hungarian association of otp pension funds pension funds ‘stabilitas’ the main characteristics...

Hungarian Association of OTP Pension Funds Pension Funds ‘STABILITAS’

THE MAIN CHARACTERISTICS OF THE

HUNGARIAN PENSION REFORM

CSABA NAGY, PRESIDENT

CONFERENCE BY BULGARIAN ASSOCIATION OF SUPPLEMENTARY

PENSION SECURITY COMPANIES

SOFIA, February 15-18, 2005


REASONS FOR PENSION REFORM

Replacement ratio of pensions

Demography –baby boom in 1950’s

Costs of PAYGO scheme are not affordable in the 21st century

Value and replacement ratio of pensions has fallen since 1990


WHAT IS A PRIVATE PENSION FUND?

As opposed to PAYGO scheme, an institution that establishes

•transparency and•relationship between contributions paid by the individual and pensions received

An optional item of employer sponsored employee benefit schemes

A form of partially opted-out scheme designed to substitute roughly 25 % of state social security pensions

PILLAR 2


WHAT IS A VOLUNTARY PENSION FUND?

A savings vehicleproviding for supplementary income to retired members

A fundamental part of employee benefit schemes

As from 2005 also a financial product:

• up to 50 % of savings can be offered as a collateral to bank loan• up to 30 % of savings can be borrowed by

the member

A form of savings entitling to tax allowances

PILLAR 3


KEY FEATURES

•Mutual ownership of members•Non for profit organisations•Fully funded schemes of•defined contribution (DC) type•Tax incentives are granted

PILLAR 3PILLAR 2 Mandatory to new entrants into

the labour market Rates of contributions are set

by legislation, currently 8 % of the monthly earnings that can be supplemented up to 10 %

Term of savings up to retirement

Voluntary membership Contributions (in excess of

a minimum fee) are optional

Minimum savings over 10 years (waiting period) or up to retirement


STRUCTURE OF LONG TERM SAVINGS

Insurance coverage (open market since 1989)

Voluntary mutual pension funds - VPFs (established since 1993)

Mandatory private funds - MPPFs (set up during 1998 and 1999)

State Social Security Pension

Mandatory Private Pension Funds

VOLUNTARILY

OBLIGATORILY

Voluntary pension funds

Insurance

Other savings


ORGANISATION STRUCTURE (VPF, MPPF)

General assembly of the members

Board of Directors

Supervisory Committee

PROVIDERSBank account

managerAdministratorAsset managerCustodianAuditorOther (Certificate Authority

of digital signatures from 2005, etc.)

SPONSORS

STATE SUPERVISORYAUTHORITY


CHANGES IN ENVIRONMENT

MAJOR ISSUES 10 YEARS AGO

Political support of the pension

reform was questionable The establishment of trust of the

population in the reformed scheme seemed to be the largest challenge

Investments primarily in state guaranteed bonds

Administration and accounting and reporting techniques had to be elaborated

Principles and techniques of audit and supervision had to be

worked out

MAJOR TOPICALITIES

The reform is irreversible and trusted,

but tax allowances might be cut Persistency of members, especially in

voluntary funds on the termination of the waiting period is of highest concern

Focus is on diversification of portfolio and monitoring of asset managers

Confidentiality and security of data and business processes, automated data processing is emphasized

Disclosure of performance, investment policy, benchmarks and returns on investment to members


CHANGES IN REGULATION

Milestones indicating development of regulation & supervision

1997: Pension reform (private funds) passed by Parliament 1998: Private funds, initially about 40, are formed and approved by supervision 1999: Active labourforce can opt –out and register in private fund by 31st August 2000: Hungarian Financial State Authority is formed by union and common

management of former agencies to monitor the entire financial sector 2001: Harmonisation of legislation with respect to private and voluntary funds 2002: The option for withdrawal from private fund and switch back to state scheme

has terminated on 31st December 2003: rate of contribution in private pension funds is raised to match initial reform

objectives (7 % in 2003, 8 % from 2004) 2004: Harmonisation of pension legislation with EU directives, although

portability of pensions is still outstanding Tax allowances to members to reduce their withdrawal of savings from

voluntary funds (rate of tax levied on paid sum reduces by 10 % each year) 2005: Voluntary pension savings (as 10 years waiting period matures) can be

used as collateral to bank loan in order to withhold members from consumption of future supplementary pensions


DRAWBACKS OF THE HUNGARIAN SCHEME

Poor design as compared to the Bulgarian model and Anglo-Saxon funds

Mutual ownership and general assembly is ineffective and inefficient,

Exclusively formal decisions are made Weak guarantees

Accounting and asset valuations are over-sophisticated in comparison to unit-pricing and keeping members’ account in unit-linked funds

Frequent changes in legislation put a cost burden on operation (in percentage of contributions)

Decentralised collection of contributions and parallel procuration processes in levying non-payers of private pension funds is rather inefficient and costly


