Svetla Nestorova: Multifunds can provide almost double second pension

- Ms. Nestorova, the OECD recommended that Bulgaria introduce multi-funds. What exactly are they? 

- The proposal from the Organization for Economic Cooperation and Development aligns with a long-standing idea among specialists in the field: pension funds' investment approaches should account for people's varying time horizons. This is known as life-cycle investing. In practice, this means that while a person is young, their funds are managed more dynamically to achieve higher rate of return. As retirement approaches, the focus shifts towards preserving the value of the money and ensuring security. Such a change would allow future generations to have larger savings and, consequently, significantly higher pensions. Currently, this is not allowed, and pension funds follow a uniform investment approach, prioritizing security. As a result, rate of return is modest, and the strategies are the same, whether for a young person with a 40-year investment horizon or a 60-year-old close to retirement. In fact, life-cycle investing is a popular strategy in developed countries, and the multi-fund system is more of a rule than an exception. There are practices and lessons from which we can draw valuable experience. It’s important for people to understand that the multi-fund system would allow us to fully take advantage of the long-term potential of financial markets to grow pension savings.

- What are the risks of multi-funds? Don’t young people need improved financial literacy before they’re introduced? 

- Improving financial literacy should always be a priority—for the education system, the financial sector, and the state as a whole. Ultimately, more financially literate people are wealthier. A society's prosperity is directly linked to the education and literacy levels of its members. However, the reform of introducing multi-funds in Bulgaria does not require special efforts on this issue, although it could serve as an opportunity for raising awareness. When you're 20, you don’t think about what you’ll do at 60. But when you’re 60, you wish you had thought about it at 20. While some areas of life offer second chances, in pension assurance, we can’t turn back time, so we are obliged to make wise decisions on time. That’s why discussions about saving for our own future should happen often, starting in school and continuing with the first paycheck. Our company’s motto is “The future begins with today's decisions!”. A key element of financial literacy is realizing that the money in pension funds is your personal property and largely determines how you will live after you stop working. According to national statistics, a person receives pension income for about 17 years after retirement, so choosing a pension fund is one of the most important decisions to make early in one's career. It’s crucial to take care of our financial future now, so one day, we have the freedom to live as we wish without being a burden to our loved ones. Even though financial literacy levels are low in Bulgaria, this is not a barrier to modernizing the system and introducing dynamic funds. The idea of the reform is to create a specific approach that is age-appropriate and applicable to everyone, regardless of their preparedness. A person will automatically be placed in the fund suitable for their age, and when retirement approaches, they will automatically move to a more conservative fund. Of course, everyone will also have the option to make a personal choice. But if no choice is made, whether due to feeling unprepared or other reasons, the system will assign them in a way that protects their rights and interests. We should inform people that even if they haven’t yet looked into this topic, they can easily take the first step by checking which pension company receives 5% of their monthly insurance income. This can be done quickly through a phone call to the National Revenue Agency at 0700 18700 or 02/98596801. 

- What will the average pension from the General Pension Funds (GPF) be in 40 years if multi-funds are introduced and the system continues to function conservatively as it does now? 

- With a very conservative estimate, the pension under the new multi-fund model should indeed reach the desired levels of 20% replacement income. Where we currently expect about BGN 700-800 per month from the second pillar, a dynamic investment policy could increase that amount to approximately BGN 1,400, which is nearly a doubling. As for the average pension levels, this is a delicate issue because they are influenced less by fund behavior and more by the economic issues—such as undeclared income, interruptions in insurance income, insuring for minimum wages, non-recognition of maternity leave in the second pillar, and so on. The truth is that no matter how we invest or what we do, if we don’t pay our contributions and fail to formalize employment to the fullest extent, we will always face problems. 

- Is an increase in contributions to the GPF necessary now that the National Social Security Institute (NSSI) has discussed raising contributions? 

