Pension Funds Online

Pension System Design

Hungary has a four pillar pension system. This consists of a first pillar pay-as-you-go system, a compulsory second pillar of individual accounts, a third voluntary individual schemes pillar and a fourth pillar of voluntary individual retirement accounts, aimed at broadening investment opportunities and encouraging greater retirement savings.

Public Pensions

The public pension system is a pay-as-you-go-financed, defined benefit (DB) scheme, covering all employees, including the self-employed. When mandatory schemes were introduced in 1998, they were made compulsory for new labour market entrants under the age of 42. Existing employees were given the option to voluntarily join the mandatory tier. About 50% of labour force exercised this option; those who did not opt for participation remained enrolled only in the first pillar.

The overall contribution rate to the pension system currently stands at 26.5%. Employers pay 18%, which goes into the Pension Insurance Fund for the first pillar. Employees contribute 8.5%.

For those employees participating in the mandatory second pillar, the contribution is divided and 7% goes to the individual retirement accounts and 1.5% is allocated to the public pension system.

For those employees who have chosen to remain within the pay-as-you-go system, the total contribution rate is 19.5% of the employee's taxable income – 18% is paid by the employer and 1.5% by the employee.

In order to qualify for a minimum pension from the first pillar, beneficiaries must have a contribution history of at least 20 years; a partial pension without a minimum is paid after 15 contribution years.

Second Pillar – Mandatory Individual Accounts

The mandatory second tier is a defined contribution (DC) system with individual retirement accounts. All covered persons – those who have opted to join the system and new labour market entrants below the age of 42 – are obliged to participate in the mandatory private pension scheme through joining a mandatory pension fund.

MPFs are independent legal entities owned by their members. They take the legal form of mutual foundations and the fund must have at least 25,000 members if it pays annuities itself and at least 2,000 members if annuities are bought from an insurance company. Membership may be open or closed. Contributions are collected and managed by fund managing companies, called private pension funds. Pension funds may manage the investment of fund assets internally or may outsource it partially or entirely to an investment company, financial institution or investment fund company.

Benefits are paid out when the beneficiary reaches the legal retirement age, which is currently 62 for men and 59 for women. The withdrawal of funds before reaching retirement is not possible. Pension fund members who have contributed for less than 15 years can have their assets paid as a lump sum. If the contribution period is longer than 15 years, members must buy a life annuity.

Third Pillar – Voluntary Pension Savings

In addition to the mandatory system, Hungarians have several options to save for retirement. They – or their employers – can voluntarily contribute to the mandatory pension funds up to a certain limit; they can contribute to a Voluntary Pension Fund (VPF) or they can join the fourth pillar.

VPFs provide individual DC accounts and are managed by the employer's insurance companies or financial institutions. Employer-owned pension funds must appoint a trustee to manage their assets. Both the employer and the employee can contribute to the fund. Benefits can be received as a lump sum after 10 years of membership or as an annuity.

Additional sources:

The Organisation for Economic Co-operation and Development (OECD) - http://www.oecd.org