




































 

70 

 

Finance, Accounting and Business Analysis 
Volume 5 Issue 1, 2023 

http://faba.bg/       
ISSN  2603-5324 

 

Defined Contribution Pension Schemes in Central and Eastern 

European (CEE) Countries – Current Issues And Future Perspectives 

 
Jeko Milev  

Department of Finance, University of National and World Economy, Sofia, Bulgaria  

 

Info Articles   Abstract 

 

 

History Article: 

Submitted 16 May 2023 

Revised 11 June 2023 

Accepted 12 June 2023 

 

 Defined contribution pension schemes have become quite popular 

throughout Europe in the last 20 years. Many countries implemented 

reforms trying to address the growing concerns about the pension 

systems organized mostly as pay-as-you-go structures in the last 

century. Adding fully funded components into the pension insurance, 

governments were trying to mitigate the problems arising from the 

ongoing process of population aging and the resulting unfavorable 

demographic trends in most of the countries in Europe. These reforms 

were widespread in Central and Eastern Europe in the late 1990’s and 

early 2000’s after the influential report1 published by the World Bank in 

1994 whose recommendations became cornerstones of the changes 

introduced into the pension systems in the region. The objective of the 

current paper is to give some insight into the current place of the 

defined contribution pension schemes in the pension systems in 

different countries in Europe and their significance in the next decades. 

The issue is substantial, especially in the light of the continuous 

inflation and rising pressure on public finances. Long term 

sustainability of both pension systems and public finances requires 

reforms that further support accumulation of resources in the long term. 

The first part of the paper describes the current condition of defined 

contribution pension schemes in 9 CEE countries, the second part is 

dedicated to some common problems of the schemes. The paper 

concludes with some recommendations for future reforms. The 

methodology used in the paper includes descriptive and comparative 

analysis, deductive and inductive approach. The basic findings of the 

research show that defined contribution pension schemes in CEE 

countries are exposed to significant political risk but they must be 

further supported and reformed in the continuous process of building 

sustainable and adequate pension systems in the region. 

 

Keywords:  

pension funds, pension 

reforms, risks, CEE 

countries 
  

 

JEL: G11, G12, G22, G23  

   

 
 
 
 
 
* Address Correspondence:   

E-mail : j.milev@unwe.bg 

 

 

  

                                                      
1 World Bank. 1994. Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. New 

York, N.Y.: Oxford University Press 



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INTRODUCTION 
 

Defined contribution pension schemes are a specific way of organizing fully funded pension 

insurance. They have been growing in popularity in the last 20 years for many reasons, but two of them are 

standing out: the reforms made in Central and Eastern European countries that supplemented the pay-as-

you-go pillars with fully funded ones and the obvious trend of transferring the investment risk towards the 

insured individuals observed in pension insurance in the west part of the continent. The tendency is easily 

seen even in those countries with serious tradition in pension insurance, based on capital accumulation 

(the UK and the Netherlands). Defined contribution pension schemes have several specific features: first, 

insured individuals and their employers pay contributions into individual accounts; second, the paid 

contributions are invested into specific types of financial assets; third, pension benefit is determined on the 

basis of the accumulated amount into one’s personal account at the date of retirement. Unlike the defined 

benefit pension schemes, in which pension amount is estimated usually as a percentage of the final salary, 

the defined contribution pension schemes do not give insight into the future benefit. The pension strongly 

depends on the sum accumulated towards the end of one’s professional career. The paid contributions, the 

realized yield and the fees charged by the managing company are the factors that affect most pension 

amount. The insured individuals bear significant risks both in the accumulation and in the distribution 

phase (Blake 2006). At the same time the so-called vested benefits2 (rights) are determined much more 

easily than the corresponding amounts in a defined benefit scheme. Defined contribution pension schemes 

became popular in Central and Eastern European countries in the late 1990’s and early 2000’s. They were 

seen as supplementary elements of the pay-as-you-go pillars whose financial health was expected to 

deteriorate in the next decades. The governments were trying to respond to the negative trend of 

population aging caused by high emigration rates, decreasing fertility rates and increasing average life 

expectancy. The expected rise in dependency ratios3 meant that pay-as-you-go pension pillars could exert 

significant pressure on public finances in the mid and in the long term. The fully funded pillars of the 

pension systems were seen as beneficial for the pension system itself but also for the whole financial 

system. There is evidence of incentivizing the trade on the domestic capital markets after introduction of 

some capital components into the pension system4. Davis (1993) also points out that pension funds, under 

certain assumptions, can contribute effectively to the development of the local stock exchanges. That was 

an additional argument for the introduction of a fully funded element in the pension systems of countries 

whose financial markets needed a booster to start channeling more efficiently the individual savings 

towards business. Two decades after their introduction, pension funds in Central and Eastern Europe have 

different destinies in different countries. Some of the governments made “reversal” reforms5 (Hungary and 

