HUNGARY - The International Monetary Fund (IMF) has warned that Hungary’s recently announced pension reforms risk undermining confidence in the system and constitute a “significant step back” for the country.

Last week, the government began a campaign to encourage pension savers to opt out of the second-pillar system, instead reverting to the state-run pay-as-you-go approach.

It came a week after prime minister Viktor Orbán’s conservative Fidesz party suspended payments into the private pension system to combat the country’s budget deficit.

An IMF report has now warned that redirecting these funds risked undermining confidence in the pension system, especially as contributors were still unsure how they would be compensated.

It added that the move allowing workers to switch back to the first pillar would only allow the government to improve headline fiscal indicators, without making the necessary reforms.

“Moreover,” the IMF added, “this measure would constitute a significant step back in the pension reform process initiated in the late 1990s, which has contributed to making Hungary’s pension system one of the most sustainable in Europe.”

The report continued that the shift from explicit to contingent liabilities would also result in higher financial risk, while at the same time decreasing transparency.

Warning that the move could stifle long-term growth, the IMF added: “Regulatory measures could be considered to address the issue of relatively low second-pillar pension fund returns.”

Earlier this year, Mihaly Varga, Orbán’s negotiator at the failed talks with the IMF and the European Union, argued the EU had forced Hungary to introduce a funded pension system against its will.