The Second Pension Will Last for Three Years in Most Cases

Is the second pension a pension at all? This is the logical question that emerges upon overviewing the results from the official reports about the first regular payments of the second (private) pillar of the pension system. The process began back in September 2021 and the first general data was published not long ago by the Financial Supervision Commission for September through December 2021.

The data shows that very few pensioners will receive a lifelong income from the second pillar, which should be its main purpose. In the mass case the new retirees have signed a contract allowing them to withdraw all their savings in the form of term payments over the next three years, or have opted out of the second pension entirely and transferred it back to the National Social Security Institute.

The payments from the second pillar pensions have started

The second, supplementary but mandatory, pillar of the pension system began working in 2002. The first payments were made in September 2021, twenty years after the system was initiated. This is roughly half the time it takes for the standard pension fund, or the capital pillar, to accumulate funds sufficiently, which takes about forty years.

The legislative changes which lay out the rules for payments from the second pillar were passed with difficulties in the last possible moment – at the beginning of 2021 (mere months before the payments were due to begin in September and just before GERB’s terms had ended, which was followed by a long period of caretaker governments and snap elections). Thanks to this the process managed to begin successfully, albeit the results that followed again put forward fundamental questions about the structure of the pension system.

The new retirees want their money now

The new texts that were passed provide for three types of second pension, or three different types of payments from the private funds: a lump-sum payment (when the accumulated amount is less than three times the minimum monthly wage, or under 900 leva until Christmas 2021 and 1110 thereafter), in term payments or lifelong (if the accumulated capital in the policy amounts to at least 45/55,50 leva per month, or 15% of the minimum monthly wage, for a period of 17-18 years). The term payments are allowed for those who have more than 900/1110 but are insufficient to cover lifelong payments of at least 45/55 leva per month.

The lawmakers also included a provision that the lifelong pension must be offered in three variants – lifelong without further conditions, lifelong with a period of guaranteed payments (between two and ten years) and lifelong pension with term payments of part of the funds until the retiree reaches an age of their choice. Each of these options carry different consequences regarding the inheritance of the fund in case the person dies.

It came as no surprise that the majority of the new pensioners wanted to receive their money as fast as possible, which puts into question the whole point of the savings.

The indicial assertions of the Bulgarian Association of Supplementary Social Security Companies showed that 50%-60% of the first retirees would get term payments instead of a pension, 20% would choose a lump-sum payment since they would have accumulated very little amounts and 10%-30% would opt in a lifelong pension.

The first official data shows that the realities are far worse than the predictions: the term payments account for a whooping 82% (mostly for a period of three years), the lump-sum payments are 6%, while 12% have chosen to receive a lifelong pension (but in most cases with the option of term payments). And, these are only the ones who decided to keep their money in the second pillar, and for whom can be assumed that they have made the profitable choice for themselves. What was the alternative for those, who opted out of the second pillar and chosen the "secure" state pension is unclear. But the conclusion is categorical – the people want their money now!

Accumulated funds in the second pillar are not enough for a pension

Towards the end of 2021 the amounts in the second pillar (in the so-called universal pension funds) of the most senior socially insured (between 60-64 years old) have saved an average of 4719 leva. At the same time, people can receive a lifelong pension only if they’ve accumulated many times more than that amount. This fact once again questions the point of having the second pillar as it is today.

For savings in the range of between 500-10000-15000 leva, it is clear that the second pillar cannot function in a way to insure an adequate, supplementary to the state pension, lifelong income.

The first official data provides proof.

It turns out that by December 31 2021 seven private pension funds had provided 270 people with pensions, 203 of which opted for a lifelong pension with a term payment option. In this case the pension is not payable in equal amounts in the whole period (which is on average 17-18 years), instead in the first several years the person receives a much larger sum, which is inheritable, than the amounts that is left to be received during the normal lifelong period. This product may be chosen only by those who have accumulated enough in their accounts, who are a minority. In their case, the average monthly amount for a lifelong pension at the end of 2021 was 224 leva.

In comparison those with a lifelong pension without further conditions or those with a lifelong pension with a guarantee for payments (during which the amounts are inheritable for the guaranteed period) have received an average of 56 and 58 monthly respectively, while the fixed minimum by law was 45 leva per month at the time.

