Hungary's mandatory pension system is in tatters following last year's nationalisation of the sector's assets, writes Thomas Escritt
Hungary's decision in November 2011 to return to the International Monetary Fund (IMF) for further financial support was an occasion for wistful thoughts for Hungary's pensions industry.
With total assets of more than €10bn in the mandatory funded sector, Hungary's pension system was one of the most developed in the region, with assets that had been accumulating since a second pillar was introduced in 1996 along World Bank lines.
This came to an end in January this year, when the government, which had turned its back on the IMF eight months before, nationalised the largest liquid pot of cash in the country to plug a severe financing gap. Assets currently stand at less than €1bn.
While individuals were not obliged to hand their private pension accounts over to the state treasury, the government warned that those who refused would be illegible for a state pension. This threat was sufficient to push 97% of the three million plus members of private mandatory pension funds to hand over their assets.
"The pensions money has already been spent," remarked one fund manager on the day the government announced it would return to the IMF. Effectively expropriating 15 years of savings was the price of pursuing the Hungarian government's self-described "unorthodox economic policy" free of IMF supervision - the fact, that the destruction of the second pillar now appears to have been in vain has been much remarked upon.
But while little remains of the country's second pillar pension system, few in the industry are eager to talk for fear of provoking what can only be described as reprisals. "I don't want to expose my company to regulatory attacks by saying something irresponsible," said the head of a well-known financial institution's pensions business.
Substantial fines have been meted out to some major players in the pensions business. Axa's Hungarian asset management business was fined HUF100m (€330,000) in November, after the financial services regulator found that the company had overcharged pension fund members for its asset management services. The regulator charged Axa with making indirect investments via funds "when direct investments in an identical portfolio would have been much cheaper". However, many in the industry have noted that Julianna Bába, head of Axa's pension fund, was also a prominent opponent of the nationalisation in her capacity as head of the pension fund association.
About half the holdings of the old pension funds were in government bonds, which were cancelled immediately. This contributed to a one-time reduction in the level of public debt. Although details of the holdings that were transferred to the government are not available, it is likely that most of the remaining €5bn is in equities, not all of which have been sold.
Since the dismantling of the second pillar, there has been great uncertainty over the future direction of Hungary's pension system. "Over the past year and a half, it has been hard to find out anything at all about plans," says the head of a well-known institution. "Little information comes out, and there's little consultation with experts outside the government, because they don't trust them."
Last year, György Matolcsy, the economy minister who announced the nationalisation, said the existing second pillar would be replaced by a publicly funded, possibly pay-as-you-go pension system with individual accounts - the so-called Swedish model.
However, there is little evidence of any work. "It now seems unlikely that anything like that will be implemented," the fund manager says. "The likely long-term outcome is that some kind of a basic pension and a work pension will be introduced. The real question is whether there'll be a pension at all."
The government has promised to announce proposals on the long-term future of the pension system in January, but nothing is yet known.
There is a widespread feeling within the industry that the pressure is likely to be placed on the remaining members to close their accounts and hand them to the state. One such measure was a law recently passed that renamed the sums paid by the employer and the employee into the state pension system from "contribution" to "tax". This cosmetic move could nonetheless have substantial consequences: by paying a contribution, an employee earns the right to a service in return. A tax does not place any equivalent obligation on the government, removing the possibility of a court ruling restoring a public pension to savers.
A further burden placed on existing pension funds relates to the method by which member contributions will be collected in future. Until the dismantlement of the second pillar, all contributions were collected centrally by the tax authorities, with contributions then being transferred automatically to both the state and the nominated private pension fund. In future, the tax authority will no longer perform this role for private pension funds, who now face the added expense of devising an infrastructure for collecting contributions.
With the sizes of fund holdings vastly reduced, consolidation has begun, with several major funds opting to merge. The pension fund provided by the Italian insurerer Generali has merged with the local fund Dimenzio. While every fund retained some members, few retained sufficient scale to operate independently. The largest are the funds offered by ING, Aegon, Axa, and OTP. Even these are contemplating mergers.
András Kozák, deputy director of Allianz Hungária, told the financial daily Napi: "The takeovers and mergers are only really just starting, and in the end there will probably only be one or two funds on the market to guarantee legal continuity."
One bright spot for the surviving funds is that those who remained in the private system tended to be wealthier than those who opted back in. The average amount of capital held per member is HUF2.4m (€7,600) more than two and half times the average holding size before.
This story first appeared in the January issue of IPE magazine.