25 October 2010

The pension system is a value in itself. The current three-pillar pension scheme enhances risk-sharing and produces more safe and predictable pensions. Even if only temporarily, pension savings should not be used as a remedy for the cash-flow problems of the government budget.

The stability of the financial system has a fundamental importance for a predictable economic environment and plays a key role in monetary policy decision-making.

The establishment of the three-pillar pension system in Hungary following the political transition has been one of the most important and progressive policy steps. It has strengthened self-reliance within society and independent responsibility of individuals. The contributions-based and fully funded pension schemes complement each other, enhance risk-sharing and, ultimately, result in more stable and predictable pensions.

The fully funded private pension fund system has two important features:

  • First, it is capable of handling pension payments and the sustainability of the system independently from demographic changes, ensuring predictability and security of the pension system even in the face of an increasing  ratio of the elderly.
  • Second, it greatly limits the scope for the state to alter the pension system from time to time guided by political or budgetary motives, thereby reducing the security and predictability of future pension payments.

Jeopardising the predictability of the operation of the private pension plan will reduce confidence in the long-term accumulation of savings and the predictability of individuals’ careers throughout their lives, while strengthening the dependence of society on the redistribution of wealth and income by the state. As a consequence, a major reform of the pension plan may create  risks to stability. Should the state choose to finance the fiscal deficit by using the pension fund savings, this will increase the risk about the sustainability of public finances and undermine the economy’s prospects for growth.

Over the last few decades, the effectiveness and performance of Hungarian private pension plans have often become targets of rightful criticism. The shortcomings of the system could be best addressed by taking regulatory measures and boosting competition rather than abolishing the entire scheme. In addition to retaining the private pension plan, regulation should aim to achieve a lasting reduction in operational costs and contribute to a genuine rise in the real returns on pension portfolios, especially in comparison with rates of return obtained over the past decade.


Monetary Council