The Gender Dimensions of Pension Reform in Hungary

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The Gender Dimensions of Pension Reform in Hungary

• Elaine Fultz
• Senior Specialist in Social Security
• ILO Budapest

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Pension privatization in the first 8 new EU
member states
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Four gender issues Where Hungary Stands

• Retreat from redistribution Great
• Pension privatization
• Elimination of redistribution in public pension
  benefit formula, fully effective in 2013

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2. Retirement Age in Hungary - Equalized for Men
and Women
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3. Pension rights for child care

• Reduced in privately managed individual savings
  scheme (second pillar)
• Contributions withheld from child care benefit
• Less than 6.00 per month
• Disincentive for men to take child care leave

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4. Life expectancy and private pensions

• 1998 pension privatization law requires the use
  of gender neutral life expectancy tables in
  computing private pensions.

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Hungary in regional comparison

• Most extreme losses to women in Poland
• Combination of individualized benefits and
  continuing privileges in retirement age
• Least losses in Czech
• Continuing solidarity in public pension benefit
  formula, no mandatory second pillar
• Hungary falls in the middle
• Individualized benefits caused losses for women
  equalized retirement age and gender neutral life
  expectancy helped to compensate for these losses.

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But --

• Unaddressed problems in the 1998 reform have come
  to the surface in the implementation period of
  the reform

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1. Pension reforms high cost is contributing to
huge national budget deficit

• The hole in the financing of the public pension
  system due to privatization.
• 13th month public pension provided at Christmas
• New package of benefit cuts being developed
• Restrictions on working pensioners
• Possible additional increase in retirement age
• Minimum pension

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2. Low Investment Returns in the Second Pillar
(ILO Study, Dec. 2004)

• Hungary 3.75 average return over first 6
  years of operations 6.6 inflation
  rate

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ILO update end of 2005(1998-2004)

• 0.7 positive return to workers
• 6.8 average annual return
• 6.1 average inflation

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Magyar Nemzeti BankOccasional Paper 402005

• The Sustainability of the Hungarian Pension
  System A reassessment
• Gabor Orban Daniel Palotai

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• the performance of the pension fund sector in
  Hungary can be regarded as unsatisfactory by some
  reasonable standards
• Pensioners in the multi-pillar system are
  projected to receive significantly lower benefits
  than those in the pure public system
• There may be sizeable differences between
  pensions provided by various funds and
• A major tension could arise from pensions being
  below any social minimum.
• Page 28

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Hungary - Lower replacement rates due to
privatization
Figure 9
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Financial Sector Assessment Program
UpdateHungary Pension-Competition and
Performance in the Hungarian Second
PillarDecember 2005

• The World Bank

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World Bank The average return performance of
MPFs has been rather disappointing.
World Bank, page 13, table 12.
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Structure of Assets of Mandatory Private Pension
Funds in Hungary
Matits, A., "Practical Experience with the
Second Pillar of the Hungarian Mandatory Pension
System," delivered at an ILO pension conference,
Budapest, Dec. 9-10 2004.
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Large differences in fees charged by different
funds
World Bank, page 23, figure 9
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Long Term Investment Performance of the Hungarian
Mandatory Pension Funds by Size of Assets,
1999-2003
Matits, A., "Practical Experience with the
Second Pillar of the Hungarian Mandatory Pension
System," delivered at an ILO pension conference,
Budapest, Dec. 9-10 2004.
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• The funds sponsored by financial institutions
  account for about 85 percent of total assets,
  despite charging higher fees.
• One of the main challenges faced by Hungarian
  regulators is take advantage of the presence of
  low cost funds to improve competition and reduce
  costs and fees for all participants.

World Bank, page 2
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Lessons of Hungarian experience

• Problems in legislation come to the surface in
  implementation period
• Need for a source of funds to fill the hole in
  the public pension scheme created by
  privatization
• Need to limit private administrative charges