Poland), others continued to support the funded component and even adopted detailed regulation 

concerning the pay-out phase (Bulgaria). The current research is trying to shed some light on the 

development of the mandatory fully funded pillars into the pension systems in Central and Eastern 

European countries and to give insight into some future changes needed to strengthen them. The basic 

thesis is that fully funded pillars need further support and reforms in order to become those elements that 

can raise sustainability and adequacy of the pension systems in the region. The studies in this field 

accomplished in the last years have some controversial results. There is no common conclusion on the 

problems that need to be sorted out in order to ensure the success of the capital pension schemes. 

Bielawska (2013) points out the fiscal issues arising after the implementation of the pension reforms in 

Hungary and Poland. The transitional costs from purely PAYG pension system to mixed one (pay-as-you-

go and fully funded) are seen as one of the basic reasons for implementing reversal reforms in both 

countries. Sebo and Virdzek (2013) put special accent to the political risk as a crucial factor for the 

investment performance of the defined contribution pension schemes in Slovakia. The return realized by 

the pension funds operating such schemes is an important element for ensuring public support for future 

reforms. Szczepanski and Brzeczek (2013) in addition to the investment performance show that specific 

risk may arise from typical principal-agent problem in pension insurance which means that pension fund 

managers can act not in the best interest of the members of the scheme. Right regulation is seen as crucial 

for decreasing this type of risk especially when pension scheme is compulsory. At the same time different 

research paper of the European commission (2010; 2012; 2018; 2021a) show a persistent trend of 

                                                      
2 Vested benefit is the amount the insured could transfer into another pension fund before reaching 

retirement age. 
3 Dependency ratio measures the ratio between those individuals aged over 65 and those in working age. 
4 There is such evidence for the Chilean stock market, where the trade volume increased several times just 

in a few years after the big pension reform in 1980’s  
5 Reversal reform is a change in the pension system that destroys the mandatory fully funded component 

into the pension system. Such reforms were made in Hungary (2011) and in Poland (2014) 



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increasing asset value and number of insured individuals in the fully funded pillars of the pension systems 

throughout European Union (EU). Some of the reasons behind the observed trend are related to the 

expected rising pressure on public finances due to the aging of the population and the deteriorating 

demographic structures in almost all of the countries in EU. The first part of the research is dedicated to 

the actual structure of the pension systems in all those countries that made reforms following the model of 

the World Bank. The second part is trying to classify some common trends and to outline some of the risks 

related to them. In conclusion recommendations are made for some future reforms. 

 

THE MANDATORY DEFINED CONTRIBUTION PENSION SCHEMES IN CENTRAL AND 

EASTERN EUROPE 

 

In the mid 1990’s the World Bank published a report that strongly recommends structural reforms 

of the pension systems around the World. At the center of the reforms was put the multi pillar approach 

that combines the pay-as-you-go principle with the fully funded one. The obvious trend of increasing life 

expectancy and decreasing fertility rates was expected to cause gradual aging of the population and 

increasing strain on the pension systems based primarily on pay-as-you-go principle. The parametric 

reforms (increasing pension age, limiting early retirement options, etc.) applied to the state pension 

schemes were considered as insufficient for promoting long term sustainability and adequacy of pension 

incomes. The introduction of fully funded elements into the pension systems was seen as a possibility to 

strengthen the financial condition of pension insurance by relaxing part of the burden that falls on the pay-

as-you-go structures, but not only. Fully funded components were supposed to incentivize individuals to 

pay contributions on real incomes thus constraining “grey economy” which was a serious issue for many 

of the developing countries (Kirov 2010). At the same time capital pension schemes under certain 

assumptions can raise savings in the economy and support stock market trade thus promoting economic 

growth in the long term (Davis 1993). And finally, fully funded pension systems could have a better return 

to the insured individuals than pay-as-you-go pillars. According to Aaron (1966), the return to pay-as-you-

go depends on two basic factors – growth rate of average earnings (they determine the amount of 

contributions paid into the social security system) and old age dependency ratio (pensioners towards 

working individuals). On the other hand, the return to a fully funded pension system depends also on two 

factors: the return of financial assets and the passivity ratio (working age towards years in retirement). 

