







































65 

 

Finance, Accounting and Business Analysis 
Volume 1 Issue 1, 2019 

 

 

 

Bulgarian Universal Pension Funds – Are They a Real Source for 

Financing the State Budget Deficit   

 
Jeko Milev   
Associate Professor, UNWE, Bulgaria 

 

Info Articles   Abstract 

 
 
History Article: 
Received 5 June 2018 
Accepted  12 December 2018 
Published  29 January 2019 

 Bulgarian pension funds have been operating for more than 15 years since the 
fundamental reform in the pension system in our country was implemented in 2002. 
For the whole period Bulgarian lev has been fixed to the euro due to the currency 
board system. In such an environment Bulgarian central bank cannot finance the 
budget deficits of the state. Bulgarian government is trying to balance the budget or 
to form small deficits because in a currency board monetary system eventual 
shortages of cash inflows should be compensated by the private sector – mainly by 
the institutional investors – banks, pension funds, insurance companies etc. In this 
situation Bulgarian pension funds are one of the cash sources that could be used.  But 
are they a real source in the long term? In the next lines a research is done on the 
structure of the government bond portfolio held by Bulgarian pension funds and how 
these financial institutions actually support the financing of the deficits formed by the 
Bulgarian government for the last 10 years. The research is trying to find answers to 
the following questions: 

1. Is the share of government bonds in Bulgarian universal pension fund 
portfolio constant or is it variable for the last 10 years. 

2. What is the share of the Bulgarian government bonds in government bond 
portfolio managed by the pension funds? 

3. Could we expect that these financial institutions will continue to finance 
the budget deficits of the Bulgarian government in the long term and to 
what extent? 

The last question is quite important having in mind that the introduction of the funded 
component of the pension system was accompanied by a transfer of the contribution 
due for the first pillar of the system (pay-as-you-go) towards the second one (fully 
funded with defined contributions). So part of the deficit formed into the pay-as-you-
go pension system is due to this reduction of the contribution rate paid by those 
individuals insured into the universal pension funds.  
 

 
Keywords :  
Pension Funds, Investments, 
Government Bonds, Regulation, 
Economic Crisis.  

 

  

   

 
 
 

 
 
 
 

 Address Correspondence:   
E-mail : jekomilev@yahoo.com 

 

 

  



Jeko Milev / Finance, Accounting and Business Analisys 

66 

 

Introduction  

Bulgarian pension system was significantly reformed in the year of 2000. As a result of this 

reform and following the recommendations of the World Bank a three-pillar pension system was 

established. Bulgarian demographic structure has been worsening for the last 20 years. Due to the 

economic slump which was a logical result after the collapse of the communist regime and the 

continuous lack of economic reforms, the country’s birth rates dropped and the emigration processes 

deepened. The negative changes were extremely severe in 1990’s and as a consequence the real value of 

pension benefits fell seriously. The continuous aging of the population has been making pay-as-you-go 

system unsustainable in the long term. Some populist decisions in early 1990’s (such as receiving full 

pension rights earlier for some labor categories or getting invalidity pension without being disabled) 

made the situation even worse. The hyperinflation from the late 1996 and early 1997 melted the savings 

of all Bulgarians including pensioners. As a result the average pension amount dropped to $5 per month. 

In such extreme economic situation Bulgarian authorities took some decisive steps to start a pension 

reform whose aim was to respond to the worsening demographic structure and to support the existing 

PAYG system1. Bulgarians were given the opportunity to save and to accumulate resources for their 

future retirement.   The long-term goal of the implemented reform is to achieve an income replacement 

rate at around 70% of the final salary of the insured person.  

