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Hungarian parliament OKs take-over of second-pillar pensions

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  • Hungarian parliament OKs take-over of second-pillar pensions

HUNGARY - Hungary's parliament has passed a law that will force members of the country's second-pillar mandatory funds to hand their savings to the state, amid a growing chorus of criticism at home and abroad.

Entitled the 'Law on the Free Choice of Pension Funds', the legislation gives the country's 3m mandatory pension fund members until the end of January - or the end of February if they can prove circumstances beyond their control - to declare in person that they wish to keep their savings in their existing fund.

If they make no declaration, their assets will automatically be transferred to a so-called Pension Reform and State Debt Cutting Fund - managed, controlled and spent by the state.

Hungary's second-pillar funds have total assets of HUF2.7trn (€9.8bn) under management.

Those who do make the declaration - and if more than a handful of the 3m members does so, long queues can be expected at the country's 33 customer services centres throughout an unusually cold winter - will lose their entitlement to a state pension on retirement, meaning they will lose the 24% of their salary their employer will still be required to contribute to the state pension pillar.

Those who accept the default opt-back option will be given any premiums above the benchmark earned by their funds in cash, tax-free.

The contribution will be renamed from a jaradék to a hozzájárulás. Though both words mean 'contribution', the latter term will not impose a legal obligation on the government to pay a pension.

Last week, Moody's downgraded Hungary's sovereign debt to one above junk status amid concerns over the sustainability of its plans to revert to a full pay-as-you-go system, while today, Pier Carlo Padoan, the OECD's chief economist, also voiced concerns.

Speaking to index.hu, a news portal, he said: "While suspending the second pillar may help cut state debt and could temporarily reduce the country's dependence on international finance, it also reduces the government's interest in solving the problems of financial stability in the long run.

"Dismantling the second pillar is the most radical step we have seen in an OECD member in the recent past."

Stabilitas, the Hungarian pension funds association, is challenging the law in the courts and is also seeking support from the European Union. Olli Rehn, the EU's finance commissioner, has criticised the proposals.

However, the constitutional court may be unable to rule on the law after a recent constitutional amendment that excluded budgetary issues from the constitutional court's purview.

Despite the pressure, many may yet opt to remain in the second pillar, since two opposition parties have promised to restore the pension rights of those who remain should they form a future government.

However, the new law also caps pension funds' operational overheads at 0.9% of assets, down from 4.5%, and asset management fees at 0.2%, levels at which few funds expect to be able to generate satisfactory yields.

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