- The current system suffers from two shortcomings compared to its original design—the second pillar contribution has been kept too low for too long and never reached the originally planned 7%. Add to this the assurance ceilings and the fact that people are not insured on their full income, and the picture becomes clearer, often discussed tendentiously. Pension saving has two basic elements—what is saved and how it is invested. This reform aims to change how savings are invested. However, how much is saved is another critical variable. As a customer of this system, I would unequivocally prefer that a larger part of it be capital-based, with my money invested to achieve higher rate of return and preserved in my personal account, rather than going into a common fund that depends on political circumstances, whose horizon is usually from budget to budget or term to term. I think anyone with a choice would prefer that. In addition to the introduction of multi-funds, overcoming the flaws of the current system also requires the third pillar—voluntary pension insurance. That is where the hope lies for people who want freedom, independence, and financial stability after retirement. The third pillar offers tax relief of up to 10%. Furthermore, management fees are very low, and rate of return is higher. Another significant advantage is that the funds from personal contributions are available to the client at any time. Each person can choose the beneficiaries for their savings based on personal preferences. It’s high time we differentiate between the second and third pillars of pension insurance. The second pillar is mandatory, is the focus of much political attention, and aims to supplement the pension from the first. But the real opportunity for planning is in the third pillar, which is currently the most advantageous investment option for income earners in Bulgaria.

Anyone can sign a contract for contributions to the third pillar or change their general pension fund. In Pension Assurance Company Doverie, the process is fully digital, and anyone can do it at home, effortlessly, in just five minutes. There are simple instructional videos if someone wants to get informed beforehand. We place a strong emphasis on digitization to save our clients valuable time and effort while providing them with the best possible service. For instance, the retirement process takes only 15 minutes.

If the responsible political position would be to ensure that the second pillar gradually takes on a much larger role than the first pillar, as demographic realities dictate, then the responsible personal position would be to take the third, voluntary pillar seriously, as it is the one truly in your control. 

- You are a new face in the pension assurance system. How will you try to convince people that it’s beneficial to invest in the so-called third pension, considering that the results there are not good?  

- I have been professionally connected to Pension Assurance Company Doverie for many years, having held various roles in the company—on the Executive Committee, Supervisory Board, Advisory Board, and so on. But what’s truly important is that I’ve been a client of this system from my first day on the labor market, for more than 20 years, and my pension depends on it just as much as any Bulgarian citizen’s does. I have always been an employee, my only income comes from my salary, and I do not have a business or any other paid activity. Consequently, I am a perfect example of how the system works—I have consistently contributed to both the second pillar, at the maximum insurance threshold, and the third pillar, with 10% of my insurance income. I have no interruptions in my insurance record and have had two maternity leaves. My GPF account, my second pillar account, has a five-digit sum, while my voluntary pension fund account holds a six-digit sum. The rate of return that my colleagues from the investment department of Doverie have generated for me over the years in the voluntary fund are almost twice as large as the accumulations in the second pillar. My third-pillar pension would be larger than what I’ll receive from the NSSI, and the second-pillar supplement would be about 10% of that.

Regarding investment performance, it’s important to note that results are not evaluated on a day-to-day basis—they are measured over years. And this becomes very clear to people who have consistently contributed to a voluntary fund over a long period. All this information is public—we’ve even created what we call an “Investment Map,” where our clients can clearly see where their funds are invested and the rate of return on them. The only effective solution for market volatility is the duration of investment. 

- For years, there has been an expectation of a shake-up in the pension market as pension payments begin. How close are we to market consolidation?  

- That depends on many factors. It’s true that it’s becoming increasingly difficult for smaller players in the non-banking financial sector — regulations and requirements are growing, and margins are shrinking. I have experience managing smaller companies, so I know this well from personal experience. Size matters when it comes to money — economies of scale can be achieved, and the ability to diversify and take advantage of markets increases. On the other hand, competition isn’t a bad thing; it should motivate us to become better. The proposed multi-fund system could actually strongly improve competition because opening the door to more dynamic investment behavior allows for changes in fund fees and a shift towards primarily performance-based fees. This would stimulate competition and ultimately have a double positive effect on clients' savings. In my opinion, entering the payout phase is the moment when the system achieves its original goal — not just to collect and manage funds but to provide income to people in their later years. There is also plenty of room for competition in this area. We are particularly proud that we are the only company that has increased our clients' income for three consecutive years by a percentage higher than inflation. The overall increase in the first lifetime pensions we issued in October 2021 is 28.63%.

A link to the interview on the "24 Chasa" website can be found here.