Davis (1993) shows that in case of equality between dependency ratio and passivity ratio, the return solely 

depends on the growth rate of average wage and the return of financial assets. For many countries the 

latter exceeds the former, thus giving precedence to the fully funded pension schemes. In addition, the 

already formed trend of population aging means that the dependency ratio is expected to further 

deteriorate in the next decades giving another advantage to fully funded structures. All these arguments 

made possible the fundamental pension reforms implemented in many countries in Central and Eastern 

Europe. Hungary (1998), Poland (1999), Latvia (2001), Bulgaria (2002), Estonia (2002), Croatia (2002), 

Lithuania (2004), Slovakia (2005), Romania (2008) made pension reforms following the model proposed 

by the World Bank. The pension systems in these countries have similar features but also common 

problems. 

At the start of the reform the governments had to address and solve important issues concerning the 

exact design, structure and financing of the second pillar pension funds. All of the countries adopted 

defined contribution pension schemes with personal accounts, managed by pension insurance companies, 

structured as separate legal entities. In the very beginning, it was crucial for the policymakers to convince 

insured individuals that pension funds are financial institutions, designed to support the pension systems 

and to increase probability of receiving benefits adequate to preretirement income. The idea of having an 

individual account for accumulation of assets for future retirement appeared to be quite innovative for 

countries where pension insurance had been organized on Semashko6 model for decades (Gochev and 

Manov 2003). Social security systems in all countries from the former Soviet bloc were financed solely by 

the state budget and people commonly believed that pension insurance cannot be financed on other 

grounds than on funds provided by the government. The financial “pyramids” that existed in some of the 

countries in the years after the collapse of the communist regimes were another scar that had to be healed. 

Convincing people that pension funds were not institutions that manage some other “Ponzi scheme” was 

important for the success of the reform.  

Another issue that had to be sorted out was related to the amount of the contributions destined to the 

pension funds. The approach adopted by all countries, but Estonia, was to reduce the contribution due to 

the first pillar and to redirect that amount into the second pillar. The government in Estonia reduced the 

                                                      
6 Nikolay Semashko is a Russian academic and politician whose ideas about social security were widely 

accepted in Soviet Union and countries from the former Soviet block 



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payment due to the first pillar but also introduced additional contribution to finance the private pension 

funds in the country. The reduction of the contribution rate for the first pillar raised the question of how to 

compensate the expected lower revenues into the state pension system. 

 

Table 1. Contribution rates for the first and for the second pillar at the start of the reform 

N: Country First pillar contribution rate Second pillar contribution rate 

1 Hungary 18.5 % 8 % 

2 Poland 12.22 % 7.3 % 

3 Latvia 18 % 2 % 

4 Bulgaria 27 % 2 % 

5 Estonia 16 % 6 % 

6 Croatia 15 % 5 % 

7 Lithuania 23.4 % 2.5 % 

8 Slovakia 9 % 9 % 

9 Romania 29 % 2 % 

Source: OECD (2004, 2008); Bejakovic (2019)  

 

The adopted approach of financing the transition period was different for the various countries. 

Three basic models were applied: revenues from general taxation, own resources, additional public debt 

(Bielawska 2013). The combination of the three variants was also an option.  

The last basic issue that had to be addressed was related to the individuals allowed to join the new 

pension funds. The very nature of the fully funded pension systems implies that insured individuals need a 

comparatively long period in order to accumulate enough resources into their accounts. Those of them 

who were close to their retirement were excluded from the possibility of saving or they were given the 

option to choose whether to join the scheme. The different countries adopted different approaches to this 

issue, but the common feature was that not all individuals were allowed to join the new pillar of the 

pension system. 

