Oct 26 (Reuters) - Hungary's parliament on Monday passed a law to allow the members of mandatory private pension funds -- the second pillar of the country's pension system -- to leave the funds, transferring their pension savings to the state.
Moving back to the state pension system would be allowed until the end of 2011 and the original elements of personal portfolios would be transferred without the need to sell any of the assets.
The legal change goes along with another measure to channel new private pension fund savings of about 420 billion forints ($2.12 billion) into the state system by the end of 2011.
HUNGARY'S PENSION SYSTEM
The 1997 pension reform added a mandatory private pension fund pillar and an optional mutual fund pillar to the state pension system inherited from the Communist regime before 1990.
The aim of the reform was to make the pension system more sustainable, increase the self-reliance of citizens and boost domestic demand in the country's financial markets.
The state-run pension fund has not invested in those markets as it operates as a pay-as-you-go pool.
Mandatory private pension funds have accumulated assets -- mainly government bonds and equities -- worth about 10 billion euros ($14.04 billion) and have been important players in domestic markets. The smaller mutual fund sector which is not affected by the new government measures had assets worth about 830 billion forints ($4.26 billion) at the end of June.
Employers pay 24 percent of gross salaries to the state as pension contribution. Employees pay 9.5 percent but in the case of private fund members 8 percent went to the mandatory private pillar and only 1.5 percent to the state. According to the new measures the total 9.5 percent will go the state until end-2011.
About 3 million of the 3.8 million workers are private fund members as the reform did not oblige older workers to join the new funds. Tens of thousands older than 52 years returned to the state system in 2009 when the previous Socialist government temporarily opened the gate.
The funds flowing into the private funds instead of the the state system have caused a gap each year in the state system which accommodates the country's 3 million pensioners.
The European Union recently rejected a call from 9 of its members including Hungary to allow deducting the costs of pension reform from state budget accounts.
The new Hungarian measures wipe out that deficit at least until the end of 2011, while returnees to the state also cut the government's later liabilities towards the private funds.
But long-term liabilities of the state in terms of pension payments will increase.
COMPOSITION OF PENSION FUND ASSETS
Mandatory private pension funds manage assets in three portfolio categories which differ in the risk accepted in investment choices. The "classical portfolios" recommended to older citizens take the lowest risk, relying on safe government debt. The share of equities is higher in the "balanced" portfolios and the highest in the so-called "growth" portfolios which have accumulated much more assets than the other two.
If citizens and their personal portfolios move into the state system from private funds, the assets in the second pillar fall. Net market demand from the funds will also decline as the returnees will no longer pay new savings into the funds.
The size of the impact will depend on the number of returnees, the composition of their portfolio and the government' strategy for managing the assets taken over.
Pension fund portfolios (in billion forints, 1 billion forint = $5.05 million)
Classical Balanced Growth TOTAL TOTAL ASSETS 52 543.3 1,965.4 2,560.7 Bank accounts/cash 1.2 3.3 9.6 14.1 Hungarian govt papers 46.8 370 788.5 1205.3 Hungarian equity 0.2 15.7 145 160.9 Foreign equity 0.2 13.7 143.7 157.6 Hungarian corporate bonds 0.4 1.2 3.3 4.9 Hungarian bank bonds 1.3 7.9 20 29.2 Hungarian investment funds 0.5 68.1 495.5 564.1 Foreign investment funds 0 31 214 245 Hungarian mortgage notes 0.7 17.9 66 84.6
NOTES - Reuters calculations based on first-quarter figures from the Stabilitas pension fund association.
The figures of Stabilitas did not include details of the asset composition of investment funds in the portfolios. According to June figues from investment fund association Bamosz, Hungarian investment funds kept about 43 percent of their assets in cash, 21 percent in government papers, 3 percent in Hungarian stocks and 18 percent in foreign stocks.
The government plans to issue government bonds worth 1,485 billion forints in gross terms next year according to its financing plan published in September.
The amount of local equities in the funds' portfolio is much below the Budapest Stock Exchange's capitalisation -- 6.19 trillion forints at the end of September -- but they have been key players in the market of small and mid-cap stocks.
(Reporting by Sandor Peto; editing by Stephen Nisbet)