IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Private pension funds in Hungary : early performance and regulatory issues

Listed author(s):
  • Vittas, Dimitri
Registered author(s):

    Despite the limited scope resulting from the high payroll taxes for the compulsory, unfunded public pillar in Hungary's pensions system, the early voluntary private pensions fund performance has been encouraging. Investment returns have been well above the inflation rate and participation has expanded rapidly. However, the sector is highly fragmented and regulatory weaknesses exist: no compulsory use of custodian and licensed asset managers; use of book values and cashflow accounting rather than market values; costly tax treatment, benefiting high income earners while not providing incentives to non-taxpayers; infrequent statements and inadequate information fund performance disclosure; no minimum relative profitability levels guarantees; and a need for strengthened and more effective supervision. Without systemic reform the private pension fund potential will remain limited. Hungary's pension system suffers from the same problems that afflict most pay-as-you-go (PAYG) systems in Eastern Europe: high system dependency rations, low retirement ages, lax disability pension criteria, increasing evasion, heavy pension costs, and large deficits. In May 1996, Hungarian authorities decided to create a mixed system of two mandatory pillars and one or more voluntary pillars. The first pillar will offer all eligible Hungarian workers a basic PAYG pension, while the second pillar will be a fully funded, privately managed, decentralized system based on individual capitalization accounts. The private pillars should boost economic growth by developing capital markets and removing labor market distortions. Systemic reform faces two challenges: whether to impose the mandate on individual workers or their employers, and how to build a mandatory pillar on to existing voluntary pillar institutions. The author suggests the use of a hybrid mandate combining an employer mandate with the right for workers to opt out and join an independent fund as a compromise. Most other regulatory issues would apply with as much severity under a compulsory private funded pillar as under a voluntary one.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1638.

    in new window

    Date of creation: 31 Aug 1996
    Handle: RePEc:wbk:wbrwps:1638
    Contact details of provider: Postal:
    1818 H Street, N.W., Washington, DC 20433

    Phone: (202) 477-1234
    Web page:

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    in new window

    1. Vittas, Dimitri & Michelitsch, Roland, 1995. "Pension funds in Central Europe and Russia : their prospects and potential role in corporate governance," Policy Research Working Paper Series 1459, The World Bank.
    2. Fox, Louise, 1994. "Old age security in transitional economies," Policy Research Working Paper Series 1257, The World Bank.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1638. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.