Bulgaria’s Financial Supervision Commission (FSC) has approved at first reading draft ordinances on higher reserve requirements for pension insurance companies and stricter rules for protecting insured persons’ funds, the regulator said on Tuesday.

The changes follow up on amendments to the Social Insurance Code and concern the introduction of multi-funds in supplementary pension insurance.

Higher reserves to guarantee contributions

The most significant change concerns higher capital coverage requirements due to the continued growth of assets managed by pension funds. Currently, the gross contributions to the largest universal pension funds (UPFs) are guaranteed by reserves amounting to only 0.5% of net assets. The increasing number of people exercising their right to retirement requires larger reserves to guarantee the gross amount of contributions. The new provisions envisage doubling, and in some cases tripling, this buffer to between 1% and 1.5% of the respective fund’s net assets.

The FSC is also proposing stricter reserve requirements for guaranteeing pension payments. Until now, guarantees mainly covered lifelong pensions. Following the amendments to the Social Insurance Code, their scope will be broadened to include fixed-term pension payments as well. The reserve requirement will increase substantially, from the current 1% to between 4% and up to 6% of the capitalized value of pensions and deferred payments.

Stricter control of financial buffers

Companies will have to allocate significantly more funds during the accumulation phase to ensure timely coverage of their liabilities so as to guarantee gross contributions and maintain reserves during the payout phase, the FSC said.

The regulator will monitor compliance with a mechanism for continuous adjustment of financial buffers. Pension companies will be required to recalculate reserves on a monthly basis. If reserves fall below the minimum level, the company will have to replenish them immediately with its own funds. If reserves exceed the maximum permitted threshold, part of the funds may be released. According to the FSC, this will ensure both stability and more flexible capital management.

In the explanatory notes to the draft, the regulator stressed that the changes are aimed at limiting the risk of deficits building up in the system. The argument is that under unstable market conditions and increased volatility, pension companies must maintain sufficient buffers to meet their obligations to insured persons and pensioners.

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