PART THREE ■ FURTHER ACHIEVEMENTS OF THE ROUND TABLE
9. How to proceed: on the necessity, possible tasks and institutional model of a Pension Insurance Advisory Council and on the continuous development of the pension model
Finally we describe a pension insurance advisory council proposed by the Round Table and the main aspects of the activities of a modelling team. A detailed presentation of the proposal can be found in Enclosure 21.
If in a given country generally accepted principles of pension policy do not exist, legislators are under-informed and not properly competent, and the institutional frames necessary for discussions over pension policy problems and for the elaboration of a consistent
concerning regular although periodical activities aimed at the overview of the pension policy and continuous modelling activity - and concerning the institutional framework for both.
Governmental agencies (Ministry of Finance, Ministry of Social Affairs and Labour, Central Administration of National Pension Insurance, Hungarian Financial Supervisory Authority) in view of their scopes of authority, institutional interests and their relationships with the government in power are not suitable for remedying the problems described.
According to the position of the Round Table there is a need for a new and unprecedented institution that will hereinafter be called pension insurance advisory council (or Council for short). The Council may have three tasks: 1. coherence analysis regarding the compatibility of (the changes of) the legal rules with the announced aims and tools of the pension system; 2.
dissemination of information about processes influencing the system and their expected consequences; 3. drawing up some possible answers after analysing their expected advantages, costs and risks.
According to the position of the Round Table a Council convened regularly, at least once in every five years, and operating periodically, for 13-15 months at each occasion, would be a solution that is best fitted to the character of the tasks. We would like to note that the first such Council should start its operation possibly at the end of 2010 or the beginning of 2011 in order that it could sufficiently rely on the results of the Round Table, on its accumulated knowledge base, data and lessons learned.
It seems to be expedient that the right of establishing the Council and inviting its members would be vested in the prime minister. The operation of the Round Table between 2007 and 2009 showed that an invitation by the prime minister does not constrain the appearance of different standpoints. It is possible that following its establishment the Council would enjoy freedom concerning its method of work.
In his/her decision concerning the establishment of the Council the assignor should accurately determine the tasks to be executed and the problems to be solved in light of the resources to be made available. At the start, the tasks, the timeframes and the budget should also be determined in advance. In addition, its suitably designed legal and organisational capacities should ensure for the Council that it would not need any support, administrative assistance from other institutions (for instance when experts are contracted), and would enjoy the widest possible scope of professional independence.
An inevitable condition for the analyses, decisions and proposals concerning the pension system is that they would be based on sufficiently detailed model calculations. The creation and continuous development of such a model needs significant resources and continuous
work, therefore instead of the elaboration of new models the preservation and improvement of the results already achieved seems to be reasonable.
While the tasks of a Council would not necessitate the operation of a permanent institution, the maintenance of the model calls for continuity from the aspect of both the organisation of work and the composition of a team. It is necessary that a properly competent institution should be responsible for the elaboration and operation of the model, which thereby could assist in the preparation of public administrative decisions and in the work of the Council.
ENCLOSURE 1
Members and permanent guests of the Pension and Old-Age Round Table
Members of the Round Table
NAME TITLE WORKPLACE
László Antal † consultant MKB Bank Co. Ltd.
Mária Augusztinovics scientific advisor Institute of Economics of the Hungarian Academy of Sciences
Gyula Barabás managing director OTP Bank Co. Ltd.
Pál Bosnyák consultant
Róbert Iván Gál senior researcher Tárki Social Research Institute Ltd.
Péter Holtzer,
chairman of the Round Table
independent expert
György Jankovits Chairman National Union of Associations of
Pensioners Júlia Király (chairperson of
the Round Table until July 2007)
Deputy Governor National Bank of Hungary
Erzsébet Kovács Professor Corvinus University of Budapest
Ákos Kozák present chairman of the Trade and Service section
András Simonovits scientific advisor Institute of Economics of the Hungarian Academy of Sciences
Júlia Szalai Sociologist Institute of Sociology of the Hungarian
Academy of Sciences
Ildikó Virág senior member Institute of Economics of the Hungarian
Academy of Sciences
László Zentai Expert
The work of the Round Table was assisted by the following representatives of public administration and invited guests with their regular participation.
