Private pensions amendments strain relations in Bulgaria’s government coalition

Written by on December 18, 2014 in Bulgaria - Comments Off on Private pensions amendments strain relations in Bulgaria’s government coalition

Amendments to Bulgaria’s law on mandatory social security contributions, approved by Parliament’s budget committee earlier this week, have met growing resistance from the parties backing Prime Minister Boiko Borissov’s government, as well as employer organisations.

The bill was opposed from the outset by the Reformist Bloc, the government coalition partner to Borissov’s GERB. The nationalist Patriotic Front, which backs the government without formally participating in it, initially backed the bill in the budget committee, but has now backed out, saying that the initiative required a wider public debate.

Even socialist splinter ABC, which has an agreement with GERB to participate in government (separate from GERB’s agreement with the Reformist Bloc) has said that the change was being rushed through, but the party was scheduled to make its decision on whether to back the amendments later on December 18.

GERB remains adamantly in favour of the bill, reported to be the brainchild of Finance Minister Vladislav Goranov, with Borissov saying that the accusations that his government was attempting to nationalise private pension funds were wide of the mark.

Borissov said that the bill gave people more choice and that private pension funds should make more efforts to persuade their customers to stick with them rather than opt to switch their money to the NSSI.

The bill is expected to be put to a vote on the House floor on December 19 and could pass even without the support of GERB’s coalition partners, with the opposition Movement for Rights and Freedoms (MRF) also backing the proposed changes.

Several employer associations have come out against the bill, going as far as to ask President Rossen Plevneliev to veto the amendments if they are passed by Parliament, in an open letter published on December 17. A public protest against the bill has also been organised on social media, scheduled for 6pm on December 18.

What is at stake?
The bill, put forth by GERB, focuses on social security contributions made to private pension funds. Under Bulgarian law, all employees are required to pay 12.8 per cent of their wages to the state-run National Social Security Institute (NSSI), which pays out the state pensions, in what is known as the “first pillar” of the pension system. It is sometimes referred to as the “solidarity pillar”, as the contributions of the current labour force are used to pay the state pensions of current pensioners.

A further five per cent of workers’ salaries are paid to a private pension fund, or the “second pillar” of the system. The major difference between NSSI and private funds is that the former calculates the pension based on a worker’s salary in the last year before retirement, while private funds have personal accounts for each customer and pay pensions based on actual contributions made by the retiring person. Additionally, the funds accumulated in the private pension account can be inherited in case of the beneficiary’s death, unlike the state pension.

The new bill envisions that anyone born after December 31 1959 be given a one-off choice to switch from their private pension fund to NSSI, with all their accumulated earnings in the private fund turned over to NSSI, not just future contributions. A decision to switch from a private pension fund to NSSI would be irreversible because the state institute does not keep personal accounts.

Additionally, all new entrants to the labour market would have their second-pillar contributions directed to NSSI unless they picked a private pension fund within a year of starting employment – under current provisions, new entrants to the labour market are distributed at random between private pension funds unless they pick one in the first year of employment.

So far, private pension funds have accumulated seven billion leva (about 3.6 billion euro). Analysts have warned that the government’s bill could lead to an outflow of money that would have repercussions on the Bulgarian financial market because pension funds are among the main buyers of government securities (one of the main criticisms of private funds are that they are too conservative in their portfolio management and offer very low return-on-investment rates) and might not be able to buy as much government debt in the future.

Some analysts have also criticised the proposal as focusing on the short-term goals of reducing NSSI’s large annual deficits, usually covered by government transfers, to the detriment of the long-term stability of the pension system.

(Photo: Clive Leviev-Sawyer)

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