 

Table 2. Criteria for compulsory joining the second pillar pension funds in CEE countries 

N: Country Individuals mandatory insured into the new pension funds 

1 Hungary All persons under the age of 35 

2 Poland All persons born after 31.12.1968 

3 Bulgaria All persons born after 31.12.1959 

4 Estonia All persons born after 31.12.1982 

5 Croatia All persons below 40 years 

6 Latvia All persons below 30 years on 1st of July 2001 

7 Lithuania All persons below 40 years 

8 Slovakia All persons that start work after 01.01.2005 

9 Romania All persons below 35 years 

Source: OECD (2004, 2008); Bejakovic (2019)  

 
The start of the reform was promising, and many individuals were convinced that pension systems 

needed the adopted change. Despite the initial enthusiasm, the new pension funds had to respond to many 

challenges in the following years. One of the first appeared on the surface just a few years after the 

beginning. The government in Hungary was not satisfied with the position of the European commission 

that funds accumulated into the second pillar cannot be deducted from the official public debt. The 

growing liabilities of the government appeared to be a threatening circumstance for the pension funds. The 

policymakers in the country made a “reversal” reform and seized the funds accumulated for a period of 13 

years. So, in 2011 the Hungarian compulsory second pillar pension funds stopped to exist. The reversal 

was made by introducing strong incentives7 for all individuals to transfer “voluntarily” their accumulated 

resources into the first pillar of the system. Similar transformation was made in Poland a few years later. 

Due to the wish of the government to keep the ratio public debt/GDP on acceptable level, the ruling class 

forced second pillar pension funds to transfer their polish government bonds into the state social security 

system. Then, the state officials promised to take responsibility of paying an additional part of the pension 

benefits proportionate to the share of government securities transferred to the budget. Polish pension funds 

were restricted to invest primarily into corporate instruments, and at the same time they started to 

gradually transfer the savings of those individuals who have 10 years to retirement into the state PAYG 

                                                      
7 The adopted new regulation required those who choose to stay within the second pillar to give up their 

pension benefit due by the state. 



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pillar. No other CEE government took actions like these, but some milder measures aimed at constraining 

the activity of pension funds were assumed by each of the researched countries. The following table 

summarizes some of them. 

 

Table 3. Regulative changes made in the CEE countries aimed at constraining the activity of second pillar 

pension funds 

N: Country Measure taken by the policymakers 

1 Hungary Full “reversal” reform (seizure of pension assets) 

2 Poland Contribution rate reduced to 2.92 %. Assets in government bonds transferred to 

the state social security system and redeemed. Assets from pension funds 

transferred gradually to PAYG pillar 10 years prior to retirement. 

3 Bulgaria Part of the assets of occupational pension funds were seized. Insured individuals 

were allowed to transfer their resources from the second into the first pillar of the 

system. Contribution rate remains at 5 %. 

4 Estonia 6 % contribution rate cut to 0 % between June 2009 and January 2011 and shifted 

to PAYG. Then gradual increase from 2011. 

5 Croatia Option to exit the scheme 

6 Latvia 8 % contribution rate reduced to 2 % in May 2009. Then increased to 4 % from 

2013 

7 Lithuania 5.5 % contribution rate reduced to 2 % in 2009. Introduced voluntary participation 

8 Slovakia 9 % contribution rate reduced to 4 % in 2013. Option to enter and to exit the 

scheme 

9 Romania Reduction in planned growth path of contribution rate from 2 % to 6 %. Rate 

froze at 2 %, started to increase from 2011 at annual rate of 0.5 p.p. 

Source: Bielawska (2015), [based on Price and Rudolph (2013) and Schwarz (2011)] and author’s update 

 

The adopted changes undoubtfully show that second pillar pension funds in the CEE region are 

exposed to significant political risk. Though managed by private institutions, these types of pension 

schemes are financed by compulsory contributions and that makes them quite vulnerable to political 

decisions. The governments in all countries were inclined to consider the second pillar as part of the public 

pension systems and the past experience proves that they can easily change the rules in a way that puts the 

funds under significant risk. The basic reason for the accomplished reverse reforms was related to the need 

for additional resources that could temporarily relax part of the burden on public finances, but two other 

factors must be mentioned as well. First, comparatively low amounts accumulated into the funds. At least 

three reasons could explain the unfavorable situation: low contribution rates, short period of accumulation 

and comparatively low yield. Pension funds are widely blamed for the realized yield for the time of their 

existence, but in an environment of very strict regulation rules and extremely low interest rates for more 

than a decade, the achieved low return is not a surprise. However, the pension funds, in those countries 

with established multi-fund systems, were able to realize significantly higher returns in the aggressive 

portfolios than in the conservative and balanced ones. The countries which did not introduce portfolios 

