HUNGARY – Pension funds, asset managers and the country’s supervisory body are banding together to produce a joint review of the technicalities of the Hungarian pension funding system, according to Mihaly Erdös at Pénzügyi Szervezetek Állami Felügyelete (PSzAF), the country’s financial supervisory authority.

The review coincides with Hungarian government debate on pension reform in the country’s first and second pillar systems.

“The supervisor, pension funds and the asset managers are going to collect together the experiences of the bookkeeping system, the investment processes and evaluate the effectiveness of the pension funds,” says Erdös.
“ These issues don’t cover the framework of the whole pension system, but they are very important technical issues, and the aim is, of course, to make Hungarian pension funds more effective and transparent,” he adds.

The evaluation process comes three years after the introduction of second pillar funds in Hungary but has parallels to national systems with much older traditions, says Erdös: “ When I was reading the Myners report in the UK I was surprised when I found out that a large part of the people who run UK pension funds are not investment professionals, the same question that is being raised in Hungary.”

The first phase of the evaluation committee’s work is expected to finish by the end of the year, when suggestions for regulation change will be reported to the government, says Erdös.

He explains the government’s planned reform of the first and second pillars of the local pension system.
“ In Hungary, new employees have to join a pension fund in the second pillar and the question is whether it should be mandatory or optional, the second question of the mandatory pension funds is about the disability retirement risk,” says Erdös.

The main debate, he says, is over the first pillar of the current system and whether it should resemble the German system, or the notional contribution systems with individual accounts that are in place in Poland and Sweden.

The transparency and clarity of the system is also under scrutiny, Erdös adds, particularly the notion of specifying clearly which part of the total social security contribution goes into pension payments and how much is allocated to healthcare and disability.
Also, members of pension funds currently get benefits which do not cover basic living costs in the case of becoming disabled early in their working lives, and the government is looking into setting up reserves within the funds for such cases, says Erdös.