Draft law amending and supplementing the Social Security Code

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With Resolution No. 367/12.05.2023 the Council of Ministers has approved a draft law amending and supplementing the Social Security Code (SSC)[1].

The amendments to the SSС are required in order to introduce into the Bulgarian national legislation the measures implementing Regulation (EU) 2019/1238 of the European Parliament and of the Council of 20 June 2019 on a Pan-European Personal Pension Product (PEPP) (Regulation (EU) 2019/1238)[2], and Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 establishing a framework to facilitate sustainable investments and amending Regulation (EU) 2019/2088 (Regulation (EU) 2020/852)[3] .

1. Regulation (EU) 2019/1238

Regulation (EU) 2019/1238 establishes uniform rules for the registration, establishment, distribution, portability and supervision of a voluntary pan-European personal pension product (PEPP), essentially a personal pension savings product, which is an additional voluntary personal pension product designed to complement existing mandatory and professional pension schemes and products in Member States. The Regulation provides for the possibility the PEPP to be offered by the widest possible range of providers – credit institutions, life insurance companies, investment intermediaries, etc.

In order to ensure the conditions for the application of the Regulation, Member States should designate a national competent authority and ensure that administrative measures and penalties can be applied, as well as define the conditions in relation to the accumulation phase and the drawdown phase due to the lack of harmonisation of pension systems.

1.1. Conditions relating to the accumulation phase and the drawdown phase

Taking into account the significant differences between the pension systems of the Member States, the Regulation does not introduce rules on the accumulation phase and the drawdown phase. As the PEPP is a supplementary voluntary pension product, the changes to the SCC are introduced in Title Three “Supplementary voluntary pension scheme”.

An age requirement of 16 years of age is introduced for the start of this phase, which is also applicable to voluntary pension funds.

As regards the payment phase, the conditions are similar to those for the national voluntary pension product: payments under the PEPP are linked to the acquisition of an entitlement to a retirement pension, and there is also a possibility for the insured person to receive a payment when he or she has not acquired the right to such a pension but has reached the required age or up to 5 years before that age. However, the Regulation has limited the possibility of early payment only to cases of disablement and only if the PEPP contract had provided for this possibility.

In the event of the insured person’s death, the persons entitled to receive a payment under the PEPP may be specified in the contract.

1.2. PEPP providers

Under the requirements of the Regulation, the PEPP can be offered by pension insurance companies authorised to manage a voluntary pension fund and authorised to manage a voluntary professional pension schemes. The Regulation also allows a provider to be an institution for professional retirement provision which is authorised under national law to offer a personal pension product and is subject to supervision.

The next condition is to separate the assets and liabilities related to the PEPP from the other activities of the provider, which is why amendments are proposed to regulate a new type of voluntary pension fund for a pan-European personal pension product.

It requires authorisation from the Financial Supervision Commission, which ensures that the pension insurance company meets the regulatory requirements and is adequately resourced when it comes to IT and staff.

2. Regulation (EU) 2020/852

The amendments to the SSC also aim to introduce measures in the Bulgarian national legislation to allow the application of Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 establishing a framework to facilitate sustainable investments and amending Regulation (EU) 2019/2088 (Regulation (EU) 2020/852).

The Regulation introduces an obligation for Member States to apply criteria to determine whether an economic activity qualifies as sustainable for the purposes of any measure establishing requirements for financial market participants or issuers in relation to financial products or corporate bonds marketed as “environmentally sustainable”.

The addressees of the obligation to include in their non-financial statement or in their consolidated non-financial statement information on how and to what extent the activities of the entity are related to economic activities that qualify as environmentally sustainable under the Regulation are the entities that are required to disclose non-financial information under Articles 19a and 29a of Directive 2013/34/EU, namely large undertakings that are public interest entities and that, at their balance sheet dates, exceed the criteria of an average number of employees during the financial year of 500.

The information should cover the environmental objective to which the investment contributes at the core of the financial product, i.e. those products referred to in Article 9 of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability disclosures in the financial services sector[4] , and a description of how and to what extent the investment qualifies as environmentally sustainable under Regulation (EU) 2019/2088.

Where the financial product includes incentives for, inter alia, environmental or social features or a combination of these features and provided that the investee companies follow good governance practices ( Article 8 of Regulation (EU) 2019/2088), obliged persons shall also include in the product description a statement that the principle of no significant harm applies only to activities that are environmentally sustainable under Regulation (EU) 2020/852.

For all other financial products that do not fall under Articles 8 and 9 of Regulation (EU) 2019/2088 obliged entities should include in their product description a statement that the investments related to the financial product do not comply with EU criteria for environmentally sustainable economic activities.

The amendments to the SCC aim to give the FSC the duty to monitor compliance with these requirements and accordingly introduce the measures and penalties applicable in case of breach.

3. Expected results of the new regulation

The drafters of the law point out that due to the requirements of Regulation (EU) 2019/1238, which will lead to difficulties in offering the PEPP, it is not possible to predict to what extent financial firms would be interested in offering it, mainly due to the significant resources that will be required to develop the product, as well as the mandatory provision of advice on the PEPP, which will make it even more expensive.

Regarding the expected impacts of the introduction of transparency requirements for the offering of financial products that aim at sustainable investments, the drafters foresee an indirect positive environmental and social impact, since in order for an economic activity to be considered environmentally sustainable, the minimum safeguards, or in other words the procedures set out in a number of international instruments, including the OECD Guidelines for Multinational Enterprises[5] and the UN Guiding Principles on Business and Human Rights[6], should also be respected.

On the other hand, the danger of investment flows being diverted towards activities that are environmentally sustainable, resulting in restricted access to finance for those that are not, should not be underestimated.

In conclusion, it should be noted that the proposed changes are long overdue to meet the requirements of the cited regulations. Regarding the PEPP, there is a concern that the product will not gain widespread popularity in the country, and as for Regulation (EU) 2019/2088, its addressees in the country are extremely limited.

 

[1] https://www.parliament.bg/bg/bills/ID/164831

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32019R1238

[3] https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32020R0852

[4] https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32019R2088

[5] https://www.oecd.org/daf/inv/mne/48004323.pdf

[6] https://www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf

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