with different risk profiles were not able to take advantage of the prolonged upward trend in the stock 

markets for the last decade. Daneva (2018) and Pandurska (2020) show the positive features of multi-fund 

system and its importance for the insured individuals in defined contribution schemes. The second basic 

reason for the implemented reverse reforms stems from the first one. When accrual of resources into 

individual accounts is not considered as significant, public opinion is not so noisy in opposing the changes 

that would destroy individual savings. The reversals in both Hungary and Poland showed that general 

public is not decisive in protecting its own rights and resources in the second pillar pension funds. The 

governments were able to implement legislative changes without meeting any significant resistance. To a 

certain extent this is also due to the lack of understanding of what exactly is lost and what function 

pension funds fulfill. All measures taken in the last decade show declining and volatile support by the 

policymakers in CEE region for the second pillar, despite the initial enthusiasm among governments that 

initiated the reforms. The fundamental question is whether pension funds should continue to be 

considered as important elements in raising sustainability and adequacy of the pension systems in CEE 

countries. 

  

DEFINED CONTRIBUTION PENSION SCHEMES AS A FACTOR FOR FUTURE 

SUSTAINABILITY AND ADEQUACY OF PENSION SYSTEMS IN EUROPE 

 

In a number of research papers (European Commission 2010; 2012; 2015; 2018; 2021b) published in the 

last decade, European commission continuously underline the problems stemming from the aging of the 



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population and the deteriorating demographic structures for the future sustainability of the pension 

systems around Europe. These unfavorable trends are expected to be managed by pension reforms which 

are seen mostly in the following directions: raising employment rates among elderly, increasing pension 

age, and enhancing the opportunities to build up safe complementary retirement savings. The reforms that 

member states are expected to implement concern both the pay-as-you-go pillar and the fully funded one 

since the observed trend of population aging is supposed to affect adversely all of the pension columns. 

Prolonged saving and gradual buildup of pool of assets is seen as irrevocable trend that can effectively 

support elderly in receiving adequate pension benefits but also governments in securing sustainability in 

public finances. The 2022 global pension index, published by Mercer and CFA institute (2022)8 confirmed 

once again that those countries which were able to build robust funded component into their pension 

systems take top ten of the places in the “Quality of pension systems” ranking: 

 

Table 4. 2022 Mercer and CFA Global Pension Index about Quality of Pension Systems 

N: System Overall grade Overall score Adequacy Sustainability Integrity 

1 Iceland A 84.7 85.8 83.8 84.4 

2 Netherlands A 84.6 84.9 81.9 87.8 

3 Denmark A 82.0 81.4 82.5 82.1 

4 Israel B+ 79.8 75.7 81.9 83.2 

5 Finland B+ 77.2 77.5 65.3 93.3 

6 Australia B+ 76.8 70.2 77.2 86.8 

7 Norway B+ 75.3 79.0 60.4 90.3 

8 Sweden B 74.6 70.6 75.7 79.5 

9 Singapore B 74.1 77.3 65.4 81.0 

10 UK B 73.7 76.5 63.9 83.0 

Source: Mercer CFA Institute Global Pension Index 2022 highlights key challenges of defined contribution 

plans for retirees. Online: [https://www.cfainstitute.org/en/about/press-releases/2022/mercer-cfa-

institute-global-pension-index-2022] 

 

The above table shows that 7 of the first 10 most robust pension systems are in Europe with no 

country from CEE region. The report outlines an important trend in the last years – the gradual turning of 

defined-benefit pension plans into defined contribution pension schemes. This is a sustainable trend and 

expectations are that more and more people will depend on this type of pension schemes in the next 

decades. Defined contribution pensions are expected to play a crucial role in mitigating the adverse effects 

on the pay-as-you-go systems caused by the negative demographic processes. Their future development is 

considered as a priority in many of the OECD countries. Together with the gradual increase of pension 

age, the strengthening of the fully funded components in the pension systems is the most obvious trend in 

the last decade. Incentivizing additional saving, governments are trying to raise both sustainability and 

adequacy of the pension systems in the long term. The main question is not whether defined contribution 

pension schemes should exist but how to be developed further so that to respond to the future challenges 

brought by the aging of the population. It’s worth noting once again that within defined contribution 

pension schemes investment risk is transferred towards the insured individual. The amount accumulated at 

the date of retirement is crucial in determining the future pension amount. From this point of view, three 