NAME TITLE WORK PLACE
Delegates of public administration with voice but no vote
Gábor Barát director-general Central Administration of National Pension Insurance
Sándorné Berényi deputy director-general Central Administration of National Pension Insurance
Ferenc Rába deputy director-general Central Administration of National Pension Insurance
Rudolf Borlói head of department Central Administration of National Pension Insurance
Mihály Erdős deputy director-general Hungarian Financial Supervisory Authority József Szűcs deputy head of department Hungarian Financial Supervisory Authority Anna Szikszainé Bérces head of department Ministry of Finance
Ádám Rézmovits deputy head of department Ministry of Finance
Mária Major Expert Ministry of Finance
Tímea Dobos Expert Ministry of Finance
Edit Lendvai Expert Ministry of Finance
Ágnes Varga deputy head of department Ministry of Social Affair and Labour Erika Asztalosné Zupcsán deputy head of department Ministry of Social Affair and Labour Judit Lakatos head of department Hungarian Central Statistical Office Regular, permanent invited guests
József Banyár technical consultant (expert advisor)
Hungarian Financial Supervisory Authority Gábor Borza deputy CEO, deputy chief financial
officer
Csaba Fehér senior economist Secretariat of the Central Budget Council László Hablicsek deputy director HCSO Demographic Research Institute Dániel Havran assistant lecturer Corvinus University of Budapest István Hetényi † independent expert, chairman of
the supervisory board
Aegon Hungary General Insurance Ltd.
András Horváth expert
Istvánné Juhász general secretary Stabilitás Fund Association
Levente Máté researcher Central Administration of National Pension
Insurance
József Mészáros lecturer Sociology and Communication Department of
the Technical University of Budapest
Gábor Orbán analyst Aegon Investment Fund Management Ltd.
The work of the Round Table was assisted by Szabolcs Végh as secretary responsible for professional affairs, until May 2009 i.e. his appointment to line secretary of state in the Ministry of Finance. From June 2008 the sessions of the Round Table were permanently supported by Gyula Horváth, director of the Actuarial and Insurance Solution Division of Deloitte Zrt., participating in the impact analysis.
ENCLOSURE 2
Sessions, agendas of the Pension and Old-Age Round Table
SESSIONS AGENDA
1. 19 March 2007 1. Opening address by the chairperson 2. Introductions
3. Aim of the Round Table
4. Operational procedures and work processes 5. Work plan
2. 3 April 2007 1. Greeting new members
2. Closure of the discussions over the work plan
3. Erzsébet Kovács: Methodological bases of the impact study 4. Róbert Iván Gál: Cycles in the Hungarian pension system 5. Others
3. 17 April 2007 1. Closure of the discussion on Cycles in the Hungarian pension system 2. Mihály Erdős: Possible options for solving the private pension fund annuity
system
3. György Németh: Alternative paradigm 4. Others
4. 10 May 2007 1. György Németh: Alternative paradigm
2. Possible options for solving the private pension fund annuity system - continued
3. A summary given by experts invited from public administration agencies on the subject matters of governmental decisions expected in the near future 4. Others
5. 5 June 2007 1. Report by Ádám Kóbor and András Bodor on their researches at the World Bank
2. Discussion of the comments on the position stated in the memo of the session on 10 May 2007 concerning the debate on the private pension fund annuity system
3. Others
6. 19 June 2007 1. Presentation given by the State Reform Commission on the proposals of the government concerning short term (parametric) reforms
2. Others
7. 28 June 2007 1. Ágnes Matits –Péter Holtzer: What kind of pension system do we want? On the most important issues of a long-term pension reform
2. Others
8. 12 September 2007 1. Tasks related to the statutory meeting (Report on the work performed since the last session, elaboration of the work plan for the autumn half-year, establishment of working groups.)
