Bulgaria’s second‑pillar pension reform: unlocking new investment opportunities through a mandatory multi‑fund model

Bulgaria has adopted a fundamentally redesigned second‑pillar pension framework, restructuring the Social Security Code to mandate a multi‑fund model, broaden investment capabilities and establish detailed transitional, governance and supervisory obligations for pension companies. The reform marks a decisive shift away from the previously uniform, one‑size‑fits‑all investment model towards a differentiated, lifecycle‑oriented system aligned with modern EU pension standards. It fundamentally changes how mandatory pension savings are invested, managed and paid out, while opening the second pillar to materially broader participation in capital markets.

The reform introduces, among other measures:

• a mandatory multi‑fund structure for universal pension funds (UPFs), with dynamic, balanced and conservative sub‑funds applying differentiated investment limits;
• a statutory life‑cycle investment model, combining automatic age‑based allocation with the option for contributors to select their preferred sub‑fund;
• enhanced individual rights, including a formal right to investment choice, switching rights and mandatory consultation with the pension company;
• a modernised investment framework enabling broader asset‑class exposure within statutory limits;
• strengthened governance, capital and supervisory requirements for pension companies; and
• a revised payout phase, including dedicated funds for lifetime and term payments, as well as updated reserving and actuarial rules.

The amendments to the Social Security Code (КСО) were promulgated in State Gazette No. 27/17.03.2026 and are expected to take effect on 1 January 2027.

1. Comparing the new framework to the previous regime

1.1 From a single portfolio to a differentiated multi‑fund structure

Under the previous system, UPFs operated a single, unified investment portfolio for all contributors, regardless of age or risk profile. There was no statutory obligation to differentiate portfolios and contributors lacked meaningful control over the investment strategy of their contributions. The new regime, by contrast, requires three distinct investment tracks with differentiated equity limits – 90%, 55% and 25% respectively.

Previously, switching between funds was possible, but often infrequent and complex. The new Articles 163 and 171 introduce formal annual rights to switch sub‑funds and create clear timeframes and procedures.

1.2 Introduction of mandatory risk‑profiling and actuarial safeguards

Risk‑profiling did not exist as a statutory requirement under the earlier regime. The introduction of mandatory questionnaires and disclosure obligations through Article 142a represents a shift toward enhanced consumer protection aligned with other EU jurisdictions.

The payment phase previously operated with fewer actuarial safeguards. The creation of payment funds, coverage ratios and reserves under Articles 123p–123z introduces greater stability and transparency in retirement payouts.

1.3 At a glance – how the system has changed

2. What is changing in substance?

2.1 Introduction of mandatory sub-fund structure of UPFs

At the heart of the reform lies the mandatory division of each UPF into three distinct investment sub‑funds – dynamic, balanced and conservative. Each sub-fund must maintain its own asset pool and investment strategy, primarily differentiated mainly by the proportion of variable‑income instruments it may hold. The dynamic sub‑fund may invest up to 90% of its assets in instruments such as equities, collective investment schemes or alternative funds; the balanced sub‑fund up to 55% and the conservative sub‑fund up to 25%, with the remainder invested in lower‑risk fixed‑income or money‑market securities.

2.2 Legal status of sub‑funds

The sub‑funds constitute more than mere internal accounting categories. Under the new legislation, they are established as distinct, ring‑fenced pools of assets, each governed by specific rules on asset segregation, investment, permissible payments and daily valuation. Pursuant to Article 137, (paragraphs 4–10) of the Social Security Code, each sub‑fund is formed solely from the contributions allocated to it, may not be used to satisfy liabilities of any other sub‑fund or of the pension company and must be valued on a daily basis in euro-denominated units.

2.3 Expansion of the payout phase

The reform also expands the regulated payment phase. Through new provisions (Articles 123p–123z), the law creates dedicated funds for lifetime pensions and for fixed‑term payments. These are governed by detailed rules on actuarial liability calculations, coverage ratios, mandatory reserves and transfers of surplus or deficit amounts between the pension company, the payment funds and the newly established central reserve for guaranteeing pension payments.

2.4 Strengthened governance and supervisory standards

Further amendments reinforce supervisory expectations on governance, capital and investment management. Pension companies are now required to maintain a capital base equal to 2% of the net assets of all pension and payment funds under management and to comply with strengthened fit‑and‑proper requirements for management and key function holders. They are also subject to extended reporting and documentation obligations.

