BUDAPEST -- Fund managers are furious over an unexpected change in Hungarian pension law they say will cost them and their clients money, and could threaten the industry's fledgling reform process.
They claim the legislation, which diverts a larger than expected amount of Hungarians' pretax earnings into the state-run, pay-as-you-go system and away from privately managed accounts, is short-sighted and political.
Last year, Hungary passed landmark legislation that created a three-pillar mandatory private pension system. The initial law said 8% of an individual's pretax wages would go toward retirement, with 6% going into a personal, privately managed account in 1998 and 7% in 1999. The remainder is placed in the state-run system.
But the new law keeps the amount designated for private funds in 1999 at 6%. That could cost the approximately 1.3 million Hungarians in the new system an estimated total of 6 billion forints ($27.6 million). The change also is expected to slow the rate at which individuals join the new system, and in some cases send people back to the pay-as-you-go system.
"What I am really afraid of is that they are only starting to touch the long-term regulation," said Peter Zatyko, general manager of Aegon Pension Fund Management Ltd. in Budapest. "This new system wasn't created by this government, so changing it is a kick to the former government."
The former Socialist-led government was ousted in May elections. Hungary is now governed by a coalition of conservative, right-leaning parties: Fidesz-Hungarian Civic Party and the Smallholders Party. Relations with the Socialists are particularly acrimonious, and the new government has canceled several projects initiated by its predecessor, including a fourth subway line for Budapest.
Government officials were not available for comment. However, the government has stated budgetary needs necessitated the move. The government believed it would have to pay 20 billion forints to the National Pension Fund Plan, the pay-as-you-go system, to cover those who shifted to the new system. That was based on an estimated 600,000 people shifting to the new system. In actuality, about 1.3 million have made the change. Now the government must shell out 60 billion forints to the national fund.
The increase comes at a time when the government is trying to lower its budget deficit to below 4% of gross domestic product in 1999, from 4.6% this year, as it prepares to join the North Atlantic Treaty Organization and the European Union.
The new law does not change the original plan to have the full 8% of pretax earnings taken from Hungarians' paychecks funneled into the private funds in 2000. But that doesn't console anyone in the pension industry. Industry participants say there is nothing stopping the government from amending the law again next year, especially since the new plan will continue to cause a large deficit in the National Pension Fund Plan.
Some find fault with the government's argument that budget demands forced the change. World Bank principal economist Roberto Rocha said deficits are to be expected with this type of a monumental change. Indeed, the World Bank gave Hungary a $150 million loan to cover the short-fall.
"The lost money is going into the private sector. It is having no effect on the current account deficit or inflation," said Mr. Rocha. "The new system has a powerful effect on growth. You have more savings and more long-term saving that directly benefits the economy."
The opposition party of the Alliance of Free Democrats is preparing a legal challenge to the new law. It intends to petition the Constitutional Court, Hungary's highest court, to strike down the law on the grounds that it breaks a government contract with the people. In addition, it interferes with the contract individuals have made with their private pension fund managers.
"People decided to switch systems on the basis of this law," said Tamas Bauer, a member of the Hungarian Parliament. "Now when the retire they are going to get less."
The pension funds are still grappling with the ramifications of the government action. The five largest pension funds are considering a joint publication relations and advertising campaign to counteract the new law.
"We have to fight the negative influence of this law," said Csaba Nagy, managing director of OTP Mandatory Pension Fund, Budapest. OTP, with 245,000 members and assets between 5 billion and 6 billion forints, is the country's third largest fund. "We have to show Hungarians they want to switch."
Like other managers, Mr. Nagy said the new law throws off his business plan for next year. Originally, he thought the fund would have about 400,000 members at this time next year. He fears the new plan will slow growth to only about 340,000 to 380,000 members. Because pension fund managers make money by charging an operational fee on assets, fewer members and lower assets mean less revenue. Mr. Nagy's not sure how this will affect the fund's revenue.
Aegon's Mr. Zatyko estimates it will cost his fund 80 million forints in revenue, adding that's not too bad: "It's not a big deal, but what happens if I'm dealing with the same situation in 2000 and 2001?"
Ironically, the government action comes right after the signing of an ethics code by the country's five largest pension funds, preventing them from directly targeting each other's members. Two months ago, they signed a pact refusing to pay brokers who brought clients formerly registered with a competitor.
"We just don't want a war between funds," said Mr. Nagy. "It would be dangerous for the funds and the clients as well."