The Bulgarian pay-as-you-go publicly managed pension system is complemented by default and voluntary defined contribution pension funds, managed privately. The regulatory regime of the private pension funds is such that turns them into: unsuitable, uncompetitive and ineffective pension products.
Privately managed pension funds are unsuitable, because they are not aligned with the investment horizon and the risk tolerance of individual investors. They are uncompetitive since their track record is of delivering below market returns for above market fees and charges. Investors have overpaid for underperformance. Finally, the default pension funds are ineffective, since they are not capable of delivering a supplementary pension. On the contrary, the insured are guaranteed to receive a lower total pension income compared to a situation where they had not participated in a default pension fund at all. Thus, the privately managed pension funds in Bulgaria inflict detriments to their customers as a result, first and foremost, of their regulatory regime.
The article outlines six such flaws, embedded in the Code of Social Insurance. I make five recommendation to fix those flaws which, if implemented, will ensure that customers will be guaranteed a supplementary pension and will receive a suitable portfolio.
The recommendations will also lead to an opening up of the cartelized pension industry to competition.
Until these or similar recommendations are implemented, the insured are best advised to invest their pension savings outside of the Bulgarian pension funds.
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