Role of Institutional Investors in Advocating Better Corporate Governance Practices

S. Toshev, Ph. D.

Pension Insurance Company ‘Doverie’

PIC ‘DOVERIE’

First South East Europe Corporate Governance Roundtable

20-21 September 2001, Bucharest, Romania

PIC ‘DOVERIE’

Bulgarian Pension Insurance System

State Social Securitypay-as-you-go principle

First Pillar

Three-pillar pension system

Supplementary VoluntaryPension Insurance

individual accounts & private management

Third PillarSupplementary Mandatory

Pension Insuranceindividual accounts & private management

Third Pillar

now

1994

2000

PIC ‘DOVERIE’

Pension Reform in Central and Eastern Europe

III pillarII pillarI pillar

PIC ‘DOVERIE’

Market Potential

Voluntary Pension Funds 5 000 000Every person over 18 years

General Pension Funds 1 400 000Every working person born after31.12.1959 is subject to assurance

Professional Pension Funds 140 000People working under the conditions ofI and II category of labor

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Expected Increase of the Assets in the Funds for SMPI

0

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

12 000 000

14 000 000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

thou

sand

BG

N

PIC ‘DOVERIE’

Foreign Investors in the Pension Sector

• TBIH• Allianz

• ING Group• Newton Group

• Munich Re• LukOil

More than 75% of the capital of the pension assurance companies held by foreign investors

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Investment Regulations

• The pension insurance company may not invest more than

5 percent of the assets of the pension fund in securities

issued by one company (10 percent with the permission of

the State Insurance Supervision Agency)

• The pension fund may not acquire more than 10 percent of

the shares of one issuer or acquire interests through which

to appoint directly or indirectly more than half of the

members of the managing body, or in any other way to

exercise decisive influence on decision-making related to

the activity of the issuer

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Importance of Corporate Governance

The role of good corporate governance practices for the success of pension reforms in South East

Europe cannot be overestimated.

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Means and Ways by Which Pension Funds May Promote Improved Corporate Governance

Pension funds should invest preferably in companies that

follow high corporate governance standards:

• Most of the companies traded on Bulgarian Stock Exchange have

already some corporate governance track record;

• Unfortunately, due to trends of concentration of ownership in the

companies during the post-privatization period, in most cases problems

do exist, especially with respect to dilution of minority stakes.

PIC ‘DOVERIE’

Means and Ways by Which Pension Funds May Promote Improved Corporate Governance

Active participation in shareholders’ meetings of the

companies in which investments have already been made:

• Efforts to make GM effective instrument of governance;

• Voting rights are assets of the pension fund. The management company

has discretionary authority to manage fund assets. By voting in

shareholders’ meetings in an informed and responsible manner on issues

of corporate governance the pension insurance company discharges its

fiduciary duties with respect to the pension fund;

• Pension funds should not be passive shareholders.

PIC ‘DOVERIE’

Means and Ways by Which Pension Funds May Promote Improved Corporate Governance

Cooperation with policy makers and regulators in preparation

of necessary amendments to the existing law which promote

better corporate governance practices.

Cooperation with other representatives of the private sector in

preparation of voluntary standards in the area of corporate

governance.