The Multifund System – Is It an Option for Raising the Sustainability of The Bulgarian Pension System?

Abstract

Background: Bulgarian universal pension funds have been operating for more than 20 years. They were established into Bulgarian pension system as supplementary elements whose basic aim was to strengthen the sustainability of the system in the long term. Following the recommendations of the World Bank (1994), the policymakers in the country introduced a fully funded defined contribution pension scheme where the investment risk is almost entirely borne by the insured individuals. Hence, low returns realized by pension companies during the accumulation phase detriment seriously the amounts of the pension benefits at the date of retirement. The second pillar pension funds are allowed to structure and manage only one portfolio of assets which could hardly suit the interests of both young and old scheme members. The investment horizon is crucial when it comes to the right mixture of assets in the investment portfolio.

Purpose: The purpose of the current study is to discuss some of the critical elements of multifund system as one of the tools for life cycle investing in pension insurance. The research is trying to shed some light on the important features that must be sorted out before introducing the scheme in practice.

Methodology: The methodology used throughout the paper embraces mostly comparative and descriptive analysis, but also deductive and systematic approaches were applied.

Findings: The basic findings of the research concern the way that must be addressed such issues as the number and structure of the managed portfolios, the distribution of those insured individuals that have not made an active choice about their preferred fund and the guaranteed mechanisms about the paid contributions.

Practical Implications: The article contributes to the ongoing debate about the exact structure and design of the multifunds as a possible elaboration of the universal pension funds in Bulgaria.

Originality: The research has a value for all those who work in the sphere of pension fund management and life cycle investing. By exposing the basic features and problematic elements of the multifunds, the research offers possible solutions for the establishment of a multifund system in Bulgaria.

Paper type: The article is a research paper. The first part compares the basic characteristics of multifunds in several countries already with such system. The second part recommends possible options for its introduction into Bulgarian practice.