Region: Orbán wants to scrap private pensions

Hungarian private pension funds are preparing to pursue cases in European courts in reaction to a pension reform bill outlined by Economics Minister György Matolcsy.

Matolcsy announced his plan Nov. 29. It calls for investors in private pension funds to lose their eligibility for a state pension unless they move retirement savings back into the government-run program. If passed, the law would mean the effective dismantling of the country's private funded pension system and could move more than 2.7 trillion forints ($12.8 billion) into the state system.

"The law infringes on all the relevant paragraphs of the Constitution on legal certainty, the ban on discrimination, social welfare, protection of ownership and human dignity," said Julianna Baba, president of the Stabilitas, an association of private pension funds active in Hungary.

After a meeting with Matolcsy last week, she said the government stands by its plan and that the group will be challenging the proposed legislation, first in the Hungarian Constitutional Court and then, if necessary, at the European Court of Human Rights (ECHR) in Strasbourg, France. 

Stabilitas have also said it will be handing in a petition to the European Parliament to appoint an ombudsman to investigate the pension-related measures on the basis that they infringe on the constitutional rights of 3 million pensioners.  

Speaking to The Prague Post, EU legal expert Marie-Pierre Granger, who does not anticipate the Constitutional Court will get involved, said she felt there was a 50-50 chance of the ECHR ruling against the measures if the case makes it that far.

"The big problem is that pensions are supposed to be member-state competencies, but there is also EU policy on trying to make pensions more predictable and protection of free movement of workers. Such reforms make it unpredictable to rely on any one scheme," she said. 

In the proposals outlined, workers will have until Jan. 31, 2011, to decide on whether to quit the current two-tier pension system and return entirely to the state system if and when the new proposals become law.

As of Feb. 1, all workers who do not specifically request to stay in the private system will be transferred wholly to the state-run system by default. Those who explicitly refuse to change will only be entitled to returns on their pension investments about a quarter of the value of the state pension.

Matolcsy wants to use 530 billion forints to fill a hole in the national pension fund next year and 250 billion forints in 2012. The leftover surplus will be used to reduce payments on government debt, which is the region's highest at about 80 percent of GDP.

Speaking on state television, Matolscy argued that individuals who refuse to transition back to the state system are going against social solidarity.

"I want to make it clear [people who do not opt back] are no longer part of the solidarity-based pension system. ? Private pension fund members will have written themselves out of the community, and will be going their own way,'' Matolscy said. 

He further rejected accusations that the proposals amounted to nationalization of the pension system. However, political scientist Andras Bozoki told The Prague Post that Matolscy's proposed measures are, in effect, compulsory.

"This is a strange assertion [by Matolscy], because the conditions are not equal to choose; the conditions are not fair,'' he said. 

The European Commission has also expressed concern.

Amadeu Altafaj, a spokeswoman for Economic and Monetary Affairs Commissioner Olli Rehn, said she is worried the "free choice" between a private and public pension is "not as free as it looks."

The markets have also reacted negatively to the news, and Moody's downgraded Hungary's credit rating two notches Dec. 6.

Bozoki said the proposals by Prime Minister Viktor Orbán's government violate the rule of law and will have negative long-term effects.

"Firstly, a contract between individuals and companies must be respected, and secondly, it should not be used for making the budget better because it is the money of the next generation," he said. 

The reform is also likely to affect Hungary's ability to attract and keep foreign talent with non-nationals generally seen as being reluctant to opt out of their private pension scheme.

Cillian O'Donoghue can be reached at
codonoghue@praguepost.com