The second pillar of the system is so-called supplementary mandatory pension insurance. It takes 

the form of two types of pension funds: universal and occupational. All persons born after 31.12.1959 

could insure themselves in a universal pension fund, while all individuals working under the first and 

second labor category (i.e. working in hard working conditions) could insure themselves in occupational 

pension fund. The third pillar of the system is supplementary voluntary pension insurance, wherein all 

participants choose to make contributions for supplementary benefits. The contribution rates for 

universal pension funds have been adjusted several times during the years. They were increased gradually 

from an initial rate of 2% in 2002 to 3% in 2004, 4% in 2006 and finally 5% in 2007. The contribution 

rates for occupational pension funds are 12% for people working under the first labor category and 7% 

for people working under the second labor category. Each person may choose only one universal and/or 

one occupational pension fund. 

Insurance in a universal pension fund gives an individual the right to2: 

• A supplementary lifetime retirement pension; 

• A lump sum of up to 50% of the amount accrued in the individual account in the case of 

permanently reduced working capacity by more than 89.99%; 

• A lump sum or deferred payment to the heirs of the deceased insured person. 

Insurance in an occupational pension fund gives an individual the right to:  

• A term occupational pension for early retirement; 

• A lump sum of up to 50% of the amount accrued in the individual account in the case of 

permanently reduced working capacity by more than 89.99%; 

• A lump sum or deferred payment to the heirs of the deceased insured person.  

In order to better protect the funds of the insured, legislation in Bulgaria states that pension funds are 

separate legal entities from the pension insurance companies that manage them. 

Investment regulations 

The introduction of a system that functions on a fully funded principle was a serious challenge for 

the Bulgarian regulators3. The implementation of a compulsory second pillar in a country where the capital 

market has been just started with low liquidity and a few financial instruments suitable for investment 

vehicles for this type of institutions imposes many risks both on insured individuals and pension companies. 

The lack of traditions in pension insurance of this kind was also an obstacle with unforeseeable consequences 

as no one was sure whether the public would support the reform4. The regulators had to reflect all these 

constraints into the rules supposed to govern the newly formed pension insurance companies. So it was of 

little surprise that they gave a priority to strict investment regulation. During the first years of their existence, 

pension insurance companies from the second pillar of the system were obliged to invest minimum 50% of 

their assets into government bonds. The investment constraints concerning the universal and occupational 

                                                      
1 Milev, J., 2012 Ten Years After The Start – Problems And Challenges Facing The Bulgarian Pension Funds 

 
2 Social Security Code, 1999 
3 Nenovsky, N., Milev, J. 2014 Bulgarian Wellfare System (1989 – 2014) Evolution, Problems, Challenges 
4 Milev, J. 2015, PAYG vs. Fully funded pension system – alternative or complementary components in the 

pension system – the case of Bulgaria 

 



Jeko Milev / Finance, Accounting and Business Analisys 

67 

 

pension funds in Bulgaria were the following: 

 

Table 1: Investment limits concerning second pillar pension funds in Bulgaria until 2006 
 Instrument Investment limit 

1. Government bonds Min. 50% 

2. Bank deposits Max. 25% 

3. Corporate bonds Max. 20% 

4. Corporate equities Max. 10% 

5. Mortgage bonds Max. 30% 

6. Municipal bonds Max. 10% 

7. Investment property Max. 5% 

8. Foreign instruments Max. 20% 

Source: Social security code, 2000 

 

By adopting such investment limits the legislator was clearly trying to prevent pension companies 

from assuming risky investments in their initial years of operation. At the same time these rules were aiming 

to convince the insured individuals in the financial security of the system. The last was very important 

because many people suffered huge money losses from their “investments” in some financial pyramids, very 

popular in the mid 1990’s in Bulgaria. This type of investment regulation was reasonable for the first years 

of operation of the Bulgarian pension funds. But it is well-known from financial theory that low-risk 

instruments are associated with low return. Pension funds are long term investors and they have some 

comparative advantages in investments on capital markets5. Variable income assets are more volatile in value 

than fixed income instruments but their yield tend to exceed that of bonds especially in the long term.  

