Private pension schemes and their impacts on the public
systems in the time of crisis
The CMKOS – FES Conference
Prague 31st March 2011
The Destiny of Mandatory Pension Funds
in Hungary
The Destiny of Mandatory Pension Funds in Hungary
The success story
How could things go wrong?
The rules of the new game
... and the changes
What is next?
2
The success story – Starting of the new system
The mandatory pension pillar was implemented in 1998 in the windfall
of the recovery of the 1995 crisis
Established by parametric reforms, e.g. increase of retirement age
The Budget took on the liability to repay the mandatory pension fund
contributions to the 1st pillar
The institution was similar to 3rd pillar pension funds, non-profit
mutual funds
In practice there were two major types:
– Affiliate of a financial group
– Independent or employer/industry based
The difference is in governace
Original Law included provisions on – for example –
Annuitization and a minimum standard for the annuities
Pension Guarantee Fund
Investment return benchmarking
3
The success story – Membership of the pension funds
Proportion to age 15-64 population
70%
60%
50%
40%
Employment rate
30%
Membership rate
20%
10%
0%
4
The success story – Members pay contributions
1,6%
1,4%
% of G D P
1,2%
1,0%
0,8%
Contributions
0,6%
Budget transfer
0,4%
0,2%
0,0%
5
The success story – Contributions are invested
Other
3%
Bank deposit
1%
Investment
funds
35%
Debt securities
4%
Government
bonds
47%
Equity
10%
6
The success story – Growth of total assets
14 000
14%
12 000
12%
10 000
10%
8 000
8%
6 000
6%
4 000
4%
2 000
2%
0
0%
7
Assets (million EUR)
Assets to GDP (%)
How could things go wrong? – Macroeconomic indicators
90%
80%
% of G D P
70%
60%
50%
Deficit
40%
Debt
30%
20%
10%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009
8
10%
90%
9%
80%
8%
70%
7%
60%
6%
50%
5%
40%
4%
30%
3%
2%
20%
1%
10%
0%
0%
2004 2005 2006 2007 2008 2009 2010
9
Debt and Total assets
Deficit, Budget transfer, and Gov. Bond
How could things go wrong? – Now see the elements together
Government bonds to
GDP
Total assets to GDP
Debt
Budget transfer
Deficit
How could things go even worse?
In 2005 the National Bank initiated discussion on the performance of
the mandatory pension funds
The conclusions were that the mandatorty pension funds are
Expensive, and
Achieve low returns
And it was true for the pension funds that cover 80+ % of the
membership – the financial groups’ pension funds
The consequence was a wave of new regulations in 2007/8:
Limits on fee deductions
Implementation of the investment portfolio choice (mult-funds)
Unit accounting (why?)
Discussions continued on two regulatory issues:
To change the institutional form to joint stock company
Uniform and detailed regulation of the pension fund annuities
A Law was passed in 2009, but suspended by the Constitutional Court
10
The rules of the new game
First crisis measures
Financial institutions and big corporations – telecoms, retail chains,
energy sector companies – pay crisis tax for three years
Mandatory pension funds do not get the contributions until the end of
2011
The rules of contribution payment have changed
Only employee contributions generate rights
– Employee contributions are paid either into the 1st pillar – or
completely to the mandatory pension fund
[10%]
– Employer contributions will be used to finance the solidarity element of
the 1st pillar
[24%]
Consequence: Members of the mandatory pension funds shall not
generate new accrued rights in the 1st pillar
11
The rules of the new game
Members of the mandatory pension funds were allowed to switch back
to the 1st pillar
Their contributions will be transferred to a special fund in the form of
assets
– only the contributions – the members may decide about the returns
The special fund is regulated in an Act, and will be
– managed by the Government
– used by definition to guarantee the solvency of the Budget and support
the a new pension system
The big question: How many memebrs returned to the 1st pillar?
12
... and the changes
Pension Fund
Aegon
Allianz Hungaria
Aranykor
AXA
Budapest (GE Money Bank)
DIMENZIO
Elettút Első Orszagos
ERSTE
Évgyűrűk
GENERALI
HONVED
ING
MKB
OTP
Postas
Quaestor
Vasutas
VIT
Total
Year-end
Still members
membership
Fidelity
(%)
% of total
602 017
477 345
72 165
282 758
30 441
12 546
2 427
66 285
104 324
76 156
23 728
523 767
38 346
756 021
26 899
6 709
7 459
8 807
16 889
10 782
3 090
13 269
2 680
1 430
154
2 390
2 141
2 166
609
19 197
3 279
17 641
457
170
216
862
2,81%
2,26%
4,28%
4,69%
8,80%
11,40%
6,35%
3,61%
2,05%
2,84%
2,57%
3,67%
8,55%
2,33%
1,70%
2,53%
2,90%
9,79%
17,34%
11,07%
3,17%
13,62%
2,75%
1,47%
0,16%
2,45%
2,20%
2,22%
0,63%
19,70%
3,37%
18,11%
0,47%
0,17%
0,22%
0,88%
3 118 200
97 422
3,12%
100,00%
13
What is next?
There are other provisions in the new regulation and the in the policy
statements
Limits on the operational expenses of the mandatory pension funds
Introduction of individual accounts in the 1st pillar
Strengthening of the voluntary pension funds
Were the mandadatory pension funds too successful?
What will happen to the members of the mandatory pension funds?
14
Thank for your attention!
Questions and follow-up:
Tibor Párniczky
parniczky.tibor@chello.hu