Today’s young people will get pensions of BGN 2,000
Daniela Petkova is Chief Executive Officer of Doverie, the biggest pension insurance company in the country in terms of assets size. Mrs. Petkova received a M.A. degree in Economics from the University of National and World Economy, then she was an owner and manager of a consulting firm. She joined Doverie as chief accountant in 1994, after winning the competition for the post conducted by Price Waterhouse. Later she was elected Chief Executive Officer.
Mrs. Petkova, many people take interest in the size of the pensions they will receive in future from the general pension funds, the so called second pensions. Could you tell them anything about the amount of those payments from now?
- Many assumptions should be made in order to give any concrete information. At least because the first pensions from the general pension funds, i.e. from the second pillar, will be paid in 2016. The people to get them are those born in 1960. By that time many circumstances may change: the retirement age, the contribution rate, the people's insurance contribution, etc. Only one thing is certain - those with higher earnings will have higher pensions. From there on everything is individual, depending on the age and gender of the person, on the individual account accumulation, the realized investment yield, etc.
Could you give some examples?
- I will give you two examples with insured persons of different age so that you could see the difference in the size of the pension insurance contributions to be got.
In the first case let's take a woman born in 1960, with a monthly insurance contribution of BGN 400, the rate of the contribution being on the present 5% level. Since all people born after December 31, 1959 have from 2002 been participants in general pension funds they have already accumulated about BGN 680 in their individual accounts. We assume that the average annual increase of the woman's salary will be 6%, and the average annual yield given by the pension fund is 10%. The calculations show that the last salary the woman would receive before retirement is BGN 805. The period of insurance by the time of retirement is 13 years. As of the time of retirement the amount accrued in her individual account will be about BGN 10,000. According to the calculations the woman's pension from the state social insurance will be about BGN 282 and the supplementary pension to be received simultaneously will be about BGN 56. So the sum total is BGN 338. That is 42% of the last received salary. So that the same person can reach the European standards of retirement insurance contribution, i.e. 70% of the last received salary, she should start making monthly contributions of about BGN 90 in a voluntary pension fund.
The second example shows how much different is the situation for the younger people. We take a woman born in 1984, receiving the same salary, BGN 400, and we make the same assumptions. The woman will have 37 years of insurance till the time of retirement. The last salary she would receive would be BGN 3200. Her individual account accumulations also look much different, about BGN 175,000. That woman may rely on a state pension of about BGN 1,100 plus another BGN 957 from the general pension fund. That is a total monthly amount of BGN 2057. The insurance contribution replacement rate is 64%, so that person lacks only 6% behind the European standard, which can be provided by voluntary pension insurance with monthly contributions of BGN 4.
Possibly however the purchasing power of the future pensions will not be so big.
- Our constant purpose is the achievement of a comparatively stable return on investment to preserve the purchasing power of the pension savings of the insured people in time. So far all pension funds manage to do it. The 5-year yield of the funds for the period 2003-2007 is 10-12% annually, and for the same period, according to data of NSSI, the annual inflation rate is 6.61%. It means that for those 5 years all pension funds have managed to keep the purchasing power of the pension resources and even to increase it.
Is it true that the accumulated yield for all years of insurance is as much important for the future pension as the amount accumulated from the contributions made by the employers and the employees?
- In long-term plan, it is absolutely true. For the entire period of insurance the amount accumulated from the realized yield may even exceed the amount from contributions.
That is why we should keep a close watch on who manages our money.
- That is right, but people should not judge the management only from the rate of the realized return, because the risk behind it also matters. The next step to be taken on the market is to announce the pension funds' results also taking the risk into account. I would advise people not to rely on the short-term yield and to consider not only the yield but the risk too.
Last year certain financial institutions working with people's savings advertized yield rates of 70, 100, and even over 100%. I have always wandered what kind of people might expect, unless they are very high-class investors that they could judge when exactly to go in and how quickly to go out so that they won't lose. Some hope they will get a return of 100%, keep on getting it for 2-3-5 years ahead, that they have found a gold mine. Such thing just could not really happen.
In this respect, what was the effect of the financial crisis on the world markets on the pension savings of the Bulgarian?
- The crisis has a negative effect on all savings. As far as the pension funds are concerned the crisis affects that part of their assets that is invested in the capital markets and particularly on the Bulgarian Stock Exchange. The accounting data of the pension funds show that the correction of their yield is quite smaller than that of the stock exchange. With 30% negative correction of the investments in shares of BSE the pension funds recorded corrections of not more than 7-11 to 14%, which is less than a half of the BSE correction. The pension funds' clients have no reasons to worry because no matter how serious yield corrections might occur in the course of 1 - 2 years they could not affect seriously the pensions since the period of insurance is quite long. In the following years till 2016 when the first pensions will be paid we will probably pass through several other upward trends and several other negative corrections.
Does the problem with switching participation under employer's pressure still exist?
- There is still pressure and as far as there is no employer penalized the pressure will continue. Until the time people start living and working with the consciousness that they have to exercise their personal choice and that the big unemployment period in Bulgaria is over, things will not change for better. We still receive many complaints. Even with the required certification of the signature on the participation switching application there are complaints lodged by insured persons with court that their signatures are forged. Investigations are presently carried out by the Commission for Protection of Competition on occasions of misleading insured persons who thinking that they were signing documents for receiving consumer credits have actually signed applications for switching participation in a pension fund.
Are there complaints from people threatened with dismissal, displacement or other penalty because of refusal to participate in the fund determined by the employer?
- Yes, there are. Presently the ordinance regulating the manner in which the participation switching is made creates conditions for such infringements, including signature forgery. Now the applications are submitted to the fund to which the person wishes to switch participation and not with the fund where his money presently is. We cannot understand why the applications should be filed with the new pension fund. If the person comes to the fund where he is presently insured, introduces himself personally and states his desire to transfer his money to another fund there will be no forged applications.
Now some employers have their own pension funds. How could you imagine that their employees could be insured with another fund? The employer goes to the employees, tells them those are the applications for their new pension fund and all of them have to fill out and sign their participation switching applications together with their salaries. If those employees had to file their applications with their present pension fund the employer, if willing to press and force them, would have to act quite more roughly and it would be more difficult for him. As far as Ordinance №3 remains the same there will be such bad practices and I have always wandered why the Financial Supervision Commission keeps it that way.