During the first years of their existence Bulgarian pension funds invested predominantly into securities 

issued by the Bulgarian state. So implementing this pension reform just few years after the adoption of the 

currency board monetary system Bulgarian state ensured a real source for financing its budget deficits. Of 

course this should be viewed as a secondary effect of the reform and not a main reason behind its logic. 

Bulgarian pension funds used to support the deficit formed within the first pillar of the pension system. It is 

difficult to estimate what part of this deficit is due to the implementation of the funded component within 

the pension system and what part of it is due to the constantly reduced contribution rate paid for the first 

pay-as-you-go pension pillar. One of the most important risks that face insured individuals in a funded 

pension system is the inflation risk6. If pension funds were not able to compensate the insured for the lost 

purchasing power of their accumulated savings they would not serve the aim for which they were established. 

That’s why it was very important Bulgarian pension funds to extend their investments in corporate 

instruments such as equities and bonds in order to increase their chances of achieving a positive real return 

in the long horizon. In 2006 some very important changes were introduced in pension fund investment 

regulations partly because of the upcoming membership in European Union in 2007. Many of the limits 

were relaxed and the existing minimum requirement for investments in government debt was removed. 

 

Table 2: Current investment limits concerning second pillar pension funds in Bulgaria 
 Instrument Investment limit 

1. Government bonds No limit 

2. Bank deposits Max. 25% 

3. Corporate bonds Max. 25% 

4. Corporate equities Max. 20% 

5. Shares and/or units issued by collective investment schemes Max. 15% 

6 Shares in special purpose investment company Max. 5% 

7. Mortgage bonds Max. 30% 

8. Municipal bonds Max. 15% 

9. Investment property Max. 5% 

10. Investments in assets denominated in currency different from lev and euro Max. 20% 

Source: Social security code, 2007 

 

Bulgarian pension funds seriously changed the structure of their asset portfolios in the next year 2007 

choosing to put the money of the insured individuals to a much greater extent into corporate securities 

and reducing the share of government bond portfolio. This could be viewed as a positive trend because 

the core idea behind the implementation of the funded pillar was to relax the financial burden on the 

state pension system in the long term. But if the structure of the investment portfolios of the pension 

funds was preserved in the years until the paid-out phase then the positive effects of the funds would be 

                                                      
5 Davis, E. Philip,1995, Pension Funds Retirement Income Security and Capital Markets. An International 

Perspective, Oxford University Press, UK 
6 Blake, D. 2006, Pension Finance, John Willey & Sons ltd, UK  



Jeko Milev / Finance, Accounting and Business Analisys 

68 

 

mitigated as a result of the massive sales of government bonds whose ultimate final payer is the 

government itself. Investing mainly in government bonds, pension funds could destroy the basic 

difference between the PAYG pension system and the fully funded one. Changing their portfolio 

structure in 2007 Bulgarian pension funds were able to channel a significant part of the savings of the 

insured individuals into the Bulgarian stock exchange. So they had their part in the formation of the 

financial balloon in that same year. In 2008 the world financial crises hit our country and as a result of 

this the main index of the Bulgarian capital market plunged by some 80%. The pension funds were not 

able to withstand the massive sales of corporate equities and the losses reported at that year were some 

double digit numbers. This negative event actually influenced the trade on the Bulgarian stock exchange 

for the next decade. Most of the pension funds especially those with foreign owners have been avoiding 

Bulgarian corporate securities. So they turn their faces towards government securities again. And as a 

result, instead of contributing for the development of the stock market and the increase of trade volumes 

with private securities, pension funds in our country started to invest heavily again in government bonds. 

So an interesting trend has been forming in the next years. For the whole period after 2010 there is a 

very clear trend for increasing the share of government securities. At the end of 2016 at about 50% of all 

assets of universal pension funds are government bonds.  

