HUNGARY - IMF staff have welcome steps taken by the Hungarian government to tighten access to disability pension and the early retirement programme.

In an attempt to tackle rising pension expenditure, the government will also lower the replacement rate of pensions for new retirees.

The measures are "a move in the right direction and should help the consolidation" of sustainability, the IMF International Monetary Fund (IMF) noted in its latest consultation paper on Hungary.

"Under discussion are the changes to indexation of pension benefits and a gradual increase in the retirement age, which are crucial to improve the long-term sustainability of public finances," the IMF pointed out.

In the 2007 budget, the Hungarian government earmarked HUF5.2bn (€20m) for pension reform - more than doubling the HUF2.2bn it spent in 2003.

However, the IMF quoted comments made by the authorities, saying the refoms "were politically difficult, given needed parliamentary support for constitutional changes".

Pension spending in Hungary is currently the third-largest among the new Eastern European EU member states as in 2004, Hungary spent 10.4% of its HUF20.7trn GDP on pensions.

By 2050, the European Commission expects Hungary's pension spending to grow by another 6.7%, leaving only Slovenia will then spend more on pensions, as Poland, currently the biggest spender, will have reduced its pension spendings significantly, the Commission expects.

The IMF also warned the rapid growth in the pension fund and other non-banking financial sectors might prove a tough test for current supervisory regulations.

The share of pension fund assets in the financial sector has increased from 5.1% in 2003 to 6.9% last year. Banks saw their share drop from 71.8% to 67.1%, although they remain the largest entity in the financial sector.

Similarly, a study by the UniCredit Group found pension fund assets in Hungarian households have grown from 6% to 16% of household financial assets and are set to reach 20% in 2009.

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