elements are of utmost importance in securing long term stability of the scheme: regular payment of 

contributions, yield realized by the pension companies and management fees. The experience of the CEE 

countries in the last two decades in managing pension schemes based on a fully funded principle shows 

that proper regulation is important for each of the three components. The regular payment of contributions 

is maybe the only element that doesn’t depend so strongly on the efforts of the regulator since the practice 

shows that there are variety of reasons for not paying contributions for a certain period. Individuals with 

irregular payments are expected to rely primarily on the pay-as-you-go system as fully funded pension 

funds are not supposed to transfer resources among individual accounts. Nonetheless, the efforts to limit 

the extent of this group should be continuous, including variety of incentives so that to constrain at least 

the number of those who voluntarily are trying to escape the payments into the pension fund.  

The investment rules are the second factor of great significance for improving the accumulation of 

resources into individuals’ account. The risks to which individuals are exposed at different stages of their 

lives are different (Milev 2014). Those who have just entered into the labor market and whose investment 

horizon is expected to be over 30 years need to worry most about the inflation risk. The risk of declining 

purchasing power of money is very serious for all types of fully funded pension schemes. If pension funds’ 

                                                      
8 Mercer and CFA institute publish on a regular basis Global Pension Index (MCGPI) by studying the 

pension systems of 44 countries accounting for 65 % of World’s population. 



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rate of return continuously lags behind the inflation rate, the probability of accumulating enough resources 

to finance pension benefit adequate to the preretirement income decreases significantly. Assuming some 

risk in terms of higher volatility of asset prices in the short term in exchange for a raised probability of 

realizing yield that exceeds inflation in the mid and in the long term looks like a good deal for those 

individuals. On the other hand, people whose retirement is close and respectively the investment horizon is 

short need mostly stability of their investment. Any significant drop in the value of their portfolio of assets 

just prior to the date of retirement can seriously hurt their financial position and the possibility of financing 

adequate benefit. Flexibility of investment rules is quite important especially when insured individuals are 

the ones that bear the investment risk. Some of the CEE countries were able to introduce the multi-fund 

system thus enabling pension companies to structure portfolios with different risk profiles for the different 

groups of insured. The investment results of the funds with different risk level undoubtfully show that 

aggressive portfolios’ rate of return is higher than the one of the conservative funds for the last 10 years. 

The unprecedented last decade of zero and negative interest rates was quite appropriate for investing in 

variable income instruments and the funds in countries where investment regulations were not so 

restrictive took significant advantage relative to others. Insured individuals in Estonia, Latvia, Lithuania 

and Slovakia were able to select aggressive strategy for their pension savings and the assumed risk was 

compensated with significantly higher return9. It is an interesting fact that the funds whose rate of return is 

the highest one are those with adopted passive investment strategy following some market index10. The 

funds in countries where regulatory restrictions didn’t allow the construction of different portfolios of 

assets adjusted for the risk profile of the insured individuals were not so successful in their investment 

performance in the last decade. Investment managers in those countries were trying to follow a balanced 

strategy but investing traditionally in fixed income instruments in an environment of extremely low 

interest rates proved to be an unsuccessful approach for the past years. The exact results of the different 

types of funds and the comparison with the inflation rate will be analyzed in another research.  

Management fees are the third component that seriously affects the amount accumulated into one’s 

individual account. The costs incurred by the insured individuals directly reduce the realized yield and 

could significantly influence the performance of the fund. The fees charged by the compulsory pension 

funds in CEE countries are strictly regulated. According to Davis (1993) “costs are higher for small funds 

than large, and for defined benefit relative to defined contribution”. This observation is partly confirmed 

by the development of the Bulgarian pension insurance companies whose fees charged on the managed 

funds’ assets were higher at the beginning of their operation and gradually declined. The investment fee 

charged on the value of the managed assets used to be maximum 1% annually for the period between 2002 

and 2015 and then it was lowered to maximum 0.75 % in 2019. The management fee charged on each paid 

contribution was maximum 5 % between 2002 and 2015 and has been gradually reduced to 3.75 % since 

2019. The observation “the smaller the fund, the higher the fees” is quite valid for the development of the 

universal pension funds in Bulgaria. However, the regulator, in this case, plays a major role since the 

general practice was pension companies to charge the maximum allowed amount. The fact that fees are 

gradually decreasing is a positive one and could further boost the performance of the funds in the next 

years. Similar trend is observed for the fees charged by the pension companies in other CEE countries as 

well. 

