Daniela Petkova, Chief Executive Officer of PAC Doverie: The pension insurance companies won the battle against inflation for the period August 2006 – August 2007

"The millions of Bulgarians, clients of the private pension funds, can feel easy about their savings for a second pension regarding the published 12% inflation rate for the one-year period between August 2006 and August 2007. For the same period all pension insurance companies won the battle against inflation and after deduction of the charged fees they distributed on the individual accounts of the pension fund members an effective annual Rate of return higher than the inflation rate.

In the voluntary pension funds the investment Rate of return for the period exceeds the 15.50% level, for the professional pension funds - 14.20% and for the general pension funds - 13.72%. The people insured with personal contributions to voluntary pension funds have also realized profit from income tax relieves since by virtue of law their contributions up to 10 per cent of the salary are tax exempt.

On the background of the common loss all Bulgarians suffer from devaluation of wages, pensions, bank deposits, etc. due to the inflation level, the value of their money for a second pension for the said period has obviously not only been preserved but even increased.

Supplementary pension insurance is a long-term activity and the amount of the investment Rate of return realized in their favor for the whole, usually 20, 30 and even more than 40 years, period of insurance is very important for the insured persons. While declaring the rate of a one-year Rate of return we must always have in mind that for the entire period of insurance even the lowest 1-year income may be compensated with higher in the following years and to turn to the highest for the whole period, as well as the other way round. However, it is by no means unimportant in the shorter periods to fulfill the minimum program for every pension fund, that is, to keep the value of the funds, which means the Rate of return should be at least equal to the inflation. The achievement of this minimum goal in a short term plan increases the value of the pension savings in the long run which would lead to higher amounts of the pensions paid by the private pension funds.

The good results achieved with the investment activity of the pension companies are influenced with certain by the last-year legislative changes and the liberalization of the investment regime. We could easily imagine what the realized Rate of return would be if the investment restriction effective till last year and compelling the pension funds to buy government securities with at least 50 per cent of their AUM was still valid. That type of investment instrument has from long ago been bringing a return of not more than 2-3 percent on annual basis. The former legal requirements would surely predetermine the battle result in favor of the inflation and the achieved present Rate of return would be impossible. The Rate of return rate, however, could be even higher without exceeding the moderate risk levels of the portfolios should the law had not set the requirement for the pension funds to invest a considerable part of their portfolios in investment instruments lacking on the market such as the mortgage and the municipal bonds. Unfortunately this disbalance in legislation leads to a forced investment in government securities, which decrease the Rate of return for the insured and should be corrected.

Probably, the data about the inflation being already published we will read and hear many statements and analyses on the reasons for its increased rate. Some will claim that the stability of prices was purposefully sacrificed in order to raise the production level. Others will say that the decisive efforts to reduce unemployment have lead it to level below the what is natural for the present economic situation in the country and that resulted in price increase, or inflation. Probably the analyses will include also the relation between the achieved level of productivity of labor and the salaries, etc. The more important in this case however is what the inflation expectations will be from now on, whether the participants in the economic life of the country will calculate in their business a forecast for a future price increase and whether the inflation will continue to grow or not. In this sense, it is extremely important the managements of the pension funds also to make their analyses and prognoses and determine their future behavior as investors.

Diversification of the portfolios in terms of types of instruments, number of issuers, types of currencies, as well as geographically by including investments outside Bulgaria becomes even more important for the security of the pension funds and their protection from inflation.

The higher than inflation Rate of return levels achieved by the pension funds should give grounds for satisfaction of the insured and for realization of the undeniable fact that saving in a pension fund, especially in combination with the tax preferences, is more beneficial for them compared to many other types of savings."