Private pension fund members who, nine years ago, did not allow government blackmail and decided to stay, nearly doubled their savings

Peter Pelyi

The abolition of the private pension fund in 2011 caused quite a stir and caused intense emotions in the media and among the people. This nationalization has caused a great deal of embarrassment to many, and has also fundamentally shaken people’s confidence in private retirement savings, as many fear that their voluntary savings could be taken away by the state. However, the nationalization of private pension funds was a reallocation of contributions, as opposed to voluntary pension savings, where we set aside our after-tax net income. In private pension funds, savings were personally collected in a segregated account for which statements were continuously sent, while no regular information was received on state pensions.

That is why everyone could feel that this money was his own and the state took it away. This has remained a delicate subject ever since and many people still feel that they have been burned by private pension funds. As a result, to this day, there is a lot of misconception about the nationalization of private pension funds and how this could actually happen in legal terms, as well as exactly how the money was raised and, in essence, what these savings were. Unfortunately, as in most cases, reality is not as black and white as it is most often communicated to us.

Because of the merger of private pension funds, many people think that it is superfluous to set aside any purpose for retirement because “the state is taking it anyway”, even though it is legally different.

A few years after its introduction, and in view of the practical results and operational experience, a review of the private pension fund system was needed in 2001, as figures in many areas did not go as planned:

1. Wealth growth has been slower than expected, for two reasons: One, a steady decline in the stock market, and the other a significant increase in costs.

2. Due to the payments made by private pension funds, the amount lost from the state budget in 1998 was HUF 20.1 billion (0.2% of GDP). The annual deficit for 2001 was HUF 81.3 billion (0.5% of GDP), which was very much felt by the domestic economy.

During the review, due to changes introduced in 2001, new entrants were no longer required to join a private pension fund and, in addition, allowed those who had previously joined the private pension scheme to join the public system.

However, the abolition of the entry requirement for newcomers was reinstated as of 1 January 2003, thus making membership of the private pension fund for those entering the labor market compulsory and, in addition, the withdrawal to the state pension system was virtually eliminated. In addition, this law also regulates the possibility of voluntary entry, so only those who have had at least five years’ employment and under 30 years of age may choose to enter voluntarily. With this age limit, the state’s goal was to allow members under the age of 30 to collect in a private pension fund until retirement, while members over the age of 30 stayed exclusively in the state pension system unless they had previously joined the private pension fund system. However, this new tightening virtually overwrote the measures taken to reduce the budget deficit, as contributions paid to private pension fund accounts were still not passed on to the public treasury and the pension fund was seriously burdened by the loss of revenue. As a result, the budget deficit reached an annual deficit of HUF 354.1 billion by 2009, which was already 1.4% of GDP. This, in turn, significantly surpassed the deficit target of 1% planned for the introduction of the private pension fund (by 0.4 percentage points), and the future did not show any more favorable trends, thus requiring further and significant changes in the system of private pension funds. This new big port sweeping change was made in 2010.

Since 2010, cumulative inflation has been 21 percent, so this is a drop in the real value of savings, but this is a nice return, as the savings for a private pension fund member who had a $ 1 million account in December 2010 . In other words, if we had 1 million in, we had an average yield of around 600-700 thousand forints by now.

At the time of channeling the savings of 3 million private pension fund members into the state system, about 100,000 members decided not to allow the government to be blackmailed (and not retire from the state system) and remain. Finally, by statute, after the September 30, 2010 period, 100 percent of the pension is paid to the members of the private pension fund, while 25 percent of the pension will come from the private pension fund and 75 percent of the pension fund. If private pension fund members decide to return to the social security scheme – for example, because they retire and the fund is unable to pay contributions – they receive the real income from the membership, as well as the voluntary contribution and its full income.