The majority of the first cohort of pensioners from the second pillar have received term payments, which is not even called a ‘pension’. These are 1863 people who wave received an average of 284 leva per month although the minimum under the law was 300 at the time. The majority – 1668 people have signed a contract for term payments for the funds in their accounts for three years, which means they have opted to receive their pension savings as quickly as possible. For the period of after the third years until the end of their lives (at an average period of receiving a pension of 17-18 years) these people will not receive anything from the second pillar, while from the first – the National Social Security Institute – they would receive 9-10% lower amounts than what they would have got had they transferred their account to the state insurance fund.

Those with the least accumulated amounts in their accounts (under three minimum pensions, i.e. 900 leva until December 25 2021) are allowed only a single payment under the law. According to data by the Financial Revision Commission, provided at Mediapool’s request, this regards 130 people who received 471 leva.

No information on the choice of 15000 women

According to the data by the Financial Revision Commission the first pensioners who have entered the payment phase of the second pillar at the end of 2021 are under 2300 (women, born after 31/12/1959, are entitled to receive a pension due to age and years of service). At the same time the preliminary forecasts were for 17000 women that would have the right to a second pension in the period September – December 2021.

For now the answer of the answer as to what has happened to the other 15000 women cannot be answered from the official statistics. It is possible some of them decided not to retire yet, while others likely transferred their accounts into the National Social Security Institute and chose to receive only a state pension, in order to avoid the 9-10% reduction from the second pillar.

Representatives of the Commission explained that they cannot provide accurate information what part of those who acquired the right to a pension have opted to transfer their accounts from the private to the state fund between September and December 2021 but for the entire 2021 35163 people of different ages and for different reasons have done so.

In the debate for the pension system there are those that claim that the first phase of the payments is too early to make general conclusions or to comment on trends. In this case, however, it is clear that the results cannot be too different because the accumulations in the accounts have been clear for years and miracles cannot be expected. The government promises to reform the pension system. It is necessary that this reform includes the second pillar.

"Doveriye" increased the pensions from April 1

The largest pension fund in Bulgarian – "Doveriye" ("Trust") increased the second pillar pension as of April 1 of this year, the company announced.

The exact percent of the increase was not mention because a precise percent of the increase of each lifelong pension or term payment depends on the time that the money in any particular account was managed by the fund.

The adjustment of the lifelong pension is by 50% of the realized annual return from what the fund invested to pay the lifelong pension in "Doveriye" between October 4 2021 and 31 March 2022, and above the technical interest rate, which is the basis for calculating the amounts of the lifelong pensions. The return in question for the period on an annual basis was 19,58%.

The adjustment of the term payments is by 50% of the realized annual turnover from what the fund invested to pay the lifelong pension in "Doveriye" between September 20 2021 and 31 March 2022. The return in this case was 28.79%.

Answering a question by Mediapool, the company said that for the term payments the average percent of the adjustment is between at least 0.50% of the March pensions and 7% of the September pensions. For the lifelong pensions this increase is between 0,3% and no more than 4.5%

The leftover from the realized return, which has not gone towards pension adjustment and the payments, are transferred to a reserve to be used in future unfavorable outcomes of the funds’ management.

By March 31 2022 the number of lifelong pensions "Doveriye" has paid are 130, 92 of which are term payments.

The average lifelong pension and that with a guaranteed period of payment is between 55.33 and 80.23 leva per month. For a lifelong pension with a period of term payment – for the term payment period – between 194.95 and 244.54 per month – and after this period – between 51.05 and 62.68 per month. The retirees receiving term payments from "Doveriye" by March 31 2022 are 1335.

According to "Doveriye" the fact that a larger share of the payments are for a term of three years and do not function as a pension income is not a problem for the system. "First, the number of these people will go done most definitely in the coming years, with a steady increase of the funds in the accounts. Second, for some people, especially in a period of increased mortality, as this one, these term payments are actually lifelong. Up until today, unfortunately we already have six people from the term payments group who have died, and we pay the unpaid leftover entirely to the inheritors," "Doveriye" told Mediapool.

The Bulgarian version of this text can be found here

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