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Longevity and equality between the generations in the supplementary mandatory pension insurance in Bulgaria

by Ioannis Kotsianos, FSA, CERA
Estimates of mortality and distribution of surplus between generations in order to ensure sustainability and fairness in the payment of pensions

The payment of the pensions from the Supplementary Mandatory Pension Insurance is becoming more and more relevant with the approach of the time for the first payments of the funds accumulated on the accounts of insured persons.

Ioannis Kotsianos, Chairperson of the Executive Committee of Allianz Bulgaria, examines the issue with a special focus on the costs associated with increased life expectancy and the issue of equality between the generations. In his report “Longevity and Equality between the Generations in the Supplementary Mandatory Pension Insurance in Bulgaria”, he answers questions such as:

  • What are the main risks and challenges in the payment phase?
  • What is intergenerational equality and why is it so important?
  • Is it possible to structure a fair system that reduces generational income disparities due to the effect of financial markets?

There is currently a debate in Bulgaria on the rules for the payment of pensions from the supplementary mandatory pension insurance pillar (1bis), which focuses on two main topics. Firstly, whether the pension funds should guarantee at the time of maturity the amount of the contributions accumulated during the insurance period. Secondly, there are several different opinions on the framework for determining and indexing lifelong pensions. The report examines the payment of pensions with a special focus on the costs related to increased life expectancy and the issue of intergenerational equality.

The challenge regarding the first part is rather intuitive. As retirees live longer, the cost of paying their fixed-rate pensions increases. To understand the potential scale of this impact, the Lee-Carter model was applied to the mortality data in Bulgaria.

The second part of the issue is more complicated. It concerns the impact of market risk (especially variations in interest rates) on the amount of the lifelong pension that can be granted to pensioners. When granting a pension, it is obligatory for the present economic value of the future payments to be as close as possible to the amount of the accumulated funds on the accounts of the insured. This means that people who retire at a period with high interest rates would receive a higher pension than those who retire when interest rates are low.

The report analyzes how future indexation of pensions can create a compensatory mechanism and ensure that generational differences dictated by the market are minimized. The impact of key parameters such as the amount of the surplus over the guaranteed contributions at the time of retirement, the technical interest rate for determining the guaranteed component of the pension and the share of the surplus in the fund for payment of pensions that should be transferred to create a guarantee reserve is also considered.

 

 

You will find more useful information in the Report: general overview of the pension insurance system in Bulgaria; Proposal for reform of the supplementary mandatory pension insurance in universal pension funds; Main risks and challenges in the payment phase; Simplified sensitivity analysis, etc.
You can read the whole report from the links below:
Ioannis Kotsianos, FSA, CERA
Chairman of the Executive Committee of Allianz Bulgaria Holding

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