After 14 years, the private pension fund market is moving again
Almost 14 years ago, in November 2010, the decision was made to transfer the contributions in private pension funds to the state pension system. At that time, under state pressure, more than 3 million fund members decided to withdraw from the state pension system. The remaining approximately 100,000 private pension fund members has continued to decrease over the years – partly due to reaching the retirement age, partly due to the return to the state pension system -, by the end of September last year, their number had dropped to 51,303.
More than a decade after the ominous fell the private pension fund segment is moving again, the number of the remaining four service providers is decreasing:
- from April, the MBH Care Pension Fund was merged into the Budapest Private Pension Fund,
- and from July 1, the Association Private Pension Fund will be part of the Horizont Private Pension Fund.
According to the announcement of the MBH Caregiving Private Pension Fund last December, with the merger, the possibility of saving in the private pension fund will be ensured for a longer period of time. At the end of September last year, the MBH fund had assets of 21 billion and 3,400 members, while Budapest had assets of 42 billion and 6,000 members according to the figures from the beginning of December.
Similar reasons are now cited by the Association pension fund. To find the Portfolio Ágota Kutiné Csurgai, executive director of the Association Private Pension Fund said that the management of the fund considered the interests of the members to be the most important when it proposed the transformation of the Association Fund through merger to the general meeting. The fund will not be able to provide annuity services to its members in the foreseeable future, as it would require more than 100 million forints to be set aside from its operating reserve, even though the more time a member spends in the fund after October 2010, the more it is worthwhile for him to use the fund’s annuity service upon retirement. Since there is currently only one fund on the fund market that can provide annuity services, the management of the Association fund recommended to the general meeting of delegates that the fund continue its activities by merging with the Horizont fund. In order for this to be realized, of course, even the general meeting of delegates of the Horizont fund must vote on this, he added. There is nothing special for members to doafter the merger, their membership will continue with Horizont Pénztár.
At our request, he also explained that on March 31, 2024, the Association Pension Fund had 8,608 members and the assets of the fund members exceeded HUF 38.5 billion. In the case of Horizont, he could not provide precise data, however, he revealed that if the merger takes place, more than 80% of the cash market workforce will be members of Horinzont (according to the latest data from the MNB, Horizont is the largest player in the market with assets of 159 billion and 34 thousand has a member).
We also contacted the Horizont Pension Fund on the subject, but in the absence of board decisions, they did not wish to comment on the matter for the time being.
What is this misery about annuity insurance?
Private pension funds have been having a headache for a long time due to the hassle of annuity provision, as according to a regulation adopted in 2015, the lump-sum payment option was no longer available. Private funds can provide both their own annuity services and those purchased from an insurance company, but there is no information yet on the existence of the latter product.
If a member decides to return to the state system, he can keep the return on his savings above inflation, as well as the membership fee supplements, the rest of the money will be returned to the state system, in return the former fund member will receive a 100% state pension. However, if annuity payments start, there will be no need to return to the TB system, since the fund itself can make payments to members. Until now, however, among the remaining private funds, only Horizont has received permission from the MNB to provide annuities.
Who did better: the one who withdrew or the one who stayed?
When a decision was made in 2010 to transfer contributions from private pension funds to the state pension system, private pension fund members at the time could decide:
- or they return to the state pension system,
- or give up the state pension (actually, the latter “threat” did not come true).
The harassment served political communication purposes, effectively, since three million fund members were afraid that they would not get their state pension if he did not resign. The harassment turned out to be groundless, and in the end it did not harm those who stayed, as they will not lose their entitlement to the state pension modified by the pension multiplier of the members even if they do not withdraw – he evaluated the situation then and now András Farkas, pension expert at NyugdíjGuru News in response to a question from Portfolio.
Looking at the returns of the last 13 years, it seems that those who decided to stay did better.
The returns achieved with private pension portfolios are outstanding when compared with how the annual average inflation has developed over the past 13 years. In the case of old-age pensions, the government announces in a decree every year in December how much the next year’s increase will be, which is calculated based on the expected inflation, so now for the sake of simplicity, we assume that since 2011, pensions have risen roughly at the same rate as the annual average inflation.
The table below clearly shows that the portfolios of the remaining four private pension funds performed well above inflation in most of the years examinedachieving a considerable real return for the members (the years 2018 and 2022 were less successful due to rather hectic capital market movements).
In the period between 2011-2023, the average annual inflation in Hungary was 4.65%, if we compare the average of the unweighted returns of treasury portfolios for the same period, we get that the returns on balanced and growth portfolios for all private pension funds were well above inflationamong the classic portfolios, only Budapest managed to surpass this.
