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Hungary's pension system attacked

Pensions professionals have questioned the viability of Hungary's just-enacted, mandatory pensions legislation, which comes into effect from January next year.

Iain Batty, pensions lawyer with London firm, Cameron McKenna, who has previously advised the Hungarian pensions regulator, describes himself as fearful for the future, while Adam Gere, managing director of Sedgwick Noble Lowndes in Buda-pest, who headed the government's pensions task force, compares the planned mandatory pension funds (MPFs) to 19th Century friendly societies.

The comments - from professionals who have advised governments and regulators across eastern Europe on pension reforms - add weight to dom-estic opposition and media criticisms.

The law, approved this July, has been vaunted as the first step in a move to a three pillar system. It will be compulsory for new employees to join an MPF from June next year, but existing employees can choose a MPF from January with both groups receiving a reduced social security pension.

MPFs can be established under li-cence from the ministry of finance by organisations expecting at least 2,000 members.

Batty says: I am fearful for the fu-ture. The law will enable the creation of too many inadequately capitalised funds. There are no minimum capital requirements. Anyone can establish a fund as long as they have 2,000 people.

Gere believes that MPFs are actually too large. "They don't allow the average employer to institute their own schemes. Employers should be the key to the whole thing," he said.

Batty has worries about the time-scale. "We still don't have the regulations, yet funds can start applying for licences this month."

Gere continues: "Our pension re-form is a good news-bad news story. The good news is that it happened. There is a connection between pensions and the capital market, in itself, a tremendous step forward. The bad news is that the whole legislation was drafted very incompetently. They had no idea about capital markets."

Gere also believes that there is also little understanding of the distinction between defined benefit (DB) and defined contribution (DC). The proposed system is DC but favours insurers. He adds: "Favouring insurance companies is not a good idea. For op-erating DC schemes they are inept."

From 30 June 1998, those entering the workforce will be required to contribute 6% of earnings to an MPF of their choice. Existing employees will be able to choose an MPF from January 1998, though they can return to the old system up to a 31 December 2000 deadline.

The social security pension accrual rate will reduce from 1.65% to 1.22%, although the full tax treatment of contributions has yet to be clarified.

John Lappin"

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