 
 

 
 

 

0,00

10,00

20,00

30,00

40,00

50,00

60,00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of government bonds into the asset portfolio managed by UPF Doverie

government bonds

0,00

10,00

20,00

30,00

40,00

50,00

60,00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of government bonds into the asset portfolio managed by UPF Saglasie

government bonds

0,00

20,00

40,00

60,00

80,00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of government bonds into the asset portfolio managed by UPF DSK Rodina

government bonds



Jeko Milev / Finance, Accounting and Business Analisys 

69 

 

 
 

So at the start of the reform Bulgarian compulsory pension funds were obliged to invest minimum 50% 

of their assets into government securities and now they have structured a similar portfolio although there 

is no such restriction any more. The next step of the research was to see what part of the government 

securities portfolio is invested into Bulgarian government bonds and how the share of the Bulgarian 

government securities have been changed for the period. Here the trend is also an upward one. The 

following graphs are showing this for the same four universal pension funds: 

 

 
 

 
 

 
 

0,00

20,00

40,00

60,00

80,00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of government bonds into the asset portfolio managed by UPF En En

government bonds

0,00%

5,00%

10,00%

15,00%

20,00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of Bulgarian government bonds into the asset portfolio managed by UPF Doverie

Bulgarian government bonds

0,00%

10,00%

20,00%

30,00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of Bulgarian government bonds into the asset portfolio managed by UPF 

Saglasie

Bulgarian government bonds

0,00%

20,00%

40,00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of Bulgarian government bonds into the 
asset portfolio managed by UPF DSK - Rodina

Bulgarian government bonds



Jeko Milev / Finance, Accounting and Business Analisys 

70 

 

 
 

So at around 20% of the asset portfolio is invested into Bulgarian government bonds. We can make a 

very clear implication here - pension funds in our country like Bulgarian government bonds and the 

savings of the future generation retirees are used to support the expenditures of the Bulgarian state. The 

fundamental question is why we have such trend? Why long term investors such as pension funds 

predominantly invest in securities which really have small volatility but their return is quite small as 

well.  We can look for the answers in several directions and in the next lines we tried to focus some of 

them.  

 The first one concerns the crises of 2008. Bulgarian pension funds effectively changed the structure 

of their portfolios in 2007, just one year after the liberalization of the investment limits which gave the 

opportunity to invest much more aggressively in corporate securities. 2008 was the year of the big hit 

over the funded component of the Bulgarian pension system. The losses during that single year were 

double digit numbers and they raised the debate whether pension insurance companies could manage 

the savings of the future generation pensioners. This debate continues even in 2017 nevertheless the 

pension institutions were able to recover these losses in the next 5 years after the crises. It was become 

quite apparent that although pension funds are long term investors they cannot afford to report losses of 

the scale of 2008. The public and the politicians are not ready to bear such negative results and the 

debate for reversing the reform of 2002 starts in a promptly manner. The second direction in which we 

may look for the answer why pension funds in Bulgaria invest so strongly in government bonds concerns 

the regulation which requires pension institutions in our country to reassess their assets on a daily basis 

and to report the results every day. In such an environment there is a natural stimulus to avoid 

investments which could fluctuate significantly in a short term. So although pension funds are long term 

investors they compete among themselves on a short term basis. They are obliged to report their return 

for each calendar year and no one wants to take the risk of reporting losses even for a single year. The 

third reason for the increasing share of government bonds is related to the coming period of paying 

pension benefits.  The first insured individuals in universal pension funds that will receive pensions from 

the second pillar of the pension system are those born in 1960. They have right to obtain pension from 

their fund five years before the legal age for retirement. Currently the age is 61 years for women and 64 

years for men. This means that women born in 1960 will have the right to get pension in 2021. Some of 

them will have enough resources in their universal pension fund to finance the minimum amount of 

pension benefit which means that they could get retired in 2016 and afterwards. So pension funds need 

to have liquidity to finance those benefits and government bonds are of the first choice.   

