Opinion regarding the submitted Draft Act for Amendments and Supplements to the State Budget of the Republic of Bulgaria for 2025, adopted at first reading

SOFIA, 01-00-024/11.03.2025

ASSOC. PROF. DR. NATALIYA KISELOVA CHAIRPERSON OF THE NATIONAL ASSEMBLY

MR. DELYAN DOBREV CHAIRPERSON OF THE COMMITTEE ON BUDGET AND FINANCE OF THE NATIONAL ASSEMBLY

MS. DENITSA SACHEVA CHAIRPERSON OF THE COMMITTEE ON LABOUR AND SOCIAL POLICY

MR. HASAN ADEMOV CHAIRPERSON OF THE COMMITTEE ON DEMOGRAPHIC POLICY, CHILDREN AND THE FAMILY

MR. BOYKO BORISOV CHAIRPERSON OF THE PARLIAMENTARY GROUP OF GERB-SDS

MS. NADEZHDA YORDANOVA PROF. NIKOLAY DENKOV CO-CHAIRPERSONS OF THE PARLIAMENTARY GROUP "WE CONTINUE THE CHANGE – DEMOCRATIC BULGARIA"

MR. KOSTADIN KOSTADINOV CHAIRPERSON OF THE PARLIAMENTARY GROUP "VAZRAZHDANE"

MR. DELYAN PEEVSKI CHAIRPERSON OF THE PARLIAMENTARY GROUP "MOVEMENT FOR RIGHTS AND FREEDOMS – NEW BEGINNING" – DPS – NEW BEGINNING

MR. DRAGOMIR STOYNEV CHAIRPERSON OF THE PARLIAMENTARY GROUP "BSP – UNITED LEFT"

MR. DZHEVDET CHAKAROV CHAIRPERSON OF THE PARLIAMENTARY GROUP "DEMOCRACY, RIGHTS AND FREEDOMS" – DPS

MR. TOSHKO YORDANOV CHAIRPERSON OF THE PARLIAMENTARY GROUP "THERE IS SUCH A PEOPLE"

MR. RADOSTIN VASILEV CHAIRPERSON OF THE PARLIAMENTARY GROUP OF PP MECH

POSITION

REGARDING: Draft Law No. 51-554-04-54/10.03.2025, submitted by a group of MPs from the Parliamentary Group "Vazrazhdane," on amendments and supplements to the Law on the State Budget of the Republic of Bulgaria for 2025 adopted at first reading (No. 51-502-01-4, submitted by the Council of Ministers on 24.02.2025).

DEAR MS. KISELOVA, DEAR MR. DOBREV, DEAR MS. SACHEVA, DEAR MR. ADEMOV, DEAR MR. BORISOV, DEAR MS. YORDANOVA, DEAR PROFESSOR DENKOV, DEAR MR. KOSTADINOV, DEAR MR. PEEVSKI, DEAR MR. STOYNEV, DEAR MR. CHAKAROV, DEAR MR. YORDANOV, DEAR MR. VASILEV, DEAR LADIES AND GENTLEMEN, MEMBERS OF PARLIAMENT,

We present to you the position of the undersigned associations against the proposal in the transitional and final provisions of the draft law to include a paragraph amending Art. 6, para. 1 of the Social Insurance Code and directing the entire mandatory pension insurance contribution to the "Pensions" fund of the State Social Insurance in 2025 (the proposed amendment has retroactive effect from 01.01.2025 — the prohibition on retroactive effect of laws is a principle derived from the concept of the rule of law, a principle explicitly proclaimed by the Constitution of the Republic of Bulgaria, and the conferral of retroactive force on a newly adopted law is permitted only by way of exception and only with an explicit provision, which is not even present in the proposal).

The submitted proposals are categorically unacceptable on the basis of the following arguments:

1. Such a change constitutes a de facto quasi-nationalisation of personal funds, because these personal contributions are private pension savings. This will lead to the drastic prejudicing of insured persons. The significant risks arising from such a step stem from the redirecting of PERSONAL contributions of all working persons — the more than 4.5 million persons insured in Supplementary Compulsory Pension Insurance (SCPI) — to the budget of the State Social Insurance (SSI) to fill deficits. If payments to the mandatory pension funds are suspended, the victims will be not only the insured persons, but also persons receiving pensions from the Universal Pension Funds who continue to work and for whom contributions continue to be received and accumulated in their pension accounts.

The heirs of the 4.5 million insured persons will also be prejudiced by such a change, since the funds accumulated in the second-pillar funds are inherited.

The proposed change will, in an anti-market manner, deprive insured persons of the opportunity to choose how and where to be insured — in a private pension company of their choosing, or to waive this option and choose to be insured entirely in the SSI with the full amount of their insurance contribution. A statutory possibility already exists for pension insurance companies, just as they compete with one another, to be competed with by the NSI as well, but this is permissible only under conditions of voluntariness, with the consumers' right of choice preserved.

