HUNGARY - Hungary has announced plans to pull the plug on the country's mandatory, funded second-pillar pension system, provoking a chorus of protests from the European Commission, the country's pension funds and analysts.
György Matolcsy, the national economy minister, yesterday dashed hopes that only a minority of second-pillar private pension scheme members would take advantage of new legislation allowing them to return, along with their pension savings, to the state pillar.
Polls had suggested that only 30% of scheme participants would do so, but Matolcsy's announcement that those who failed to return would lose their entitlement to a state pension - while still having to contribute to the first-pillar pay-as-you-go scheme - makes holding out all but impossible.
Matolcsy argued that, because state pension contributions financed current pension payments, those who refused to hand their assets to the government had "written themselves out of the community of pension payers" and therefore would not benefit on retirement.
But a government spokeswoman said today that pension contributions would be renamed a pensions tax, implying that the government will be free to spend contributions on anything it likes.
Fund members have until the end of January 2011 to decide, but experts say the move makes it all but certain that the bulk of the country's HUF2.7trn (€9.6bn) in second-pillar pension assets will be returned to the state treasury.
A financier with close links to the governing Fidesz party said: "This is no longer a purely economic issue. If only 30% had opted back in, it would have represented an enormous loss of prestige."
Dávid Németh, an economist at ING in Budapest, said: "This is effectively a nationalisation of private pension funds. It's the nightmare scenario."
The government has promised that those who opt back in to the state system will receive a full state pension instead of the three-quarters state pension to which private savers were previously entitled.
Plans to create individual virtual accounts in the state pillar appear to have been abandoned.
Gabriella Selmeczi, the prime ministerial commissioner entrusted with communicating the new plans, said today that the promised accounts would only amount to a statement of an individual's expected pension entitlement, based on income and length of service, and not on the scale of an individual's contributions.
Third-pillar voluntary private pension management fees will be capped at 0.9% of total assets, down from 4.5%, from 2012, a level most industry experts regard as too low to provide effective fund management.
Stabilitas, the Hungarian pension fund association, said it would challenge the measures in the constitutional court, arguing that the decision, by allowing members to move only in one direction, out of the private pension pillar and into the state pillar, infringed members' rights.
It also called on the European Parliament to appoint an ombudsman to examine the government's plans.
A spokeswoman for Olli Rehn, the European Commission's finance commissioner, said: "We are concerned by the Hungarian authorities' latest announcement concerning the pension system. The announcements appear to reflect an aim of fully abolishing the private pension system."
The Commission was concerned about the sustainability of the measure.
"The pension funds' accumulated assets are being used to finance current expenditure," the spokeswoman said.