Decision No 7 of 31 May 2011 on Constitutional Case No 21/2010
Proceedings have been instituted on the grounds of Article 149(1)(2) of the Constitution.
The Members of Parliament request that paragraph 4a of the Transitional and Final Provisions (PRZ) of the Social Insurance Code (KSO) be declared anti-constitutional. The provision concerned was incorporated into the KSO by creating paragraph 48(2) of the Law amending and supplementing the KSO (ZIDKSO) (promulgated in the State Gazette (SG) No 100/2010).
In the petition the MPs argue that paragraph 4a PRZ KSO wholly contravenes Articles 4(1), 5(1), 17(1) and (3), 19(2), 51(1) and 57(1) and (2) of the Constitution.
Paragraph 4a(1) PRZ KSO lays down the rules governing the monies accumulated and available in individual accounts as at 1 January 2011. According to the cited provision the monies accumulated in the personal accounts of “women born between 1 January 1955 up to and including 31 December 1959 and men born between 1 January 1952 up to and including 31 December 1959 who as at 31 December 2010 paid pension insurance into occupational pension funds” shall be transferred into the budget of the State Social Insurance Fund in breach of the principle of inviolability of private property, which the insured persons enjoy by Constitution.
The petitioners maintain that the funds accumulated in the individual accounts of the payees are protected by absolute and inviolable property rights, which are similar to the ownership right of a saver over funds they have accumulated in a savings account and that the fact that they are paid in by the employer is irrelevant to the nature of ownership. They emphasize the prohibition on the reallocation of funds and shares between the individual accounts, which further supports the premise of their inviolability. Furthermore, the revenue generated by investing the funds accumulated in occupational and universal funds is exempt from income tax, which further demonstrates that according to the lawmaker the funds concerned are private property of the insured natural persons.
According to the MPs following the transfer of the monies accumulated in private accounts of an occupational pension fund into the State Pension Fund (DOO) insured persons lose their personal rights in the funds, for example the right to manage and dispose of them, including certain insurance rights, such as the right to a one-off payment of an amount equal to 50% of the monies accumulated in their individual account should they lose more than 70.99% of their ability to work (Article 142(1)(2) KSO).
The petitioners argue that paragraph 4a(5) and (6) KSO violates Article 17(3) and (5) of the Constitution as the transfer is tantamount to disposing of private income without the consent of the owner of the monies whilst according to Article 17(5) of the Constitution expropriation may be undertaken solely in the cases expressly mentioned in Article 15(7) of the Constitution.
The MPs acknowledge that paragraph 4a(7) and (8) PRZ KSO creates safeguards for the ownership rights of insured persons in the transferred monies and any income to be generated from its investment. In their opinion this effectively “an imperative intervention on the part of the lawmaker” into the relations between insured persons and pension insurance funds without the consent of either party and “a violation of the rights of insured persons”, which contravenes Article 4(1)(5) of the preamble to the Constitution according to which Bulgaria is a State based on the rule of law. The provisions concerned also contravene Article 5(1) of the fundamental law, which postulates the principle of supremacy of law.
The petitioners also allege a contradiction between paragraph 4a PRZ KSO and Article 57(1) of the Constitution according to which “the fundamental rights of citizens are inviolable”. They argue that in accordance with Article 51(1) of the Constitution the right to social insurance is a fundamental right that is directly linked to the right of citizens to work (Article 48 of the Constitution).
With a view to ruling in the case the Constitutional Court considered the following:
Following the 1999 reform insurance law evolved into a distinct area of law. In addition to the changes in the public insurance domain, mandatory and voluntary pension insurance were introduced, which resulted in private insurance funds being set up whose functions and activities are subject to stringent regulation in line with a set of principles laid down by law.
State social insurance is within the remit of competence of a specialist public body – the National Insurance Institute (NOI), which operates in line with the cost covering principle.
