HUNGARY - The Hungarian government has embarked on a communications offensive to encourage the country's funded pension scheme members to opt back into the pay-as-you-go state pension pillar.

The move implies prime minister Viktor Orbán's populist conservative Fidesz party intends to move beyond the freeze to second-pillar contributions announced last week and is seeking to dismantle the country's existing private pension system altogether.

In an interview on Tuesday evening, Orbán said the 14-month freeze on contributions to second-pillar funds would now be made permanent, adding that savers' money was safer with the Hungarian state, which has major financing difficulties and avoided bankruptcy only with the help of a €20bn loan from the IMF and the EU less than two years ago.

"We cannot force people to put their money on the stock market," he said, claiming that "no western European country has this kind of mixed private and public system".

While Orbán said existing scheme members would not be forced to return their assets to the state system, a spokesman implied the bulk of savers would be expected to do so.

Peter Szijjártó said on Wednesday: "People will choose safety and return to the state pension system. If that happens, there will be no need to revisit the question of contributions."

While the government is hoping for a HUF750bn (€2.7bn) windfall from the dismantling of the country's private pension pillar, many analysts believe the move could make Hungary's financing problems more acute.

Peter Attard Montalto, emerging markets analyst at Nomura, told IPE: "If you assume two-thirds opt back into the first pillar and two-thirds of their portfolio is in bonds, then you could see HUF330bn of bond selling over a year - which is 3.2 per cent of total outstanding forint debt, or some 20 per cent of total gross issuance next year.

"It would certainly increase the cost of funding next year."

Another concern of analysts is that, by removing a pool of ready buyers of Hungarian debt, the move will make it more difficult for foreign investors to justify holding a high-yielding asset that will be harder to offload in tough times.

Orbán said future contributions to the state pillar would be recorded in individual accounts, which suggests the government aims to introduce the Swedish, or nominal defined contribution, system. 

In this system, individual contributions finance current pension payments, but are also recorded in a notional individual account, which pays a defined notional 'interest rate', though no assets are invested.

Ultimately, pension payments are tied to the value of this account on retirement.
Péter Holtzer, former head of Hungary's largest pension fund and now a consultant, wrote last week: "It's a nice system, but very risky, and it's not politician-friendly.

"It's not a coincidence the only country where it works transparently is the country after which it is named."

With a declining population and a bleak demographic outlook, Hungary looks ill suited to a pay-as-you-go system.

And a system based on notional accounts managed by the state looks a hard sell in a country where governments are prepared to rip up and redesign a 12-year-old pension system overnight.
 

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