Saving for old age does not bring quick profit
Mrs. Petkova, the Financial Supervision Commission recently presented data on the negative yields of the supplementary pension funds. That is a bad news for both the fund members and the insurers, and for the mutual trust that should connect those parties. How would you comment that fact as a manager of a pension fund and as a deputy chairperson of the Bulgarian Association of Supplementary Pension Security Companies?
Fundamentally, there are two principles that may underlie supplementary pension insurance; the first is the defined contribution principle, the other, the defined benefit principle. In our country pension insurance is based on the defined contribution principle. It is important to know this fact, especially today, in connection with the results of the pension funds in Bulgaria which are seriously influenced by the global financial crisis. The question what will now happen with the pension funds is frequently asked. It is important to know that due to the manner in which the pension funds are regulated in Bulgaria they cannot go bankrupt or their money just vanish. Such possibility is only theoretical and can materialize only if all others go bankrupt before that, including the state, and not only our state but others also. The negative yields for 2008 are undoubtedly a disturbing fact but we are all certain that within the framework of the long horizon of pension insurance that yield will be compensated. Most sensitive to the yield levels in 2008 are the members of the voluntary funds, and unfortunately some of them lost their nerves, withdrew their savings and thus wasted their chance to restore their losses of 2008. For the market as a whole the number of people that quitted pension insurance is insignificant, since the members of the voluntary pension funds are 600 thousand out of the 3 million people insured in all pension funds in the country. In my view the people that chose to withdraw their money are 50 or 60 thousand at the most.
Please, outline the differences between the two principles you mentioned.
If anyone has ever heard of a pension fund gone bankrupt, that must have been a fund operating on the defined benefit principle or an occupational pension plan. I have never heard of such fund based on defined contribution plans. The fact is that the funds based on the defined contribution principle contract with their members only the amount of the contributions to be paid and when the time comes for the member to retire the commitment of the fund is to calculate the benefit on basis of the amount accrued in the individual account. With the defined benefit plans, the pension fund contracts with the client not the amount of the contribution but that of the benefit to be paid by the fund in future. From then on, no matter what happens in the years of insurance, no matter what the yield, the fund is obliged to pay the pension amount as agreed in the past. In those cases usually the pension amount is agreed on in percent of the salary. There are no such pension schemes in Bulgaria, fortunately. In a period of crisis, such as now, the impact of which no one could foresee, those funds have serious difficulties since they accumulate huge liabilities which they might possibly not manage to cover. That is why internationally the present tendency is to turn from defined benefit to defined contribution plans as it is in Bulgaria.
That variant bears no risks for the contributors, does it?
With the defined contribution funds the contributor's risk comes from the possibility of a negative yield, which reduces the amount accumulated in the individual account and hence the amount of the pension. However for the entire period of insurance that risk is small since there is no crisis to continue 30 or 40 years, as is the usual period of a person's active carrier. Over such a long period the temporary negative results are compensated. The risk is strongly reduced also by the fact that the assets of the pension funds are invested in a variety of instruments - government securities, bank deposits, stocks, bonds, real estate, etc. Even theoretically it is impossible for all that money to vanish. The only thing that may happen is that the gains may be smaller, as in 2008. And to continue with the examples, I may also mention the bank deposits as one of the types of investments we make. According to law 25 percent of the assets of the pension funds may be invested in bank deposits, but we are not allowed to invest all those 25 percent in one bank. We are obliged to invest them in several different banks. How can we loose all that money? Only if all banks in which the pension funds have invested go bankrupt. Other instruments, the most risky ones for example, typical for 2008 for bringing many losses are the shares on the Bulgarian Stock Exchange. We often need to explain that the losses in 2008 coming from that type of investment are accounting losses since those are shares of Bulgarian companies which in spite of all are still there, operating, making profit. There would be a problem if all companies in whose shares pension funds have invested somehow go bankrupt. But how could that happen to all the companies? That means the entire economy to go bankrupt and the state itself to go bankrupt. No such data are available. The pension funds have invested money also in government securities, both in Bulgaria and in other EU countries. The yields they bring might be small, but you could loose that money only if the state goes bankrupt. The other investments are in real estate where the prices may go up and down but this is land, buildings, how could the money be lost? I can definitely say, and I speak also on behalf of my colleagues, that we have no reasons to feel guilty about having not done the best.
In times like this success and failure are measured by how far we have managed to minimize the effect of the crisis. Presently we are gathering information about what the other pension funds in the world have achieved, and things look quite worse than in Bulgaria.
Are you afraid that a large number of people may start withdrawing their money?
I am not afraid because the members of the mandatory funds, and those are the predominant part of the clients on our market, are not allowed to withdraw it. From the point of view of the members it may not sound good that they have no such rights but we know as experts that it is better for them since if they let panic grip them and withdraw their money now they will suffer great losses and not only accounting losses, but real. Thus the law protects them in a way. To the clients of the voluntary funds we explain that the only way for those accounting losses, which I mentioned and which will soon or later be covered, to materialize is if the member withdraws the money from the fund. Every member that makes contributions for a longer period has a better chance not to sense the negative yield.
Is there any risk of nationalizing private pension funds like it happened in Argentina?
I am certain that the problems that Argentina has are at the root of such a decision for which I can only say - too bad for the people that will be deprived of the possibility to receive pensions based on individual savings and also too bad for the state. Because the state could not be able to provide pension amounts such as those that people could have received with an additional pension from an individual savings plan. All other conditions being equal, the practice shows that the individual savings plans provide pensions about 4 times bigger than those from the a pay-as-you-go system. I think that the Bulgarian pension insurance model is a model that in future will be applied by many other countries that for the rest are far more ahead from us. The best models are those that combine state social insurance with the private one, like it is here.
If I presently make bigger contributions does that mean I will get a bigger pension some day?
Yes, for certain. But it does not mean that if you start contributing three years before retirement you will get a higher amount. Thus you may not receive and you may even loose part of your money. The main factor, most strongly influencing the result of individual savings plans is the length of insurance.
When the worst thing happens....
- ...the money is inherited....
And if you have already retired but you wish to make contributions for a bigger pension?
The law allows that but if I have to give you an honest advice, I would have to disregard the business interests, since our major principle is to never lie to clients. One has no interest to do it. If you have already retired you cannot get the same benefit from pension insurance as those that have made contributions for 5 - 10 years. I will never stop saying that anyone wishing to earn profit for a short time should either have a very good knowledge of investment or should be ready for an unpleasant surprise thinking that pension insurance is the place for a quick profit. It is possible but very risky...
DANIELA PETKOVA joined Doverie as chief accountant of the company in 1994, after winning the competition for the post conducted by Price Waterhouse.
Under her guidance in 1997 the Accounting Department developed into Finance and Accounting Direction, and from 1997 she served as Chief Financial Officer until July 1999 when she was elected CEO of the Company.
Before joining the Company Mrs. Petkova gained serious experience in the sphere of: financial analyses, tax advice and corporate accounting as an owner and manager of a consulting firm.
Mrs Petkova received a M.A. degree in Economics from the University of National and World Economy.