Governance of the Hungarian Private Pension Funds

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Governance of the Hungarian Private Pension Funds

• Agnes Matits
• Budapest, Hungary

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Pension System in Hungary
Mandatory Private Pension
Voluntary Private Pension
STATE PENSION
Life annuity
Life annuity(lump sum)
lump sum or annuity
full guarantee
minimum guarantee
no institutional guarantee
Voluntary Mutual Benefit
Social Security
Mandatory Pension Fund
Fund
Central Retirement Budget
Individual accounts
Individual account
PAYGO
Defined contribution
Defined Contribution
Employer contributions
Employee contributions
Voluntary
Mandatory up to earnings limit
Mandatory
Voluntary
contribution
/ donation
regular
occasional

contributions

(
State Pension
Mandatory Pension Funds
Voluntary system
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PRIVATE PENSION FUNDs in Hungary

• Mandatory Pension Funds
• Voluntary Mutual Pension Funds
• Main features
• defined contribution
• immediate vesting
• special fund corporation Pensionkassen
• non-profit
• self- governed

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The Pension Fund Corporation

• Legal entity
• The members are the owners
• The organizations of the fund
• the General Meeting of the Members/ Delegates
• Board of Directors
• Auditing committee
• Certain experts and executives must be employed

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The general meeting

• the main decision body
• delegates elected by and from the members for 5
  years term
• consists of 25 to 100 delegates
• should be convened at least once a year

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The rights of the General Meeting

• to modify the Charter of the Fund
• to elect the governing bodies and their
  chairpersons
• to approve the annual reports and the financial
  plans
• to decide on the auditor, on membership fees
• to decide on MAs
• Comment the bigger the fund the more formal
  decisions are made by the general meeting

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The Board of Directors

• The managing body of the Fund
• Fund members should be represented
• At the voluntary funds only fund members could be
  elected to the Board
• Shall meet at least in every three months
• Shall consist of an odd number of members
• voluntary funds min of 3 members
• mandatory fuds min of 7 members

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Roles of the Board of Directors

• to prepare the decisions of the general meeting
• to decide the business strategy
• to decide the mode of operations, select the
  contracting partners
• to approve the regulation of asset management and
  the services of the Fund
• to ensure that the books and records are kept in
  accordance to the rules
• to exercise the ERs rights over the managing
  director
• Comment the members of the Board of Directors
  are often representatives of the interest of
  founding institution

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The corporate governance

• Same corporate forms
• different governance
  roles
• The role of governing bodies depends on the
  working structure
• The more diversified structure the less need for
  expertancy of fund corporation

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Pension Fund Operations
Portfolio record-keeping Control of asset
managers Physical custodianship Investment and
asset valuation
Custodian Service
Record- keeping Book keeping Data
processing Investment recording
Administration
Banking
Operational Management
Maintaining current account
Cash handling
Marketing Communication with members Communication
with employer Liquidity management Control of
outsourcing partners Statutory reports Establishme
nt of pension benefits
Transfers
Asset Management
Investment activity
Investment account maintenance
Investment valuation
Security account maintenance
Professional works
Report on market trends
Executive accountant, Lawyer,Actuary,
Investment specialist
Auditing
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Some typical working structures of Hungarian
Private Pension Funds I Plain structure
Pension Fund Corporation
Commercial Bank
Auditor
Comment Only Banking and
Custodonian Services are contracted out
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Some type of working structures of Hungarian
Private Pension Funds II Specialised structure
Commercial Bank
Pension Fund Corporation
Asset Management Company

Auditor
Comments Investment activity is also
out-sourced Often more paralel
contracts
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Some typical working structures of Hungarian
Private Pension Funds III Racionalised stucture

Commercial Bank
Pension Fund Corporation
Asset Management Company

Administration Service Company
Auditor
Comments Founders are often the owners of both
the Asset Mngmt. Co. and the Admin Service
Company
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Some typical working structures of Hungarian
Private Pension Funds III Diversified structure

Bank
Custodian Service Company
Pension Fund Corporation
Asset Management Company

Auditor
Administration Service Company
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Some lessons from the practice

• Self-governance vs. Corporate governance
• the professinalism of governing bodies
• conflicts of interest
• formal decisions
• selection of contracting parties
• market competition

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Thank you for your attention !

• Dr Agnes Matits
• Senior consultant at the International Training
  Centre for Bankers
• Independent Actuary and Pension consultant of
  several Private Pension Funds
• Chairperson of the Board of Directors, Ráció
  Voluntary Pension Fund
• Address International Training Centre for
  Bankers
• 1022 Budapest,Csopaki u. 6.-8.
• phone ( 36 1 ) 22 40 710 or 21 20 705
• fax ( 36 1 ) 20 11 330
• mobil ( 36 ) 30 9410 699
• e-mail amatits_at_itcb.hu or
  matits_at_matavnet.hu