EUROPE - Hungary's government has effectively dealt a death blow to the remnants of the country's mandatory funded pension pillar after announcing that a 14-month temporary freeze to contributions would be extended indefinitely.

The move, which will deprive the remaining private pension funds of inflows, is likely to put both fund management companies and fund members in an impossible position, forcing members to opt back - assets and all - into the state pension pillar if they want any pension entitlement.

Stabilitas, the Hungarian pension fund association, said it would challenge the decision in both Hungarian and international courts.

Its scope for doing so is limited, however. A new constitution coming into force on 1 January clips the wings of the Constitutional Court, removing budgetary questions from its purview.

Julianna Bába, the association's chairman, said: "Until now, we have been surviving from reserves we accumulated in the past."

György Matolcsy, Hungary's national economy minister, announced the continued contribution freeze last week as part of a package of revenue-boosting measures and spending cuts made in response to a rapidly deteriorating budgetary outlook.

Diverting the fund contributions of the 100,000 savers who remain in the funded system into the state Treasury will bring in HUF48bn (€160m) over the course of a year.

But the government may be hoping many will opt back into the state pension pillar once the funds are effectively forced to make a one-time gift of their savings to the state.

The remnant of the second pillar has some HUF223bn in assets.

However, many doubt the government will stop there. Peter Attard-Montalto, an emerging markets analyst at Nomura, said: "Such an amount would certainly be a decent plug to the budget hole next year. However, the Tier 3 makes much richer pickings for the government with HUF836bn in assets in 1.3m accounts."

Hungary was the first country in emerging Europe to introduce a funded pension system, in 1996. At its peak at the end of last year, the mandatory second pillar had 3m members and some €10bn in assets.

The country's populist Fidesz government, following its decision to break with the IMF at the beginning of 2010, announced that only those pension fund members who handed their assets back to the state's pay-as-you-go pension pillar would be entitled to a state pension on retirement.

Faced with what critics described as a form of blackmail, some 97% of members did opt back into the state system, handing the government a one-off €10bn windfall.

Despite this, fiscal consolidation has not gone according to plan, and Hungary announced last month that it would be returning to the IMF for budgetary support.

In a radio interview last week, Viktor Orbán, prime minister, said: "This moves completes our reform of the pension system."

The first pillar remains in deficit.

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