3. Implications for pension companies

3.1 Operational and investment model overhaul

For pension companies, the reform represents a fundamental operational overhaul. Each UPF must design, launch and maintain three compliant sub‑funds with distinct investment mandates, risk profiles and control frameworks. This requires revisions to investment policies, portfolio construction processes, asset‑liability modelling approaches and risk‑management systems. IT architecture and custody arrangements must support three parallel net asset value calculations, three sets of investment limits and three performance benchmarks. Although Article 137(9) permits transfers of cash and/or other assets between sub‑funds, strict segregation of accounting, valuation and investment processes must be maintained.

3.2 Increased prudential and governance expectations

The strengthened prudential regime, particularly revised capital requirements and governance obligations, necessitates enhanced oversight functions, stronger compliance frameworks and more rigorous investment committee structures. Amendments to Articles 121d and 121h introduce stricter approval requirements, detailed documentation obligations and increased accountability for senior management.

3.3 New consumer‑facing obligations

The new consumer‑facing framework requires companies to expand customer‑support capabilities. This includes developing risk‑profiling questionnaires, conducting suitability assessments and providing written information on sub‑fund characteristics in accordance with Article 142a.

4. Implications for investment funds, issuers and capital markets

4.1 A Structural reallocation of long‑term institutional capital

The introduction of a mandatory multi‑fund structure is expected to drive a long‑term reallocation of institutional capital across asset classes and maturities. The dynamic and balanced sub‑funds enable significantly greater exposure to growth‑oriented and market‑linked instruments than was possible under the previous regime. As younger contributors are automatically allocated to higher‑risk sub‑funds, a growing share of contributions will be invested with a long investment horizon and a higher tolerance for short‑term volatility. This is likely to strengthen the role of second‑pillar pension funds as providers of patient capital within Bulgarian and EU capital markets.

4.2 Expanded demand for capital‑markets and alternative instruments

The statutory permission for up to 90% equity and equity‑like exposure in the dynamic sub‑fund and up to 55% in the balanced sub‑fund is likely to increase demand for a wider range of instruments, including:

• listed equities and IPOs on regulated EU markets;
• corporate and covered bonds, including longer‑dated issuances;
• infrastructure investments, including project bonds and infrastructure funds;
• EU‑regulated collective investment schemes and alternative investment funds; and
• sustainable and green financing instruments aligned with EU taxonomy standards.

This diversification is structural, supported by lifecycle allocation mechanisms that ensure a continuous inflow into growth‑oriented strategies.

4.3 Opportunities for issuers and market sponsors

For corporate issuers, financial institutions and project sponsors, the reform enhances the attractiveness of the Bulgarian pension sector as a long‑term investor base. Dynamic and balanced sub‑funds will be incentivised to seek diversified sources of return, potentially supporting:

• equity capital raisings, including follow‑on offerings;
• private placements structured within EU frameworks;
• infrastructure and energy transition projects; and
• asset‑backed and secured instruments suited to institutional investors.

The ring‑fenced structure of sub‑funds and strengthened governance framework also improve transparency and predictability for market participants.

4.4 Integration with regional and EU capital markets

The reform is expected to deepen integration with EU capital markets. As investment rules and governance standards align more closely with EU norms, Bulgarian pension funds will be better positioned to participate in cross‑border investments, EU‑wide fund structures and syndicated transactions.

4.5 A shift towards strategic investment

Overall, the multi‑fund model shifts the system from passive, uniform allocation towards a more strategic and differentiated investment approach. Pension funds can now align investment strategies with defined risk profiles and time horizons, enhancing both efficiency and market participation.

For investment funds, issuers and capital markets participants, this represents a meaningful opportunity to engage with a larger, more sophisticated and more diversified institutional investor segment, supported by a modernised regulatory framework and a predictable flow of long‑term savings.

5. Conclusion

The amendments to the Social Security Code represent a comprehensive modernisation of Bulgaria’s second‑pillar pension system. They introduce lifecycle‑based investment design, enhanced consumer choice, stronger prudential safeguards and clearer payout structures. While pension companies must implement significant structural and operational adjustments, the reform also creates meaningful opportunities for capital markets by channelling long‑term savings into a broader range of investments.