12 March 2013.
The statutory pension system in Hungary exists in the form of a one-pillar, pay-as-you-go social security pension scheme, supplemented by the voluntary private pension scheme established in 1993 and by several other pension saving schemes (e.g. business insurances, pension pre-saving customer accounts).
The capitalized private pension scheme was regarded as part of the statutory pension scheme from 1998 to 2011. However, it did not meet the requirements – due to reasons detailed thereunder –, deteriorated the budget balance on a long-term basis and significantly exacerbated the increase in public debt.
As a consequence of measures taken in stages during 2010-2012 the number of private pension funds members decreased to a fragment of the former one; since 2012 the statutory payments of contributions are duly concluded into the social security pension system. As a result, the private pension system does not operate as a part of the statutory scheme any longer. The 70,000 people who stayed members fulfill to pay the membership fee on a voluntary basis.
III. The reform of the two-pillar statutory pension system in 2010-2012
The Hungarian statutory pension system had operated as a two-pillar scheme since 1998. Approximately three-quarters of pension insurance contributions was paid into the state pillar operating on a pay-as-you-go basis, whereas the rest i.e. one-quarter of such contributions was paid into private pension funds operating on a funded basis. Therefore, the regulations on benefits were accordingly defined in the relevant laws.
The membership in the mixed funded pension system was mandatory for those who commenced their career after 30 June 1998. Meanwhile, for those who had paid contributions i.e. who had already been insured during an earlier period of time, also had the opportunity to voluntarily join it. If they joined this mixed funded pension system, they automatically waived a quarter of their pension rights already acquired prior to the access.
The two-pillar statutory pension system in operation since 1998 had increasingly failed to meet the requirements. Numerous elderly insured people joined the mixed system without thinking of the consequences, however, the investment performance of funds could not live up to expectations. These processes had dramatically deteriorated the benefit prospects for the majority of fund members. Meanwhile, the transitional costs of the reform and the reimbursement obligation concerning the shortfall of social security revenues burdened the state budget. As a result, the operation of the two-pillar system considerably contributed to the growth in state debt and the deficit in public finances.
Experiencing the unfavorable processes, the Hungarian Parliament decided on the reform of the two-pillar statutory pension scheme which was gradually implemented in 2010-2012. The major measures were as follows:
decision in November 2010 on
- the termination of the career starters’ obligatory access to the private pension funds and on
- the suspension of membership fee payments for 14 months (between October 1, 2010 and November 30, 2011);
- In December 2010 the Parliament adopted the provisions of the step-back from the private pension funds. Accordingly, members could initiate to sustain their membership at any pension insurance directorate until 3January 1, 2011. In the lack of such initiative, membership ceased automatically on 1 March 2011. The former members’ assets were reimbursed for the Hungarian State. At the same time, former members became entitled to full social security pension, thus their future benefits will not be reduced because of the membership. (They are regarded as if they had never been fund members.) Besides, former members were entitled to the non-obligatory additional membership fee paid during the membership and to the investment yield noted on the individual account which was gained by exceeding the inflation rate (they could also receive it in cash);
- an act with effect from 2012 was adopted on diverting all the normatively regulated obligatory contribution payment into the Pension Insurance Fund i.e. into the pay-as-you-go pillar of the Hungarian pension system;
- since August 1, 2012 an act is in force on obtaining social security pension rights for those sustaining their memberships. Accordingly, since the date of suspension of the payment of statutory fund membership fees i.e. since October 1, 2010, fund members are fully entitled in the social security pension scheme as well.
As a result of the implemented changes, the Hungarian statutory pension system became a one-pillar system since 2012. The private pension scheme continues to operate as a voluntary pillar with a considerably reduced number of members (from 3,115,000 persons in 2010 to 74,000 persons). 97.6% of fund members decided on taking a step-back into the purely social security pension system.