Банкеръ Weekly



ECONOMY LOSES ABOUT BGN1-1.5BN DUE TO THE INORDINATE REQUIREMENTS TO SECURITIES, TRADED BY COMPANIESUnder the suitable pretext that's what Europe wants officials in Bulgaria are about to conclusively whither investment yearnings of pension funds in Bulgaria, obviously, without taking into consideration the fact that the financial system in the State is like a table, standing on four legs. Banks, insurers, pension funds, and investment intermediaries, are something that turned into a major boastfulness and support for the governments in recent years - the financial stability of the State. The question is if these governments realize what the consequences would be if one of these is shaken due to administrative incompetence.Government's financiers have again been seized by the passion of pretending to be more European than the Europeans themselves. Instead of liberalizing the regime for corporate investments, they are in fact increasing the State's intervention on the market of additional pension insurance. A proof are the new amendments to the Social Insurance Code, drafted by an expert panel with the Agency for Economic Analyses and Forecasts, on the proposal of the Commission for Financial Supervision (CFS). These amendments completely contradict the funds' long-time hopes to invest more freely their assets. The Finance Ministry is to move the draft bill for approval by the Council of Ministers.It turned out that the velvet cuffs of the CFS are intended to introduce the obligation that all debt securities, traded by pension insurance funds, should be qualified. That requirement is projected to enter into effect as of the date when Bulgaria becomes a member of the EU. The idea is that all municipal, mortgage and corporate debt securities which are within the portfolios of pension funds, should have a credit rating. The emblem qualified for the paper traded in this country is something good, indeed, branch insiders comment. But it goes flat against the situation on the domestic markets of non-government debt securities. Moreover, there is no such a demand on the part of Europe, experts add.More than 50 companies or municipalities operate on that market at present. All of them issue bonds, but only two of them have and investment rating. In that situation the requirement for qualification will simply forcethe pension funds to close down almost their entire portfoliosas of the eventual EU-accession date, January 1, 2007.At that, without any alternative, as they will simply not have where to invest their money. The absurdity in this case is that the Social Insurance Code stipulates a 5-day term within which the attracted funds should be invested. From both a market and a social point of view it is non-sensical to quickly sell assets just because of legislative imperfection. The Bulgarian financial market is not sufficiently developed, and there is not a variety of investment instruments, which is characteristic of Westeuropean markets. In other words, pension funds' assets increase unsteadily, but they do not have a sufficiently rich choice of instruments in which their could invest their clients' money, managers commented. It's a public secret that big pension companies face serious difficulties connected with the investment of the assets they manage. One of the possibilities in that direction is to increase the permitted investments in shares. The current restriction is up to 10% of the pension fund's assets. It is true that the stocks are riskier, but a 10% limit is too restrictive in order to allow a normal diversification of the assets. Therefore, branch insiders propose that the limit would be raised to 25% at least. For quite a long time now pension companies have been insisting that the law allows each of them decide how to structure its portfolio, in compliance with the volume of assets it manages and its investment policy and strategy. The stalemate situation regarding the projected amendments to the Social Insurance Code reaches as far as setting also the requirement to invest the pension funds' money in bank depositsonly in banks with a set credit ratingThis requirement is neither a must in any of the EU directives. It's another question that only 14 of all the 35 banks, currently operating on Bulgaria's territory, have been assigned a credit rating by a specialized international agency. But in any case, the additional limitation of the level of credit rating could seriously narrow the number of banks in which pension funds would be allowed to open deposits. Thus, the funds will be deprived of the possibility to maintain a well-differentiated portfolio. The banks without a respective credit rating will also suffer a negative impact. For the time being there are no chances whatsoever for Bulgarian law-makers to get out of the intricate cases, in which they fell. It's doubtful if anyone realizes the outcome of the investment Catch 22, in which domestic pension insurance companies have been trapped for years. Or is that matter too sophisticated, both for the army of Bulgarians, ensured by law, and for the handful of officials in the CFS and the Finance Ministry who handle it?These days the CFS website proudly announced the latest data about the net assets of pension funds in Bulgaria. Their amount exceeded the phsychological level of BGN1BN, the institution boasted. In September 2005 they were 27% up from the end of 2004 and 95.87% up from end-2003. Another tendency can be also observed. For the first time the net assets of universal funds exceeded those of voluntary funds. As of September 28 the assets of universal funds totalled BGN385,242,002. According to forecasts, the money attracted in pension funds will increase by another BGN100MN by the year-end. Thus, additional pension insurance has emerged as one of the most quickly developing financial markets in Bulgaria. With the resource they manage pension companies already occupy their place as important institutional investors in our economy, experts comment. More than 99% of pension funds' assets are invested in it. According to the funds' own projections, their portfolio will reach BGN1.5BN in end-2006. This financial resource is respectful enough and would certainly have a healthy influence on the Bulgarian economy. Even for those who are ignorant about the finance and pension sphere it is clear that BGN1.5BN is BGN1.5BNAnd the resource has been accumulated as a percentage from the pension contributions of all Bulgarians, born after December 31, 1959. After the start of the pension reform in this country the National insurance Institute (NII) began to transfer to the pension funds 2% of the employees' instalments. As of 2003 the percentage rose to 3%, and as of 2006 it should be 6% by law. The idea is to invest the money and gather the so-called second pension in order to compensate the miserable incomes. In the ideal case, according to actuary calculations, the process will take some 15-20 years. Thus, those who are employed now will have higher incomes when they retire and won't be a burden to the state insurance system. That is in fact the basis of the Bulgarian pension model, contrived as a hybrid between the system in Chile and the traditions of the solidarity type insurance in Old Europe. The complete breaking off of annuity in Chile from the State yielded results 22 years later. The revolutionary change was made in 1980 when the state-run pension system was entirely superseded by a privately managed national system with individual saving batches. Two decades later the private funds were already managing 51% of the country's GDP, a rapid development of the capital markets can be witnessed, as well as an additional economic growth of 5-6% and a steep shrinkage of unemployment. Such effects in Bulgaria for the time being seem only phrases in the mouths of politicians. And it comes to nobody's mind to project a transition period for the introduction into the Bulgarian financial reality of borrowings such as qualification of securities, credit rating, etc.The drafted amendments to the Social Insurance Code stipulate a ban for pension funds to invest in real estates in the country and abroad. Until now they were allowed to invest in immovable property in Bulgaria alone up to 5% of the mandatory funds' capital, and up to 10% of the voluntary funds' assets. Moreover, the purchased estates could not be used for the needs of the companies or of persons connected with them, i.e. they were not allowed to set up offices with the money of insured persons. By these limitations the risk was reduced to the minimum, especially on the background of the dynamics on the domestic real estates market, people in the branch commented. The present ban practically deprives the companies from an instrument with a long-term investment horizon, the Bulgarian Association of Holdings for Additional Pension Insurance believes. According to its members, investments in real estates preserve the real worth of money and are a protection against inflation. Moreover, that instrument is appropriate for a better diversification of the funds' portfolios and reduces risk in them.

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