Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ Reform Experiences in Eastern Europe HUNGARY Csaba NAGY

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ STRUCTURE OF LONG TERM SAVINGS Insurance business was set up in 1989 Voluntary mutual pension funds have been established since 1993 Mandatory private funds were set up during 1998 and 1999 State Social Security Pension Voluntary pension funds Insurance Other savings Mandatory Private Pension Funds VOLUN TARILY OBLIGATORIL Y

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ MAJOR INDICATORS ON SAVINGS Organisation Insurance companies (Life + composite) Mandatory Private Pension Funds Voluntary Pension Funds Number Number of insured/ members, thousand persons Reserves (billion HUFs)650,16561,4434,4 Reserves in million EURs Reserves in percent of GDP3,73 %2,59 %2,34 % Data as of December 31st, EUR = 266 hufs

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ Market participation – Mandatory Funds Based on number of members Based on assets in 2003

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ KEY FEATURES (MPPF, VPF) Non for profit organisations: any operation profits will be distributed among the members Fully funded schemes Tax incentives are granted: in order to stimulate people’s intention to savings Defined contribution type of schemes: benefits will be determined based on the contributions paid on behalf of the member and the investment returns earned Mutual ownership: members are the owners, representatives of the funds are appointed by the general assembly. Founders or employers may support the funds, however decisions will be made by the elected representatives of the members

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ ORGANISATION STRUCTURE (VPF, MPPF) General assembly of the members Board of Directors Supervisory Committee PROVIDERS Bank account manager Administrator Asset manager Custodian Auditor Other (Certificate Authority of digital signatures from 2005, etc.) SPONSORS STATE SUPERVISORY AUTHORITY

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ THE ROLE & IMPORTANCE OF FUNDS The most efficient savings vehicle to provide pension supplement after retirement Long-term savings generate demand on financial markets 1.22 million persons, i.e.28.4 % of labourforce, joined to voluntary pension funds by the end of Mandatory private funds covered 2.31 million persons by the end of 2003, i.e % of labourforce Assets of voluntary funds increased to million EUR by 2003; mandatory funds’ assets to mEUR It represents 2.34 % resp % of GDP by December 31, 2003 It amounts to over 3% resp. 4 % of population’s financial savings

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ MPPF: GROWTH IN MEMBERSHIP

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ VPF: MEMBERSHIP from 1994 to 2003

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ MPPFs: Asset accumulation upto 2003

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ VPFS: Asset accumulation upto 2003

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ CUMULATED SAVINGS in percent of GDP

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ MAJOR ACHIEVEMENTS Larger portion of the active labourforce opted for the two- pillar scheme than it was initially assumed by designers of the reform Mandatory Private Pension Funds operate in competitive environment, therefore a strong emphasis is set on performance issues The solutions applied to MPPFs provoke an enhanced transparency, accountability and better performance regarding the state PAYGO scheme The developments in regulation and supervision of funds and providers (investors, trustees, auditors, administrators, etc.) tend to enhance quality of services in the interest of the members

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ CHALLENGES For Voluntary Pension Funds: Possibility of withdrawal the account balance on maturity of the 10 year waiting period Market became saturated, thus the acquisition of new members is more costly Members and financial resources are being pulled by the growing health-care funds Treatment of non-paying members For Mandatory Pension Funds Market became saturated thus competition is growing Persistency became an issue Achievement of high investment returns in an underperforming stock and money market Obligation to recover due but unpaid membership fees proves a hard and costly requirement

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’ TYPICAL COSTS OF MANDATORY FUNDS Breakdown based on aggregate data for mandatory funds for 3 quarters in 2003 published by Hungarian Financial State Authority,