2. Others
Manresa 4-6 October 2007 1. Summaries by working groups (II Impact study-delimitation; V Global);
summaries by the participants on the pension system they deem as ideal;
raising and solving problems necessary for the continuation of the impact analysis; delimitation of the grey zone, preparation of the Green Paper;
2. Others
9. 28 November 2007 1. Report on the impact analysis. Further tasks
2. The product, Green paper, editing, “grey zone”. Discussion
3. Reports by other working groups (tax and changes in 2013; pension council;
European development)
4. Certain issues concerning the first and the second pillar and the Pension and Old-Age Round Table. Discussion
5. Report on the summary of data flow elaborated by the Hungarian Financial Supervisory Authority and the Central Administration of National Pension Insurance
6. Report on the results of the request for comments on the switch of private pension fund members back to the state system
7. Report on the official meetings of the chairman of the Pension and Old-Age Round Table
8. Others
10. 13 March 2008 1. Summary report on the impact analysis (2007-2008), results achieved so far, further tasks
2. Discussion on the second-third pillar work document elaborated by Banyár–
Fehér–Németh
3. Discussion on the draft of the First Report
4. „Ageing”, invited guest: Éva Orsós, member of the Council of Old-age Affairs, officer in charge for the preparation of the National Strategy on Old-age Affairs
5. Reports on meetings 6. Others
11. 19 June 2008 1. Impact study, detailed discussion of the basic version 2. Reconciliation on the further phases of the impact study 3. Report of the working group dealing with retirement age 4. Report of the working group dealing with disability pension 5. Others
12. 7 October 2008 1. Discussion on the report of the Round Table on the “current pension system” version; approval
2. First results of the researches of CANPI-HCSO-Round Table 3. Others
13. 12 December 2008 1. Summary on the status of the work of the Round Table, on the next steps, on year 2009
2. International comparison of the pension systems 3. The work of the Round Table in European context 4. Others
14. 23 April 2009 1. Summary report on the researches of CANPI-HCSO-Round Table 2. On issues of the individual records
3. On the activities of the Round Table and the statements made by its members
4. Report on the impact analysis 5. Others
15. 18 June 2009 1. Second pillar, private pension funds
2. On the old-age and disability pension systems
3. Report on meetings concerning individual record management 4. Report on the impact analysis
5. Others
16. 11 November 2009 1. Approval of the content and structure of the Report closing the work of the Round Table
2. Approval of the document on the necessity, possible tasks and the
institutional model of a Pension Insurance Advisory Council, for inclusion in the Report
3. Discussion and approval of the document on the main issues related to the mixed pension system, the second pillar, for inclusion in the Report 4. Discussion and approval of the document on the contribution record
management, for inclusion in the Report
5. Approval of documents discussed and approved earlier by the Round Table, or elaborated for the Round Table, for inclusion in the Report
a) On the old age and the disability pension system
b) Description of the model (including the description of prognoses concerning the population and mortality of the disability pensioners)
c) Socio-demographic prognoses
d) Summary report on the data survey of HCSO-CANPI
e) On the relationship between the policy of old-age affairs and the policy about ageing
f) Pension paradigms in the OECD countries
g) Open coordination of pensions and the role of the MoLSA 6. Others
17. 26 November 2009 1. Approval of the report of the Pension and Old-Age Round Table 2. Closing address
A significant part of the work of the Round Table was performed in working groups. The most important one among them was the impact study group continuously operating since its establishment in 2007 that was responsible for the conduct of the socio-economic impact analysis. Topics of other ad hoc working groups: disability insurance, retirement age, second pillar, pension policy council, taxation.
ENCLOSURE 3
The current pension system, changes effected in the recent past (2006 to 2009), year 2013*
A short summary of the Hungarian social pension insurance system; basic elements of its operation
Sectoral mandatory old age pension insurance in Hungary has been in existence since Marie Theresa. The number of persons involved in the system was initially very low, but later in line with the progressing industrialisation it has grown continuously; the largest extension was caused in 1928 by the introduction of an arrangement that integrated industrial workers in the system. The pension system extended very slowly to cover the agricultural population (1936, 1938). The tasks were performed by three big insurance companies (OTI - for the labourers;
MABI - for white-collar workers; OTBA - for public servants) and some smaller ones (for instance that of the Hungarian Railways). These were institutions managing funded, defined benefit plans, and as the number of their contribution paying members increased and persons eligible for pension were still absent, their capital asset portfolio grew relatively quickly.
