Central & Eastern Europe: Waiting for 2014
Hungarian pension funds are on the brink of extinction. The only hope is a change of government, and policy, in 2014, writes Barbara Ottawa
The ‘Hungary scenario’ has become a phrase synonymous with the state expropriation of second pillar assets – especially in eastern European countries.
One of the first official acts of newly elected conservative prime minister Victor Orban was to freeze all contributions to the second pillar in 2010 – at first for a limited period of 14 months. By the end of 2010, it became clear that the halt to payments would be permanent.
Orban went on to incentivise people to leave the second pillar altogether. By January 2011, just over 100,000 of 2.9m plan members made the effort to go to a pension fund administration office in person to hand in a written statement saying they want to stay in the second pillar, therefore forfeiting their right to a state pension.
“This number is now down to 75,000”, one source in the Hungarian pension system told IPE, who wants to remain anonymous because of the ongoing difficult political climate.
The further decline is down to some of the pension funds already having shut down their business in which case members are automatically transferred to the state system. “That was the government’s plan,” the source notes.
Among them is the largest in the system, the pension fund run by the Hungarian banking group OTP. In autumn 2012, it wrote a letter to its members noting that the second pillar fund will be dissolved but that the third pillar fund remains open.
“Previously, it was not impossible that the legislation might change in a more favourable direction but this has not taken place,” the fund noted and added that under these circumstances “a long-term operation of private pension funds is practically impossible”.
The fund pointed out that of its current 13,530 members, just over 1,000 paid a membership fee and only 11 made so-called ‘donations’ for operating costs.
Last year, Hungarian pension funds had called on members to help pension funds cover their operational costs by making donations on top of the contributions.
By June 2011, pension funds had to transfer €11.8bn, almost 10% of the GDP, to the newly established pension reform and debt reduction fund established by the governmental debt management agency AKK leaving under €1m in the system – and since then the assets have further declined.
According to IPE’s source there is no future for Hungarian pension funds unless they manage to survive until the next election in 2014 and the right person wins. But he emphasises that “several pension funds want to survive and are still hoping for a solution” as it “would not be fair to the members to give up”.
However, while according to him the IMF “could help” in principle, he does not think the Hungarian government will listen.
The pension fund association, Stabilitas, is therefore recommending “only those members remain who are confident that the current legislation is amended in the future”. And that they should also be willing to make donations towards the operating costs of the pension funds.
It is not yet clear how many of the 19 funds (as per year-end 2010) will remain operational this year in what is one of the eldest second pillar systems in CEE having been set up in the mid 1990s.
In 2001, a guarantee was introduced to the system with the value of the assets calculated at the moment of retirement over the whole contribution period and the deficit being paid out of the guarantee fund each pension company had to fill with up to 4% of its assets under management.
Prior to the crisis, a law was passed under Orban’s Social Democrat predecessor as prime minister, Ferenc Gyurcsány, obliging Hungarian pension to introduce life-cycle funds to increase safety in the defined contribution system. Because of the financial breakdown the implementation was postponed to 2010 – or, as it turned out, indefinitely.
Despite these adjustments, prime minister Orban and his party have continued to explain to Hungarians that the second pillar is not safe and have cited mismanagement at the funds.
Prior to Orban’s contribution freeze, 8% of the salary had been diverted to the second pillar and another 24% to the state pension system. Now, Hungary introduced a new indexing system linking the increase in the state pension to the real GDP growth.
But according to the European Union, Hungary will only slowly climb out of the recession it entered in late 2011.
The EU expects a weak recovery for 2013 and 2014 with growth rates of 0.3% and 1.3% respectively after a negative 2012 at -1.2% but with a relatively high inflation of over 5% in the coming years.
Analysts agree that the nationalisation of the pension assets helped the country temporarily generating a budget surplus of 4.3% in 2011 only.
In addition, Hungary has to struggle with increasing bond yields and a sub-investment grade sovereign rating since early 2012.
Nevertheless, critics in other countries like Bulgaria, are citing Hungary as an example that second pillar pensions are not working and that the money should be transferred to the state system.