Court expected to rule Hungarian pensions grab unconstitutional

EUROPE - Hungary's constitutional court is expected to rule that a key point in the law that led to the effective nationalisation of the mandatory second-pillar pension system is unconstitutional.

The ruling will come too late to save the second pillar - the funds' €10bn in assets have already been transferred to the government, used to cancel outstanding bonds or allocated to current spending. But the ruling could increase pressure on future governments to offer redress for last year's nationalisation.

The draft ruling, which was obtained by the news portal origo.hu, says a measure that would rename state pillar contributions a 'pension tax' is unconstitutional.

This measure was crucial to encouraging some 2.5m members of the second pillar to sign over their saved assets to the state.

When György Matolcsy, the economics minister, announced the nationalisation last autumn, those who opted back into the state pillar were promised a full state pension on retirement.

Those who hung on to their pension assets would have to carry on paying contributions, renamed a tax, but be entirely reliant on their accumulated assets for their pension provision on retirement.

Before this threat was made explicit, only a minority of second-pillar savers expressed a wish to opt back in, according to polls. In the event, some 97% of members handed their assets to the state.

The nationalised pension assets are central to the government's aim of bring the budget deficit down below 3% of GDP, even as the euro-zone crisis hits growth across Central and Eastern Europe.

If the court's final ruling matches the draft, it will mean that state pension contributions will no longer be regarded as a tax, which means payees will be entitled to services in return for their payment in the form of a state pension.

Since most of those who remained in the second pillar are young, the ruling will only have budgetary consequences some two decades in the future.

However, some tens of thousands of those who opted back in made a sworn declaration at the same time saying they were only doing so under duress, having been threatened with the loss of their state pension.

A constitutional court ruling could give momentum to moves to obtain compensation for at least this group of savers.