Insofar as the relations between insured persons and pension insurance companies are of a private-law nature, the proposed change would constitute an impermissible intervention by the state in those relations, through the removal of persons' freedom to choose their insurance and the violation of the inviolability of private property through the proposed quasi-nationalisation of insurance contributions that are received and accumulated in the individual pension accounts of insured persons. This is also the purport of Constitutional Court Ruling No. 7 of 31.05.2011 on constitutional case No. 21/2010, which declared unconstitutional the text of §4a of the TFP SIC, providing for the transfer of funds from the individual accounts of persons insured in the occupational funds of the SCPI to the SSI.

2. A fundamental change to the three-pillar pension model, which has proven itself over the years and is fully supported by international institutions — the OECD, the EC, the IMF, EIOPA and others.

The system successfully passed a detailed asset review, and the payout phase is gaining momentum, with pension insurance companies making regular pension payments since 2021. Security and reliability are noted as a result of the successful review also by the OECD. The second pillar is an integral part of the model and was created precisely to mitigate the deficits in the solidary first pillar, whose financial condition continues to deteriorate, especially in Bulgaria. The deficit is becoming chronic and ever larger, while at the same time the state transfer is increasing at a dizzying rate, exceeding BGN 11 billion for the payment of growing pensions from the first pillar. The redirection of insurance contributions amounting to BGN 2.7 billion will not resolve the problem of the deepening imbalance in the revenue-expenditure structure of the SSI, and even if it temporarily reduces the growing deficit, in the long term it will deepen the problem.

3. Freedom and the right of choice.

With the amendments to the Social Insurance Code from 2015, citizens have the right to choose whether to be insured in the second pillar or to change their insurance to the SSI. This means that insurance in the second pillar is in fact voluntary and everyone can make their own decision. The process of changing insurance to the SSI shows that Bulgarian citizens prefer and consciously choose to be insured in the second pillar, because they understand the benefits and the perspective of accumulating personal pension savings that are inherited.

The suspension of contributions to the mandatory pension funds would constitute a forcible termination of insurance in the second pillar.

4. Contradiction with the recommendations of international organisations such as the OECD and the EC for a significant deepening of the role of the capital pillars in view of the deteriorating demographic situation in Europe and especially in Bulgaria.

It is very likely that such a step will be received very negatively by the OECD, including potentially affecting the country's membership procedure with the OECD. It is precisely the OECD that prescribes that second-pillar funded pension systems become the most comprehensive, that a sufficiently high overall level of contributions be guaranteed in order to achieve objectives related both to the adequacy of pension income and to the long-term sustainability of pension systems. Only a gradual increase in the size of contributions can help insured persons reach a pension income that provides an appropriate level of income replacement after retirement. They insist on ensuring that all persons should have appropriate and sustainable investment pension savings strategies.

It should be borne in mind that the OECD and the European Commission do not support such policy decisions as those taken in Hungary and do not consider them good practice.

In addition to the above arguments, it must be taken into account that the Bulgarian pension insurance system passed several serious reviews and analyses in connection with the process of Bulgaria's accession to the OECD. Supplementary pension insurance was one of the core sectors that was thoroughly analysed and received a positive assessment in 2024, both for the state and stability of the three-pillar model and with regard to the effectiveness of supervision.

Pension companies are the most closely supervised and transparent business — they report their transactions to the FSC every day and publish the unit values of the funds on their own websites.

In 2024, the lengthy process of internal review and analysis of the system and its stability by the Economic and Social Council (ESC) also concluded, with the participation of almost all stakeholders. On the basis of the analysis, the ESC report gave a positive attestation for the state and role of supplementary pension insurance and the three-pillar model as the most appropriate alternative, and presented important recommendations for improving the pension system.

Given that Bulgaria is seeking to become a member of the Eurozone and a full member of the OECD, steps that would discredit the existing model should not be taken.

In addition to the arguments described above, we draw attention to the fact that the high budget deficits caused by the financial and economic crisis of 2007–2009, the COVID pandemic and geopolitical conflicts will not be improved by such a decision for the de facto abolition of the three-pillar model in Bulgaria. While the redirection of pension contributions from the second pillar, which are managed on a funded basis, to the first pillar, which is part of the SSI and whose funds are managed on a pay-as-you-go basis, will insignificantly reduce budget deficits in the short term, such steps are detrimental to the country's long-term fiscal position.

Hungary is the only country in the European Union that has suspended insurance in the second pillar of the pension system.

On 13 October 2010, the Orbán administration announced that it would divert contributions of 8 percent of gross wages from the private pension funds of Hungarian employees to the state for a period of 14 months from November 2010. The declared goal was the temporary diversion of mandatory contributions from the private pension funds to the state, but with the creation of a fait accompli situation the diversion became permanent.

Approximately 3.2 million clients of the private pension funds were given no other option but to return to the state social security pension system.

The funds from the Fund were used for repaying state debt, covering the budget deficit, and settling the obligations of local government. No pensions were paid from the accumulated funds, meaning the purpose of the funds was to cover a budget deficit, not to cover the deficit of the public insurance system.

The unsold government securities denominated in forints, as well as the shares, were transferred to the State Asset Management Company. The remaining assets denominated in foreign currency were sold off by 2013. By the end of 2013, all funds of the Pension Reform and Debt Reduction Fund had been liquidated.

