1. 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

2. 2 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?

3. 3 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

4. 4 The success story – Membership of the pension funds

5. 5 The success story – Members pay contributions

6. 6 The success story – Contributions are invested

7. 7 The success story – Growth of total assets

8. 8 How could things go wrong? – Macroeconomic indicators

9. 9 How could things go wrong? – Now see the elements together

10. 10 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

11. 11 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

12. 12 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?

13. 13... and the changes Pension Fund Year-end membership Still members Fidelity (%) % of total Aegon602 01716 8892,81%17,34% Allianz Hungaria477 34510 7822,26%11,07% Aranykor72 1653 0904,28%3,17% AXA282 75813 2694,69%13,62% Budapest (GE Money Bank)30 4412 6808,80%2,75% DIMENZIO12 5461 43011,40%1,47% Elettút Első Orszagos2 4271546,35%0,16% ERSTE66 2852 3903,61%2,45% Évgyűrűk104 3242 1412,05%2,20% GENERALI76 1562 1662,84%2,22% HONVED23 7286092,57%0,63% ING523 76719 1973,67%19,70% MKB38 3463 2798,55%3,37% OTP756 02117 6412,33%18,11% Postas26 8994571,70%0,47% Quaestor6 7091702,53%0,17% Vasutas7 4592162,90%0,22% VIT8 8078629,79%0,88% Total3 118 20097 4223,12%100,00%

14. 14 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?

15. Thank for your attention! Questions and follow-up: Tibor Párniczky parniczky.tibor@chello.hu parniczky.tibor@chello.hu