Supplementary mandatory pension insurance is undertaken by pension insurance funds (legal entities), which may operate as either universal or occupational funds (a distinct form of an incorporated body). They operate in line with the capital covering principle established in Article 125(2) KSO. Under the system insurance contributions are paid into individual accounts held in the name of each insured person into which the income generated from investing the accumulated monies are also paid. The mandatory pension insurance contributions are paid into occupational funds by employers (Article 157(4) KSO) as one of the fundamental rights of insured persons is that to an occupational pension in the case of early retirement due to hazardous or exceptionally difficult working conditions. When stipulated by law, supplementary pension insurance is mandatory (Article 127(2) KSO).
Collecting supplementary pension insurance contributions paid into the occupational branch of a pension insurance fund requires obtaining a permit and is subject to strict government supervision (Article 125(1)(4) KSO).
Paragraph 4a(1) PRZ KSO lays down imperative provisions for the transfer of monies accumulated in the individual accounts of the persons in the age groups mentioned above as at 1 January 2011 into the State pensions fund. In effect, this means that the monies accumulated in the individual accounts of insured persons are transferred into a fund to which a set of different rules applies. The monies concerned is capitalized separately for the purposes of calculating a sum representing a certain share of total accumulated funds, which may be invested on behalf of the insured person. The amounts accumulated in each individual account remains separate and distinct. The underlying premise of this doctrine is that “the funds are privately owned” (V. Mrachkov, Insurance Law, Fifth Edition, Sibi Publishing, page 366). Funds may neither be transferred or reallocated between individual accounts (Article 129(8) KSO) nor may they be expropriated (Article 129(11) KSO).
The structure and underlying principles of the State Pension Fund are different. The monies paid into it are pooled in line with the principle of solidarity in insurance. They are collected from the sources referred to in Article 21 KSO and are disbursed in accordance with Article 22 thereof for the purposes of paying State pensions, i.e. pensions paid by the government from monies collected from mandatory social insurance contributions.
Insured persons pay monies into occupational pension funds on the basis of a dedicated application lodged with and approved by a pension insurance fund (Article 140(3) KSO). Where an individual has not chosen an occupational pension fund in accordance with the procedure described above any monies paid is allocated on an ex officio basis into accounts kept by registered occupational funds according to a set of rules developed by the National Revenue Agency and the Commission (Article 140(4) KSO). Insured persons are entitled to choose a pension insurance fund within a certain period of time stipulated by law. The signature of an insurance contract between an insured person and a pension insurance fund further demonstrates that the relations between the two parties are governed by private law. The provisions of concluded contracts are prescribed by law but insured persons are free to choose a pension insurance fund at their own discretion, including whether or not they wish to transfer their account to another fund (Article 171 KSO). The allocation of accumulated monies on an ex officio basis due to the failure of an insured person to sign a contract with a pension fund is undertaken to ensure compliance with the law as the payment of insurance contributions is mandatory. In other words, it is a compensatory measure necessitated by the failure of an insured person to take action. The contracts concerned are a statutory prerequisite for a pension insurance fund to undertake the management of pension contributions. Insured persons are entitled to choose a pension fund because the monies accumulated in their account is intended to cover the pension or benefits to be paid to the account holder should an insurance event occur. A pension fund manages but does not own the monies paid towards pensions. Neither does the State, which means that pension contributions do not conform to the definition of “public funds”.
In order to conclusively ascertain the legal nature of supplementary mandatory pension insurance and of the rules that apply to monies accumulated in the accounts of insured persons, it is necessary to consider the liability attaching to pension insurance companies under the KSO. More specifically, pension funds are liable to insured persons (Article 134 KSO) for any damage resulting from a failure to manage monies in good faith (i.e. damage resulting from intentional misconduct). That liability may arise on the grounds of a contract concluded between an insured person and a pension insurance fund or on the grounds of the ex officio reallocation of the pension contributions paid by an insured person.
This means that the monies accumulated into the accounts of insured persons is subject to rules that ensure protection and material benefits in case an insurance event (social risk) arises.