Although the above figures are very strong arguments in favor of staying in the box office, yield is not the only decision factor, when members have to think about what is more worthwhile: staying in the fund or opting for the state pension system? In general, it can be said that:
- for that who wants to receive a 100% state pension, you must return to the state pension system. It is important that the member of the private pension fund can rejoin the state pension system at the same time as or after applying for the social security pension, but only until you choose to take the fund annuity (if the fund annuity payment has already started, you cannot request withdrawal). This can be a realistic choice especially for those who had better earnings in their last years before retirement and did not have that much savings in their private treasury. In this case, you will receive a 100% state pension, in addition to the real fund yield and voluntary contributions.
- It is also possible that someone remain a private pension fund member even after retirement, in this case you can receive your money saved in the fund in the form of annuity (only one fund, Horizont, provides annuity for now). If you stay in the fund, you will only receive about 75-80% of the state pension (legally, at least 75%).
Let’s go deeper into the numbers
András Farkas explained the numbers behind the above two possibilities in more detail to Portfolio.
In the event that the fund member does not return to the state pension system, his pension will be supplemented by his private pension fund annuity.
The basic formula of the private pension fund annuity
The amount on the member’s individual account divided by the number of months of the expected remaining lifetime of the member. The expected life expectancy of a 65-year-old Hungarian woman is 17.3 years, or 208 months. The life expectancy of a 65-year-old man is 13.2 years, or 158 months. The private pension fund – which can invariably only be Horizont, since the others cannot pay fund annuities – will, of course, calculate based on its own mortality tables.
In this case, the state pension of the fund member would be a benefit reduced by the private pension fund multiplier. In a somewhat simplified way, 75% of the pension comes from social security and 25% from the private pension fund in such a case, for the period up to September 30, 2010, while for the period from October 1, 2010 until the date of pension determination, the state pension is already 100%.
How should the old-age pension of a private pension fund member be calculated?
According to the legal regulations, the old-age pension of a member of a private pension fund must be calculated by multiplying the amount of the old-age pension established according to the general rules by the multiplier to be calculated in the manner specified in the annex to the Pension Act.
In other words, they first calculate the amount of the pension according to the general rules (the amount of the monthly net lifetime average earnings multiplied by a percentage pension multiplier depending on the length of the service period expressed in whole years), then the amount thus obtained is multiplied by the multiplier for the calculation of the old-age pension of the private pension fund member, thus obtaining the the (reduced) amount of your state pension to be paid.
The multiplier to be used when calculating the social security pension of private pension fund members shall be calculated as follows:
W = h + (1-h) * 0.75,
where:
Sz = the value of the multiplier to be used, and
h= the quotient of the length of service acquired after September 30, 2010 (numerator) and the total recognized length of service (denominator)
When calculating the value of h, the duration indicated in the numerator and denominator must also be determined in days, and the quotient must be rounded to two decimal places.
The formula expresses that the remaining fund member will be entitled to 75% of his pension from the social insurance pension system for the period of his insurance relationship until September 30, 2010, and 100% for the period after that. This is currently approx. 80% means a state pension for him, the rest must be covered by the fund annuity.
The fund member can decide for or against the withdrawal based on his state pension and fund annuity. On the justification of the withdrawal
as a rule of thumb, if the state pension exceeds four times the amount of the pension, it is better to return to the social security system.
If, on the other hand, the member decides to withdraw, the amount of his individual pension fund account – reduced by the payment due to the withdrawing member – is transferred to the Pension Insurance Fund, after which his state pension is calculated as if he had never been a private pension fund member. The withdrawing member payment belongs to the affected member (this is essentially the amount of the real return, as well as – if there was such a payment – the membership fee paid on a voluntary basis, as well as the membership fee supplement).
How to apply for withdrawal from the state pension system?
According to the wording of the relevant law, the person entitled to an annuity service can request the payment of the pension service at the same time as his claim for the social security pension, or after that, but only until he chooses to receive the fund annuity. If the fund annuity payment has already started, you cannot request a withdrawal.
In the deed of withdrawal of the Horizont Private Pension Fund for example, the fund member must declare his withdrawal in point 2:
“- Fund member about to reach retirement age:
The undersigned declares that I wish to terminate my private pension fund membership and return to the social security pension system. For the withdrawal, LXXXII of 1997 on private pensions and private pension funds. I am entitled according to § 24 (15) of the Act.
– Fund member who has reached retirement age:
I, the undersigned, declare that when verifying my eligibility for the fund service, I learned about the amount of pension service available from the fund, and that I do not wish to use the annuity service. LXXXII of 1997 on private pensions and private pension funds. Act 30/A. According to § (4), I wish to return to the social security pension system.”
András Farkas sees that with everything
today, it may be more beneficial for the vast majority of those who are still fund members to return to the state pension system at the same time as they apply for a pension.
Cover image source: Getty Images
