg. The National Social Security Institute (NSSI) with the help of several local and international IT consultants has quickly built systems, utilising huge amount of information received from the pension funds.

"This is the first e-government system operating in Bulgaria, processing applications for the Universal Pension Funds, the first business-to-government system in our country," says Vladimir Grigorov, a NSSI local IT consultant.

"Bulgaria has even left some west European countries behind in developing such a sophisticated system that reduces bureaucracy and saves time and money." Mr Grigorov, who has watched closely the pension reform and the process of collecting applications by the private pension funds and transferring them to the NSSI, believes it is a good example of how government institutions and private companies should co-operate.

"The great benefit of the pension reform so far is that Bulgarians have started thinking how to invest in their future and to take control of their lives rather than continue to depend only on the 'mother-state'," says Mr Grigorov.