By law the persons paying contributions into occupational pension funds have the following rights:
-the right to an early retirement (Articles 142(1) and 168 KSO). The amount of the pension is calculated on the basis of the monies accumulated in the account of the insured person (Article 169 KSO);
-the right to receive a one-off payment of a sum equal to 50% of the funds accumulated in the account of the insured person in the case of a permanent loss of more than 70.99% of their ability to work (Article 142 KSO). A permanent loss of ability to work may result from a general disease, occupational disease or an accident at work;
-in the event of death of an insured person their heirs – a surviving spouse or relatives in the ascending or descending line – are entitled to receive a one-off sum equal to the entire accumulated amount in the account or receive it in deferred installments over an agreed period of time in accordance with the rules of succession and taking into account the share in the property of the deceased each heir holds calculated in accordance with the Heirship Act. Where the deceased person is retired, their heirs are entitled to receive the remainder of the amount in their individual account. Where no heirs come forward, the remainder of the sum is paid into the government budget (Article 170 KSO);
-an insured person is entitled to transfer the monies they have paid into an occupational pension fund into another in accordance with the procedure laid down in Article 171 KSO;
-upon retirement an insured person is entitled to withdraw in a single transaction or transfer the monies accumulated into their account with an occupational pension fund to a universal insurance fund on the condition that they are not eligible to receive an occupational pension under Article 168 KSO (Article 172 KSO).
The analysis of the above rights warrants the conclusion that there is direct link between them and the amount of accumulated funds and that they are inheritable in accordance with the Heirship Act as private rights, with the individuals into whom inheritance rights are vested being exhaustively stipulated in the KSO.
The transfer of the funds of the insured persons mentioned in paragraph 4a PRZ KSO into the State Pensions Fund entails the loss of some of the above rights (for example those under Articles 142(2), 171 etc. of the KSO) as they are essentially transformed into rights relating to public and not private social insurance. Even where such transformation ultimately entails better retirement prospects for an insured person it still constitutes a breach of the underlying principles of insurance because monies are transferred into a fund governed by different rules without the express consent of the rights holder. In light of the constitutional provisions on social insurance (Article 51(1) of the Constitution) individuals have rights, which have been effectively transformed and are therefore different from those they have in respect of the funds accumulated in their accounts with occupational pension funds.
According to Article 127(2) KSO persons employed as category I or II workers pay mandatory contributions to occupational pension funds because they are entitled to early retirement, regardless of their age. The funds accumulated in the accounts of the persons mentioned in paragraph 4a(1) PRZ KSO are to be transferred into the State Pensions Fund, i.e. the persons concerned are excluded ex lege from the scope of mandatory occupational pension insurance and will not be entitled to early retirement on the grounds of their date of birth. This contradiction in terms between the stipulations laid down in the Social Insurance Code contravenes the principle of the State based on the rule of law (Article 4(1) of the Constitution) and undermines the stability of the established legal order.
Article 51(1) proclaims the right of citizens to social insurance. Indeed, the Constitution neither sets out a definition of the insurance system nor refers to the provisions of specific laws. However, this does not constitute a statutory exemption. The Bulgarian social insurance system, and in particular supplementary mandatory pension insurance, is governed by a set of rules stipulated in enacted laws (Article 125(4) KSO). This means that insurance relations are governed by dedicated statutory acts.
The scope of government regulations applicable to supplementary compulsory pension insurance covers the identification of the parties to insurance transactions and the underlying principles of the legal arrangements that govern the collection of pension contributions and their management and disbursement. The lawmaker stipulates the requirements for pension insurance funds created as special purpose vehicles (joint-stock companies) under the Social Insurance Code (Section II of Chapter II of the KSO) and the Company Act. By law pension insurance funds carry out activities solely relating to supplementary pension insurance. They may not carry out commercial transactions that are not directly related to their core activity nor may they own shares in limited liability companies or unlimited liability partnerships. In addition, they are not allowed to acquire shares in other pension insurance funds although they are allowed to issue registered non-materialized voting shares. Pension insurance funds are to be incorporated with a minimum shareholding capital of five million BGN. They may not distribute dividends in amounts or in a manner that may reduce the capital to less than 50 percent of the minimum requisite capital for the purposes of incorporation. A failure to comply with the capital adequacy requirements may incur administrative penalties. Applicable regulations require pension insurance funds to operate in accordance with an issued permit and license following their registration. In addition, they are subject to a number of other statutory rules governing their structure and activities.
