Real yields of pension funds to be received in the mail

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Hungarians who returned to the state-run pension system from the private pillar are set to receive the yields of their savings at the end of August. Optimistic scenarios say that the extra spending money could give a tangible boost to the economy.

Depending on whether private pension fund members made statements on how they want to receive payment, the real yields – the amount generated exceeding inflation – will arrive via bank transfer or post by the end of the last summer month.

Prime Minister Viktor Orbán announced last October that the wealth accumulated in private pension funds would be taken over by the state, converting Hungary’s pension scheme into a two-pillar variety (the second pillar is voluntary pension savings). At the time, the Stabilitás fund association decried the effort as clear nationalization and noted that some 3 million Hungarians had amassed around HUF 1 million in savings each over the dozen years the funds were in operation.

Accordingly, Stabilitás said that the aggregate amount of savings in the private funds amounted to HUF 3,162 billion at the end of March. Once all that is taken over by the state, the group reckons HUF 260 billion of the total will be returned to individuals in the form of yields. The group’s president Julianna Bába said that on average, those returning to the system will get HUF 80,000 each.

What to expect

Some funds have already made public the amounts their former members may expect. ING’s fund is to transfer a total of HUF 40.5 billion. The first group of refund recipients – those that have been with the company since private funds were established in 1998 – are to receive HUF 101,544 each on average. The Életút fund announced that it has already completed transfer of the HUF 413 million in real yields to its members. Here, the average per capita amount in reimbursements was HUF 170,000. The funds that have not yet released average forint sums offer their members calculators on their websites where members may find out how much they are likely to get.

According to data released by financial market regulator PSzÁF, 11 of the 17 private pension funds achieved a positive yield over the past 13 years, while the remaining six were in the negative. As such, the majority of former members may expect payment.

Regarding those who did not explicitly state they want the money transferred to their bank accounts, there are now capacity concerns envisioning delays in postal delivery. But recipients should also stay aware. If the postman cannot deliver the money, because the person they are looking for is unavailable – e.g. they’re at work – he will leave a notification on which post office they can pick up their cash. For those eligible for more than HUF 150,000, this is the standard case, since delivery workers may not handle amounts exceeding this. However, if the amount in question is not picked up by September 16, several years of waiting will ensue, since the post will transfer unclaimed refunds to the treasury where they will be rolled into state pension accounts.

Economic impact

PM Orbán announced that HUF 1,345 billion of the pension takings will go directly to reducing state debt. Through the move, the country will be able to reduce what it owes to 77% of GDP from 81% in a single move, something he labeled a “world record.” The political opposition questioned his claims of success, since the reduction is achieved through a one-off move, the legitimacy of which is still widely contested. In fact, the Constitutional Court is set to address the issue after the summer recess.

On a smaller scale, citizens getting the yields of their savings in cash is also expected to be a slight boost for the economy in general due to the simple fact that people will have a little extra money to spend. These expectations are underlined by a Takarékbank forecast, which predicts annual GDP growth of 3% this year. The bank pointed out that for the time being, expansion is fueled almost exclusively by exports, with domestic consumption contributing little to nothing. With the extra funds people are left with, this could take a change for the better. Portfolio.hu analyst István Madár was also optimistic, telling InfoRádió that the refunds could fuel retail turnover by 2% in the second half of the year.

However, these projections were made before Europe became heavily preoccupied with its ongoing debt crisis. The Swiss franc, the currency used in a wide array of mortgage loans, has been breaking new records. Therefore, it is far more likely that debtors will try to use the moderate sums they are to receive to pay back loans or simply make their monthly scheduled mortgage payments. It could be that the returned yields will generate very little additional consumption. 

Future problems

As an additional concern, even though the government now claims that the pension system has been “saved” and has become sustainable, experts say this assumption is far from true. An OECD directive that is also accepted by the EU declared that citizens of member states need to receive at least 70% of the respective country’s average earnings as their pensions in order to have acceptable sustenance when they retire. It is generally accepted that a solely state-run pension system will not be able to cover the gap.

Calculations released by insurance company Aviva show that the gap between what is now put aside and what would be necessary to reach the benchmark for those retiring between 2011 to 2051 is HUF 532,000 on average per year. Even though the company noted that Hungarians reacted to crisis conditions by cutting back on consumption and accumulating savings, they are generally still very far from that level.

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