Effects of the crisis on Hungary's pension system


  • Losses suffered by private pension funds

The drastic losses suffered by pension funds (in the past few months the total value of invested assets decreased by 15 percent in Hungary) intensify the population’s distrust of the financial system. This is only exacerbated by banks’ unilateral loan-agreement modifications that, at a time of strong forint devaluation, have led to significantly higher loan payments.


  • Another setback for self-reliance

Following disappointing experiences with private pension funds the population’s already lackadaisical interest in self-reliance is further weakened. While due to the crisis the population's appetite for savings has recently improved, unhappy experiences with investments may slow the process.


  • Rising unemployment

A rapid rise in unemployment reduces the revenues of state-run and private pension funds alike[1]. In the case of the former this poses a financing, in the latter a yield risk. Rising unemployment increases the risk as, continuing a strategy consistently applied since the systemic change, the forthcoming governments can hope to remove some of the jobless from the labour market by offering enticing retirement options. And this will only put additional pressure on pension funds.


  • Raising the retirement age: double pain

The forming government plans speeding up the introduction of the statutory retirement age at 65 to the earliest date allowed by the Constitution and a further increase by six months annual from then on. With raising the retirement age (incidentally, a needed and welcome development) the percentage of those withdrawing their assets from the second pillar in one lump sum will increase, for the expected years spent in retirement will decrease. On the one hand, this will put further pressure on funds and, on the other, due to depleted savings after caring for children and repaying debts, the proportion of low-income pensioners will rise, placing additional burdens on the social welfare system.



  • Growing government intervention

Government regulation of the second pillar is expected to increase (in the form of additional yield-guarantees and provisions related to investment structures). However, for this funds have to switch from the current self-government basis to a share company model. As a result they could generate assets providing the basis for a yield guarantee.


Due to a wave of popular disaffection, decisions detrimental to the pension system could be made (we have seen examples for this in Slovakia): reduced employee-contributions, options to return to the state-run system promoted by effective communication and the elimination of mandatory membership.


The drastic impairment of pension savings may increase popular dissatisfaction with private pension funds and indirectly this could stall the pension-reform process throughout the region.



Expected governmental measures concerning the pension system in Hungary


The forming Bajnai-government’s planned anti-crisis measures concern the pension expenditure more radically which consist of elements as follows:

  • Postponing the 2009 pension adjustment to 1 January 2010;
  • Cancelling the reduced pension correction in 2010;
  • Withdrawing the second part of the 13th-month pension of 2009;
  • Abolishing the 13th-month pension entirely as of 2010, to be replaced by an optional pension allowance conditional on expected GDP growth;
  • Changing the pension indexation method; 
  • A speedy implementation of regulations on early retirement; 
  • The already mentioned raising of the retirement age. 


  • It is still questioned whether the whole socialist faction will vote for these measures, which are necessary for maintaining the low budget deficit, but extremely unfavourable for the pensioners and for those who are close to the retirement age (see the “Pensioner Dilemma” below). An extensive pension reform is unlikely in this term, as the remaining one year is not enough for a structural transformation of the system.


  • In the medium term the extremely unpopular pension reform may be helped by the fact that the majority of Fidesz supporters come from the active segment of the population, i.e., once in power, the party may embark on painful restructuring and face less political backlash.



The “Pensioner Dilemma”

In respect to the state-run pension system stability is a top requirement; yet recently this has come under increased threat. Demographic and labour-market trends simultaneously undermine the pay-as-you-go system on two fronts: young people spend more time in the educational system and become active contributors at an increasingly later age, while more people reach retirement age and spend more years in retirement.

Of all major systems, the pension system carries the largest political risk for governments (the so called “Pensioner Dilemma”). As pensioners may decide elections (close to half of all active voters are pensioners) past campaigns had focused primarily on currying political favour with that segment of the population. However, the new government is also under pressure to cut the expenses in the pension system. As international investors are clearly losing patience with the Hungarian welfare system on the verge of collapse, the government is forced to implement measures adversely affecting pensioners. While some government measures that were undertaken a few months earlier (e.g., the reduction of the 13th month pension and its termination for future retirees) already challenged long-held taboos, the new government’s planned anti-crisis measures go even further (see above). However, major reforms needed for long-term sustainability are unlikely to be implemented in the following one year.  

In other words, for a credible long-term pension reform there is a need for political consensus, or at least the cooperation of the two major parties. However, the coming election season is not conducive for the development of such consensus as the parties wage a fiercest struggle for precisely that one-third of the electorate made up of pensioners most active in elections.

Between 2010 and 2015 Hungary's baby-boomer “Ratkó” generation (born in the early 1950s during a period of banned abortion) will reach 60; from then on, following the voter-grabbing logic politicians are expected to pass decisions favouring the older generation and delay urgently needed reforms. Consequently, this increases political risk in the short and medium term alike.





Private pension funds


In 2008 private pension fund assets in Hungary suffered major losses of between 10 to 20 percent. Simultaneously, almost without exception membership yields turned negative. In 2008 the asset-weighted average yield in the second pillar came to -15.82 percent, the first negative yield in the ten-year history of these funds. Through mandatory annual statements all members learn of the depreciation of their savings, which could trigger a strong panic reaction among the population. To prevent such an eventuality, pension funds have already launched campaigns advising the population against withdrawing assets or encouraging moving assets to safer portfolios, as to avoid realising losses.


Pension funds have lost assets worldwide as well as in the region. Romanian funds represent the only exception; they actually managed to produce positive yields.


Fund members can monitor the performance of their assets in real time, which also means that an increasingly large percentage of the population becomes aware of huge losses.


Periods of poor performance provide politicians the opportunity to criticise private pension funds, further damaging the public's perception of the system and, once in power, the same politicians can easily justify political decisions detrimental to funds. Here is a Hungarian example: the administration in office between 1998 and 2002 temporarily suspended mandatory membership for newly hired employees and neglected to implement previously established contribution increases. As a result, the financial position of private pension funds seriously deteriorated.





Private pension fund - misery: Slovakia and Romania



The most blatant attempt at “disciplining” the private pension system was seen in Slovakia. The second pillar, introduced in 2005 by the Dzurinda-cabinet, was regularly attacked by Robert Fico, claiming that the revenue loss caused by these funds to the state-run pension system creates huge costs for the state. After gaining office, the campaign waged against private pension funds led to concrete measures: referring to poor performance, on two occasions in 2008 the government provided fund members the option of returning to the state-run system. Lately, the Slovak government tried to score points with voters and hamstring the operation of private pension funds with promises of a drastic reduction of fixed fees charged by pension funds.


Romania also implemented measures to weaken the market position of private pension funds. In Romania members can enter the second pillar since 2008. Under effective regulation fees paid into private pension funds are to be raised by an annual rate of 0.5 percent until it reaches 6 percent by 2016. However, the raise for 2009 has been suspended by the government for political reasons, a decision pensions funds plan to challenge at international legal forums.


[1] The advocacy group representing private pension funds projects a 5 revenue loss for 2009.