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Hungary to Strip Private Pension Fund Members of State Pensions Benefits

Hungary will strip private pension fund members of their state pensions unless they move retirement savings back to the government-run program, Economy Minister Gyorgy Matolcsy said today in Budapest.

The directive is part of the government’s effort to do away with the mandatory private pension system and move 3 trillion forint ($14.6 billion) of assets managed by the funds into the state budget to reduce public debt. Hungary has since 1998 had private funds that manage employees’ mandatory pension contributions, as well as the state-run system.

“It’s unprecedented in Europe that a government is threatening to kick its own citizens out of the state pension system,” Zoltan Torok, a Budapest-based economist at Raiffeisen Bank International AG, said in a phone interview. “It’s probably enough to ensure that no one is going to stay in the private pension fund system in his or her right mind.”

Hungary is ending mandatory private pension funds after the European Union rebuffed a request by nine member states to be allowed to lower debt and deficit figures by the amount of transfers to the funds. People who opt to stay in the private funds will lose the 70 percent of their future pension claim that would have been paid by the state, Matolcsy said.

“It’s possible to make this decision but it has grave consequences for the future because that person is opting out of the state pension system,” Matolcsy told reporters today in Budapest.

‘Effectively a Nationalization’

Three million Hungarians have mandatory private pension funds. They have until Jan. 31 to decide whether to switch their holdings to the state. Their assets will be automatically shifted to the state system after that date, unless they expressly declare otherwise, Matolcsy said.

“This is effectively a nationalization of private pension funds,” David Nemeth, a Budapest-based economist at ING Groep NV in Budapest, said in a phone interview.

Hungarian employers pay 24 percent of each employee’s salary into the state pension system, while workers pay 10 percent.

Expelling private pension fund members from the state system means employees staying with the private pension funds will lose social security contributions their employers pay to the state. The government would continue to transfer the contributions made by employees to the funds.

The government is offering a cash incentive to switch private pension assets back to the state. Members whose returns exceeded the average inflation rate will be compensated in cash on the difference, Matolcsy said. The government estimates the overall compensation payout will be as much as 120 billion forint, Matolcsy said.

Authorities will also start investigating private pension funds to see whether investors’ assets “are still there,” Matolcsy said.

“We hope so,” he said.

To contact the editor responsible for this story: Zoltan Simon at zsimon@bloomberg.net

To contact the editors responsible for this Willy Morris at wmorris@bloomberg.net

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