The new pension model
Following the pension reform in 2000 and the adoption of the Social Security Code (SSC), a new pension model came into force in Bulgaria on 1 January 2000. The change was necessitated by various factors, the main ones being the increase in the proportion of the population past the working age and the population decline. Its introduction aims to raise the living standards of future Bulgarian pensioners.
The new model consists of three pillars and combines the two main principles – the pay-as-you-go principle for State social insurance and the pay-as-you-go principle for Supplementary compulsory and Supplementary voluntary pension insurance. With its introduction, the responsibility for the pension income amount is shared between the state, employers and the insured.
The new three-pillar pension system includes:
- First pillar – National Social Insurance (NSI) – it covers the entire working population in Bulgaria. It operates on a pay-as-you-go (solidarity) basis, i.e. the contributions of the currently employed, which go into the Pension Fund of the National Social Insurance, are used to pay the pensions of the current pensioners. Insurance is compulsory and is provided by the National Social Security Institute (NSSI).
- Second pillar – Supplementary Compulsory Pension Insurance (SCPI). It provides an early retirement pension for people working in the first and second labour category and/or a supplementary old-age pension for people born after 31 December 1959. It is built on a capital-based principle and private pension insurance companies are the core of this model. The following two Funds belong to the second pillar of pension insurance:
Universal Pension Fund (UPF) – a fund for supplementary compulsory pension insurance, which includes all persons born after 31 December 1959 who receive income from employment. Having an individual plan in an UPF gives right to:
- the receipt of a supplementary old-age lifelong pension (one-off or deferred payment of funds, subject to legal conditions)
- one-off or deferred payment of up to 50 percent of the funds accumulated in the individual plan in the event of permanently reduced working capacity of more than 89.99 percent
- one-off or deferred payment to the heirs of a deceased insured person or of a pensioner.
Professional Pension Fund (PPF) – a fund for supplementary compulsory pension insurance in which all persons working under the conditions of the first and second labour category participate. Having an individual plan in a PPF gives right to:
- the receipt of a fixed-term early retirement pension, which is received until entitlement to an old-age pension under the Social Security Code
- one-off or deferred payment of up to 50 percent of the funds accumulated in the individual plan in the event of permanently reduced working capacity of more than 89.99 percent
- one-off or deferred payment of the funds in the individual plan when an old-age pension has been granted under the terms of Part I of the Social Security Code and no right to an early retirement pension has been acquired
- the transfer of the funds in the individual plan to the UPF or the SPF in case an old-age pension has been granted under the terms of Part I of the CSR and no early retirement pension has been acquired
- payment of amounts to the heirs of a deceased insured person or of a pensioner
- Third pillar – Supplementary voluntary pension insurance (SVPI). It ensures the receipt of a supplementary pension or a pension due to old age, invalidity or death. It operates on a capital-based principle and is implemented by private pension assurance companies through the voluntary pension funds they manage.
Voluntary pension fund (VPF) – a supplementary voluntary pension fund (SVPF) in which all persons aged 16 or over can be insured if they decide – at their own expense, at the expense of their employer, at the expense of another insurer or in combination. Having an individual plan in a VPF gives right to:
- a personal old-age pension
- a personal invalidity pension
- a fixed-term survivor’s pension.
Management of the pension system in Bulgaria
The National social insurance, which forms the first pillar of the pension system in Bulgaria, is based on the principle of solidarity of the insured. This means that the funds from their contributions are pooled in a common account from which the pensions of all pensioners in the first pillar of the social security system are paid. This is managed by the National Social Insurance Institute (NSII).
In contrast to the National Social Insurance, the supplementary compulsory and supplementary voluntary pension insurance are based on the capital-based principle. Each insured person in a universal, professional or voluntary fund has an individual insurance plan, where all of his/her contributions are accumulated and invested in financial instruments defined and limited by the Social Security Code with the aim to make a profit and grow these assets. The funds are managed by pension assurance companies, which are subject to a licensing regime and state regulation and control in order to protect the interests of the insured. Supervision of pension assurance companies is carried out by the Financial Supervision Commission, which is a specialized administrative body and reports to the National Assembly of the Republic of Bulgaria.
The three pillars in the Bulgarian pension system are interlinked. The supplementary pension insurance does not replace but complements the state pension insurance by providing the insured with the possibility to receive one or more pensions along with the “state” pension, subject to legally defined conditions.