Hungarian pensions face investment cull
HUNGARY - Plans by the Hungarian government to cap investments in foreign assets have been criticised by Hungarian pension funds.
Mandatory pension funds in Hungary will have to cap their exposure to foreign investments from next year at 45% in the riskiest portfolios of the lifecycle model, and this limit will then be cut by a further 10 percentage points from October 2010.
For the two remaining lifecycle strategy portfolios the government wants to set the cap at 20% and 5% respectively from January 2010.
But Csaba Nagy, chief executive of the OTP Private Pension Fund, fears that this will bring a setback to Hungarian pensions.
He noted these new regulations severely limit diversification possibilities for pension funds, thereby increasing the risk in the portfolios.
The government is seeking to increase domestic investment through the measure and at the same time decrease foreign exposure risk.
However, Nagy said he believed the Hungarian stock exchange did not offer enough diversification possibilities to limit pension funds to this market.
The mandatory pension funds were required from January this year to introduce a lifecycle model offering three portfolios with different risk profiles, the riskiest of which could carry a maximum of 40% in equities.
This contrasts with activity last year equity exposure in the funds increased and diversification to foreign investments reached a new high.
Depsite this move, however, the 19 mandatory pension funds saw their assets decline by 5.5% in 2008 to HUF1,870bn (€6.9bn) as a result of the global financial downturn and the funds' average investment return stood at -20%.
According to the annual "Risk Outlook" published by the Hungarian supervisor PSZAF, the FX exposure in mandatory pension funds amounted to 26.7% in the optional life cycle portfolios and 24.7% in the other portfolios.
The PSZAF did not give a detailed list of all foreign investments but according to its statistics close to 9% of assets were invested in foreign equities and another 10% was held in other foreign "investment units".
However, these figures are an average and funds invest their assets quite differently, while the statistics do not give any figures on foreign bond or real estate holdings
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