Capital was invested primarily in real estates and financial assets that became practically annihilated by World War II and the succeeding hyperinflation. At the same time people eligible for pension as well as elderly, destitute people in absolute need of some benefit came forth. No other solution was left than the switch from the funded (“expectancy”) system to the pay-as-you-go system39, which was declared by the government to be effective as of 1 January 1947. This system, however was far from being uniform, and was still not extended to rural people making up about the half of the population.
In the succeeding decades several consecutive laws and by-laws modified the system, which meant mainly the enlargement and extension of the population involved in pension insurance as well as the extension of the scope of benefits. Universalism and full maturity of the system has been codified by Act II of 1975 that is essentially still in force. Act LXXXI of 1997 redrafted rights and obligations related to the mandatory pension system, as part of the social insurance reform package. In the decades after the effectiveness of this Law the parameters
* The first pillar is presented on the basis of the paper prepared by Levente Máté, the second pillar is presented on the basis of the paper prepared by Ádám Rézmovits.
39 The name (the mirror translation is: distributing and assessing) essentially means that in the absence of accumulated capital the ever actual benefits are covered by then collected contributions, with the involvement of contributions from the State or the public finances as necessary.
(contribution rates, pension formula indexing) were almost continuously changed but the system remained basically unchanged and was able to hold out during the critical macro-economic and employment period following the change of the socio-macro-economic system. The real value of pensions as well as their relative value (compared to the average wage) decreased, then increased for a transition period in parallel with the gradual introduction of the pension for the 13th month, and decreased again with its termination, but the disbursement of pensions - unlike in some other countries of the region – was always continuous and reliable. The great majority of the population over the retirement age is provided with pension, although very many of these pensions are of a low amount. Accrual of pension rights for the senior generations is a consequence of the former pro forma full employment. With the current and foreseeably low level and fragmented employment this cannot be expected in the future.
The comparative basis used for our impact analysis (NY2006) is the versions of Act LXXXI of 1997 which was in force in 2006 and in 2008.
The determination of the social insurance pension was defined by two basic factors: the
“income to be replaced” (in forint) and the assessed rate of such replacement (in percentage).
In 2006 the income to be replaced by the Hungarian old age pension in short is the monthly average of the earnings - entailing contribution payment obligation, acquired between 1988 and the day of the retirement, approved, evidenced as necessary and valorised - net of any degression applicable. The nine-step algorithm used for the determination of the income to be replaced and the assessed rate of replacement are described hereunder.
Nine-step algorithm used for the determination of the income to be replaced in 2006
The income to be replaced is given by the result of a nine-step algorithm:
1. determination of the length of the wage period counted in days: the period between 1st January 1988 and the day prior to the day when the entitlement commenced.
2. checking of the limit on admitted income (so-called “ceiling”) for each year under review: only the gross earnings that at the time of payment qualify as the basis of contribution payable by the employee could be admitted; the part of the gross earnings that is in excess of the admission limit shall not be deemed as pension basis, although the employer is obliged to pay pension insurance contribution on this part of the earnings, too.
3. verification of the validity of the wage period: a wage period shall be deemed as valid only if for at least half of its duration the applicant had earnings, incomes that serve as the basis of pension calculation.
4. validation of any eventually invalid wage period by applying earnings achieved prior to such wage period: inching continuously backwards from 1st January 1988 those calendar days should be found in the social insurance history of the applicant when he/she had earnings, wages serving as basis for pension calculation, and these should be included in the calculation of his/her wages
5. validation of any wage period still invalid, through the application of minimum wages: if a wage period could not be validated with the inclusion of earning or income producing days prior to 1st January 1988, then, inching continuously backwards from the day of the commencement of the entitlement the gross earnings achieved in a given year should be increased by one thirtieth of the minimum wage applicable on each day when the applicant did not have earnings, incomes serving as basis for pension calculation, and the number of those days when the applicant actually had earnings, incomes serving as basis for pension calculation should be increased by one, and this step should be repeated until the days so supplemented would make the wage period valid.
6. net value calculation: gross incomes of each year that belong to the wage period should be reduced to their net value in the manner elaborated on the basis of the personal income tax rules applicable for the year under review, and specified in the Pension Act.
6. net value calculation: gross incomes of each year that belong to the wage period should be reduced to their net value in the manner elaborated on the basis of the personal income tax rules applicable for the year under review, and specified in the Pension Act.