HUNGARY - More attention should be directed at "enhancing" mandatory second pillar pension provision in Hungary, the OECD has warned, as existing contributions to these pensions are "barely adequate" to cover defined contribution (DC) costs.

In the OECD Economic Survey of Hungary 2010, the organisation said the recession had been a trigger for "long-overdue structural reforms". These include pension reform in May 2009 to gradually increase the retirement age to 65 from 2012, the indexation of pension benefits to the consumer price index (CPI) and reducing pension benefits in proportion to the degree of early retirement.

The report confirmed the growth of public pension outlays will be reduced from an estimated 6.5 percentage points of GDP between 2007 and 2050 to just under 2.5 percentage points if these measures are sustained.

However, the OECD warned the reforms "also carry some risks". This includes Hungary's decision not to "fully follow the previous OECD recommendation of an exclusive indexation of post-retirement benefits to inflation". Instead, it claimed while the move to link benefits to CPI means pensions may partly benefit from productivity gains, it "weakens fiscal sustainability".

The report also said an estimated reduction in the projected average replacement rate - from 49% to 38% for public pensions, and from 49% to 43% for public and private pensions - could act as a disincentive for workers to participate in the system given the "still very high contribution rates pertaining to the first pillar".

It suggested workers have the incentive to under-declare earnings to reduce calculations of pension contributions, and over time this could lead to inadequate pensions for future retirees and increased government spending on social assistance to prevent poverty.

"Thus the authorities' attention ought to be directed at enhancing the mandatory second pillar. Financed by a contribution rate that is only about a third of the pay-as-you-go (PAYG) rate, contributions to the second pillar are barely adequate to cover the higher fixed costs incurred in managing DC pension funds", stated the report. 

In addition, the OECD pointed out that rising life expectancy will require greater pension contributions over a lifetime in order to maintain replacement rates. It therefore suggested: "In the future, the government should increase the statutory retirement age in line with increases in life expectancy."

Ilona Juhász, secretary general of Stabilitas, the Hungarian Association of Pension Funds, said the current contribution rate to the second pillar pension system is 8% of gross earnings, but added "the Act accepted by the Parliament at the end of 2009 - and currently being reviewed by the Constitutional Court - regulated two areas including the institutional reform of the mandatory pension funds".

"We hope that the next financial government together with the funds will process a convenient solution. There are three million active employees in our pension fund system who need the stability of the system," said Juhász.

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