CHANGES IN REGULATION OF INVESTMENT

Milestones indicating the development of regulation of investments by funds 1996: obtaining supervisory authority’s approval to foreign investment was eliminated

regulation on incompatibility of asset manager, custodian and fund managers 1997: OECD government bonds or securities can be held up to 5 % of assets 1998: concept of accruals instead of cash received & paid in accounting, asset valuation;

performance measurement, annual returns according to uniform formula published

1999: Custodian is responsible for reporting on composition of assets and compliance 2000: Quarterly reports to supervision on investments and operation are largely simplified 2001: investment policy, and principles of asset management (i.e. targetted

breakdown and duration of assets, furthermore a benchmark portfolio and returns in order to measure performance to be approved by fund management introduction of portfolio by choice system (voluntary pension funds)

2002: funds are obliged to open a bank account with the custodian and all transactions related to investment have to be recorded on this account;

2003: daily asset valuation (fund with assets over EUR 4 million); allocation of returns based on market pricing to members’ accounts;

2004: regulation of investment in real estates; matching the currency of assets with currency of emerging liabilities;

2005: 50 % limitation on investment in equities is eliminated; responsibility regarding the activity of custodian is stipulated.


PORTFOLIO OF FUNDS

Private Pension Funds as of September 30th, 2004

0,47%7,79% 0,61%8,51%

72,70%

1,71% 8,22%

bank depositequitiescorporate bondsstate securitiesinvestment trustscashother

Voluntary Pension Funds as of September 30th, 2004

0,68% 8,56%9,48%0,56%

72,59%

3,19%4,93%

bank depositequitiescorporate bondsstate securitiesinvestment trustscashother


ADMISSIBLE ASSETS TO PENSION FUNDS

Asset classes specified in the legislation Short selling of papers is prohibited Cash of a maximum of 500.000 HUF cca. 2,000 EUR at cashier’s office Balance on bank account and bank deposit Government papers (T-Bills, bonds, domestic or foreign, etc.) Corporate and non-state-guaranteed bonds and foreign equities are

altogether maximised in 30 % of assets, each type limited to 10 % Balanced and equity funds are maximised in 50 % Mortgages maximised in 25 % of total assets Standard futures or options in relation to collateral security or arbitrage Repurchase agreement based on government paper limited to 20 % Real estate or real estate related investment funds up to maximum 10 %

Investment outside OECD or EU countries are maximised in 20 % of total value of foreign assets


PROCEDURE OF INVESTMENT

BANK ACCOUNT

PENSION FUND

ASSET MANAGER

CUSTODIAN KELER

EMPLOYERS, MEMBERS

Financial assets

Information, mandate

Daily asset valuation

Hungarian Clearing House

SUPERVISORY AUTHORITY HFSA

securities


KEY FIGURES


Voluntary Pension Funds

5

86

7

78

57

71

5

6 5

6

64

MARKET SEGMENTATION

Private Pension Funds

65

7

8

5

5

6

7

4

5

5

3

5

5

3

5

5

5

5

3

Private Funds set up by banksPrivate Funds set up by insurance companies

Private Funds set up by employersOther Private Funds

2004 2003200220012000

2004200320022001


MARKET PARTICIPATION – Mandatory Funds

Based on number of members Based on assets in 2004

MKB Rt. 1,1%Non

members of Stabilitas

16,8%

ING - NN15,5%

Credit Suisse L&P

8,3%

ÁB-AEGON 17,6%Allianz

Hungária 13,0%

OTP MPPF28,4%

OTP MPPF26,4%

Allianz Hungária

10,8%

ÁB-AEGON 16,6%

Credit Suisse L&P

9,3%

ING - NN19,3%

Non members of

Stabilitas16,8%

MKB Rt. 2,1%


PRIVATE PENSION FUNDS, Assets & members

Membership

2064 2193 2253 2225 2305 2377

1347

0

500

1000

1500

2000

2500

1998

1999

2000

2001

2002

2003

2004

Q3

0%

10%

20%

30%

40%

50%

60%

Number of members in percent of active population

ASSETS

359 703 11341652

22462958

1150

500100015002000250030003500

1998

1999

2000

2001

2002

2003

2004

Q3

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

Assets in million Euros in percent of GDP


VOLUNTARY FUNDS, Assets & members

Membership

13 194464

675940 1008 1081 1153 1179 1218 1 242

0200400600800

100012001400

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Q3

0%5%10%15%20%25%30%35%

Number of members in percent of active population

ASSETS

2 27 93 229 404 636900

11681433

1737,6 1934

0

500

1000

1500

2000

2500

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Q3

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

Assets in million Euros in percent of GDP


LONG TERM SAVINGS IN PERCENT OF GDP

0,29% 0,79% 1,34% 1,90% 2,43% 3,02%3,86%

1,40%1,71%

1,96%2,11%

2,34%2,52%

2,08%

2,63%

3,14%3,32%

3,55%

3,84%

3,93%

1,00%

0%

2%

4%

6%

8%

10%

12%

1998 1999 2000 2001 2002 2003 2004 Q3

Life Insurance ReservesVoluntary Pension FundsPrivate Pension Funds


THANK YOU FOR YOUR ATTENTION

Should you have any questions, please contact in e-mail [email protected]

hungarian association of otp pension funds pension funds ‘stabilitas’ the main characteristics...

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