What are the basic concerns about this type of portfolio structure? First, the pay-out phase is coming 

closer and we may expect that pension funds from net buyers of Bulgarian government bonds will turn 

into net sellers of these securities. This means that in the medium term there is an increasing probability 

the Bulgarian government to lose one important source for financing its budget deficits. All other things 

being equal one may expect a downward pressure on government bond prices during the pay-out phase. 

This means that pension funds in the country will stop being a real source for financing the state budget 

deficits or at least they will continue to be such a source but to a much smaller extent. Second, as pension 

funds are going to sell some of their holdings in government securities the stimulus for the government 

to reform the investment regulations will increase. The possibility of reforming the system following the 

polish experience is becoming serious7. Third, having so many Bulgarian government securities into 

their portfolios, Bulgarian funds put under question the funded component of the pension system. In 

this way the private pension institutions in the country will depend on the government to refinance or 

                                                      
7 In Poland the government effectively cancelled part of its debt held by the pension funds in 2014. Polish 

pension funds were forced to transfer the government bonds held by them into the state governed first pillar. The 

government just promised to pay part of the pension of the future retirees equal to the value of the transferred 

bonds.  

0,00%

20,00%

40,00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of Bulgarian government bonds into the 
asset portfolio managed by UPF En En

Bulgarian government bonds



Jeko Milev / Finance, Accounting and Business Analisys 

71 

 

to repay its debt in order to finance their pension obligations. But in this way the difference between the 

pay-as-you go pension system and the fully funded one is quite dubious. 

 

Conclusion 

Bulgarian pension system was seriously reformed in the year 2000. As a result a compulsory funded 

component was introduced. During the first years of their operation the universal pension funds invested 

heavily into government bonds following the very strict investment regulations. What is interesting in 

Bulgarian case is that pension funds continued to invest predominantly into government bonds even 

after the relaxation of the very strict regulations in 2006. The reasons for this trend are several but maybe 

the most important one concerns the financial crises that hit our country in 2008 just two years after the 

new investment regulations came into force. From one hand this investment behavior effectively 

supports the government expenditures in times of currency board regime, fixed exchange rate and 

central bank which cannot fully use its monetary policy instruments. But from another hand this type 

of investment policy risks low investment returns in the long term and could raise continuous debates 

about the role of the pension funds for supporting the panting pay-as-you go pension system. The future 

of the pension funds in Bulgaria depends on whether they will be able to pay part of the pension due to 

the insured individual in amount not less than the envisaged reduction of the pension benefit received 

from the first pillar pay-as-you go system. The success of the pension reform depends on the future 

efforts made by the pension funds themselves but also on some future reforms which should make our 

second funded pillar much more resilient to future shocks both internal and external.    

 

 

 

 

  



Jeko Milev / Finance, Accounting and Business Analisys 

72 

 

References: 

 

Blake, D. 2006, Pension Finance, John Willey & Sons ltd, UK  

Davis, E. Philip,1995, Pension Funds Retirement Income Security and Capital Markets. An International 

Perspective, Oxford University Press, UK 

Nenovsky, N., Milev, J. 2014 Bulgarian Wellfare System (1989 – 2014) Evolution, Problems, Challenges. 

Milev, J. 2015, PAYG vs. Fully funded pension system – alternative or complementary components in the 

pension system – the case of Bulgaria 

Milev, J., 2012Ten Years After The Start – Problems And Challenges Facing The Bulgarian Pension Funds 

Social security code, promulgated State Gazette, No. 110/17.12.1999, effective 1.01.2000 

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

York, N.Y.: Oxford University Press 

Bulgarian financial supervisory commission - www.fsc.bg  

Bulgarian stock exchange - www.bse-sofia.bg 

National Social Security Institute -  www.nssi.bg 

National Statistics Institute-  www.nsi.bg 

 

http://www.fsc.bg/
http://www.fsc.bg/
http://www.bse-sofia.bg/
http://www.bse-sofia.bg/
http://www.nssi.bg/
http://www.nssi.bg/