Hungary's experience showed that it is extremely wrong to seek short-term solutions for reducing budget deficits, as in the long term the situation deteriorates significantly.

5. Such a conjunctural measure would have a negative impact on the capital market and investors' confidence in the state.

Such a measure will negatively affect both the persons insured in the pension funds and the capital market, investors therein and the state as a whole. At the end of the third quarter of 2024, the investments of the SCPI funds in Bulgarian financial instruments totalled BGN 5,292,584,594.97, of which in government securities — BGN 2,341,019,249.25, in corporate bonds — BGN 880,353,198.85, in shares — BGN 1,297,360,739.42, in mutual funds — BGN 754,976,550.35 and in alternative investment funds — BGN 18,874,857.10. There is a real danger of "fire sale" liquidation and/or restructuring of the pension funds' portfolios — on the one hand, to implement the political decision and, on the other, to meet the quantitative regulatory requirements. The "cost" or ultimate effect of applying such a measure is borne directly by the persons insured in the pension funds, who under the applicable legislation bear a significant part of the investment risk, as well as by the state from the perspective of the obligations assumed.

In the event that an attempt is made to redirect insurance contributions from the private pension funds to the SSI, this means that Bulgaria is facing a serious budget problem for which a short-term solution is being sought, which will further worsen both the country's budgetary position in the medium term and the post-retirement financial prospects of every citizen insured in the second pillar. The redirection of insurance contributions from the pension accounts of insured persons to the SSI would have the same effect as redirecting the savings for the construction of the Hemus Motorway to finance short-term objectives. This only led to the suspension of the motorway's construction and the current expenditure of saved investment funds. The same will happen if similar actions are taken with respect to the second pillar of the pension system, namely the robbery of people's prospects of securing funds and income for old age, with the aim of redirecting their funds earmarked for pension savings in the capital pension funds towards resolving short-term fiscal problems.

6. Incentive for individual saving and the formalisation of labour income.

The second pillar improves incentives for the formalisation of labour income, since pensions depend directly on actual insurance contributions. Private pension funds diversify the risks associated with investment decisions and political interference, and enhance the personal responsibility of individuals for planning their financial future. Last but not least, private pension funds support long-term growth by encouraging long-term savings and therefore investment, and improve the efficiency of the allocation of savings and investment decisions. Private pension funds play an extremely important role in supporting the state in its debt financing policy, including in developing debt financing for large infrastructure projects — a practice in a number of countries (Croatia, the United Kingdom, etc.). The participation of pension funds in the capital market as large, highly regulated institutional investors contributes to the higher economic growth of the country, both through predominantly investing in debt financial instruments and promoting the development of segments for attracting capital through capital market mechanisms, and through the development of the capital market, which in turn can improve capital market regulation, transparency and infrastructure, impose better corporate governance standards and reduce price volatility through long-term investment decisions.

7. The return achieved from investing the funds of the supplementary compulsory pension insurance over the last two years (2023 and 2024) is positive, with a nominal return of 6.56% achieved for 2024, while for 2023, the nominal return was 8.32%. According to FSC statistics, the arithmetic mean return for the two-year period is 7.31% for the universal pension funds, 7.28% for the occupational funds and 8.01% for the voluntary pension funds. These return levels are higher than the average inflation for the period (2023–2024) of 6%.

8. Last but not least, a major reform in the field of supplementary pension insurance is forthcoming. It is a continuation of the OECD's recommendations following their review of pension insurance for the purposes of Bulgaria's accession to the organisation, as well as of the recommendations from the aforementioned ESC analysis. The reform concerns the introduction of the multi-fund model in the pension system (introduction of the possibility of investment choice), the aim of which is to ensure that the negative effects of inflation on pension savings are overcome and that a stable achievement of higher returns is secured. In this regard, significant legislative changes to the SIC will need to be made (new pension products, guarantees, reserves, etc.). All of this necessitates the enrichment of the three-pillar model and is incompatible with the proposal of PP Vazrazhdane, which in practice amounts to its closure.

We believe that the joint position presented will be taken into account in the discussion and voting on the proposal dangerous for the system, submitted by MPs from the PG "Vazrazhdane," which aims to set back by decades the development of the three-pillar pension model in Bulgaria and to expropriate personal pension savings.

YOURS SINCERELY,

Evelina Miltenova, Chairperson of the Bulgarian Association of Supplementary Pension Insurance Companies (BASPIC)

Vassil Velev, Chairperson of the Association of Industrial Capital in Bulgaria (AICB)

Dobri Mitrev, Chairperson of the Bulgarian Industrial Association (BIA)

Nataliya Petrova, Chairperson of the Bulgarian Association of Management Companies (BAMC)

Radoslava Maslarska, Chairperson of the Bulgarian Association of Licensed Investment Intermediaries (BALII)

Evgeni Angelov, Chairperson of the Bulgarian Private Equity and Venture Capital Association

Dobromir Ivanov, Executive Director of BESCO — Bulgarian Entrepreneurial Association