The host of statutory regulations mentioned above also stipulate certain requirements for the persons paying contributions into occupational pension insurance funds (Article 127(2) in conjunction with Article 4(1)(2) KSO).
Furthermore, the scope of government regulation covers the specific rights of insured persons, the grounds on which these rights arise etc.
The legal relations between a pension insurance fund and an insured person arise on the grounds of a standardized insurance contract concluded voluntarily between the parties to it in accordance with a procedure stipulated by law. A violation of a citizen’s right to insurance exceeds the remit of statutory regulation. Applicable regulations envisage the conclusion of an insurance contract whose content is predefined. However, the parties to contracts enjoy certain discretionary rights, i.e. their consent is required. The transfer of accumulated monies into the State Pension Fund requires the consent of the insured person, which may not be derogated by the enactment of an imperative law to the contrary. Without prejudice to the merit of the arguments set out in the opinions of the parties to the proceedings according to which by enacting paragraph 4 PRZ KSO the lawmaker does not radically alter the insurance system but, acting on the grounds of feasibility, excludes a particular category of persons from the scope of supplementary mandatory insurance with a view to optimizing the future pensions of the persons concerned, the transfer of monies from an occupational fund into the State Pension Fund requires the consent of the insured person. The nature of the legal relations between an insured person and a pension insurance fund precludes government intervention, particularly where it affects rights and relations governed by private law. The government has exceeded the remit of its competence in respect of enacting imperative provisions applicable to social insurance relations. Hence paragraph 4a PRZ KSO is anti-constitutional.
According to the enacted paragraph 4a(9) PRZ KSO the legal relations between an insured person and the pension insurance fund managing the funds accumulated in the account held with its occupational pension insurance branch are terminated effective as from the date of transfer of the monies referred to in paragraph 1 into the State Pension Fund. The petitioners argue that terminating legal relations in the manner described above contravenes Article 19(2) of the Constitution as it is not expressly specified as grounds for termination in Article 342 KSO, which lays down the rules for the dissolution of an undertaking engaged in supplementary social insurance and not those that give rise to terming legal relations between an insured person and an insurance fund. The cited provision contradicts Article 4(1)(5) of the preamble to the Constitution because the remit of competence of the government to enact regulations that affect relations governed by private law, which require the express consent of the parties to them, has been exceeded. The envisaged termination of insurance relations is a direct consequence of paragraph 4a(1) PRZ KSO.
According to Article 19(2) of the Constitution laws must be enacted to guarantee that all citizens and legal entities enjoy equal legal conditions for economic activity. The rationale of stringent government regulation of the specific economic activity carried out by pension insurance undertakings is the need to safeguard the rights of insured persons. In the case at hand the enacted paragraph 4a KSO provides for the transfer of the monies accumulated in the accounts of a specific group of persons whilst the pension insurance funds from which such monies are withdrawn are to continue carrying out their core activity of collecting insurance payments from other categories of insured persons. This exceeds the remit of competence of the government to enact regulations. The transfer of the monies accumulated in the private accounts of the persons referred to in paragraph 4a(1) PRZ KSO into the State pension Fund causes the deterioration of the financial performance of and revenue generated by pension insurance funds and eliminates an essential mechanism within the system of supplementary mandatory social insurance, which allows pension insurance undertakings to invest a certain percentage of the funds available in private accounts following their capitalisation with a view to boosting their profitability. This is contrary to the principles of a market economy and constitutes a violation of Article 19(1) of the Constitution, which proclaims the principle of free economic initiative, i.e. the principle of a free market upon which the country’s economy is based.
Building and strengthening a State based on the rule of law requires creating conditions that promote and enhance the stability of economic players and safeguarding and protecting the conditions for economic activity, including investments. Paragraph 4a PRZ KSO creates uncertainty that is detrimental to pension insurance companies and creates strong expectations that other amendments in a similar vein are to follow in breach of Article 19(3) of the Constitution, which postulates that the investments and economic activity of Bulgarian and foreign citizens and legal entities are protected by law.