The three analyzed components (paid contributions, realized yield, charged fees) are undoubtfully 

important for establishing defined contribution pension schemes as an important factor for the future 

adequacy and sustainability of the pension systems in CEE countries. However, there is one crucial 

element that if not put under control, could devastate the fully funded pillars in all of the countries in 

Europe – inflation. The last decade of unprecedented low interest rates and very loose monetary policy 

implemented by the main central banks (mostly Fed and ECB) provoked high inflation rate in 2022 which 

reverse the trend in interest rate level and for a period of 12 months both Fed and ECB raised the main 

reference rates significantly11. The inflation rate and the resulting volatility of interest rate levels have 

disastrous effects for the pension funds both in the short and in the long term. The sharp rise of interest 

rates resulted in a drastic drop of the market values of all fixed income securities in the portfolios of 

pension funds. The widely adopted mark to market approach in evaluation of these securities lead to 

announcing huge losses in 2022. That could significantly undermine the trust of the general public towards 

                                                      
9 The aggressive portfolios in Slovakia realized 2 to 3 times higher return than the conservative ones for the 

period between 2013-2022.  
10 In Slovakia pension funds are obliged to offer portfolio of assets that replicates a market index. The 

investment performance of these portfolios significantly exceeds the yield realized by aggressive portfolios 

which have been managed actively for the period 2013-2022 
11 ECB raised the reference rate from 0 % to 3.75 % and Fed raised the rate from 0 % to 5.25 % for the 

period between 01.01.2022 and 10.05.2023. 



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pension funds although the duration of their liabilities allows the losses currently to be considered as 

“accounting ones”. In the long term, however, inflation could be even more erroneous. Rates of inflation 

like the ones in 2022 could devastate the defined contribution pension schemes. It is almost impossible to 

realize rate of return that exceeds such rates12 of inflation. Unfortunately, the huge public debts and 

pension liabilities in the first pillar of the pension systems in almost all countries in Europe make inflation 

quite probable in the next decades. From one side, it will allow financing of the pay-as-you-go systems 

easier but on the other it will ruin the sustainability of the fully funded pillars of the pension systems 

around Europe. Defined contribution pension schemes cannot sustain such a trend and their existence 

may be called into great question. 

 

CONCLUSION 

 

 Pension systems around Europe are facing big challenges in the next decades. Traditionally 

established on a pay-as-you-go principle, they must be rebuilt thus responding to the negative trends of the 

aging of the population and the deteriorating demographic structures. Pension systems in CEE region are 

affected even more by the unfavorable demographic trends suffering additionally from net emigration and 

loss of people in working age. The structural reforms made in the early 2000’s introduced fully funded 

defined contribution pension schemes which were considered as important elements that could support the 

pay-as-you-go systems in the long run. The reports published by the World Bank and the European 

Commission in the next years were continuing to foster additional saving as a necessary tool for preventing 

poverty in old age. However, due to a variety of reasons many of the CEE countries started to delay some 

additional changes in their second pillars and even to reverse already accomplished reforms. The support 

for the fully funded schemes should be a prolonged effort. The most sustainable and adequate pension 

systems around the World continue to be the ones with robust funded component. So, the pension 

insurance built on a capital principle must not be left behind but additionally strengthened with important 

reforms that could mitigate some of the risks that appeared in the last years. First, pension funds must be 

allowed to structure portfolios with different risk profile thus addressing both the inflation risk which is the 

most important risk for those individuals with long investment horizon and asset price risk for those 

individuals who are close to the date of their retirement. Second, regulators need to keep different types of 

fees charged by the managing companies as low as possible, because they can significantly affect the 

amount accumulated in the individuals’ accounts towards the date of retirement. Third, those individuals 

who were not able to accumulate enough resources to fund their retirement must not serve as an argument 

to implement some type of “reversal” reform. Governments should have continuous policy to reduce the 

scale of this group by incentivizing individuals to save additionally for their retirement. This is the only 

sustainable approach to address the negative demographic trends and to mitigate the expected hit over the 

pay-as-you-go pension systems in the next decades caused by the aging of the population. 

 

 

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12 2022 inflation rate in Bulgaria is 13% 

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https://ec.europa.eu/eurostat
http://www.federalreserve.gov/

