Governance of the Hungarian Private Pension Funds

1. Governance of the Hungarian Private Pension Funds Agnes Matits Budapest, Hungary

2. Pension System in Hungary Mandatory Private Pension Voluntary Private Pension STATE PENSION Life annuity Life annuity(lump sum) lump sum or annuity full guarantee minimum guarantee no institutional guarantee Voluntary Mutual Benefit Social Security Mandatory Pension Fund Fund Central Retirement Budget Individual accounts Individual account PAYGO Defined contribution Defined Contribution Employer contributions Employee contributions Voluntary Mandatory up to earnings limit Mandatory Voluntary contribution / donation regular occasional contributions ( State Pension Mandatory Pension Funds Voluntary system

3. PRIVATE PENSION FUNDs in Hungary Mandatory Pension Funds Voluntary Mutual Pension Funds Main features defined contribution immediate vesting special fund corporation “Pensionkassen” non-profit self- governed

4. The Pension Fund Corporation • Legal entity • The members are the owners • The organizations of the fund • the General Meeting of the Members/ Delegates • Board of Directors • Auditing committee • Certain expertsand executives must be employed

5. The general meeting • the main decision body • delegates elected by and from the members for 5 years term • consists of 25 to 100 delegates • should be convened at least once a year

6. The rights of the General Meeting • to modify the Charter of the Fund • to elect the governing bodies and their chairpersons • to approve the annual reports and the financial plans • to decide on the auditor, on membership fees • to decide on M&As Comment : the bigger the fund the more formal decisions are made by the general meeting

7. The Board of Directors • The managing body of the Fund • Fund members should be represented At the voluntary funds only fund members could be elected to the Board • Shall meet at least in every three months • Shall consist of an odd number of members voluntary funds : min of 3 members mandatory fuds : min of 7 members

8. Roles of the Board of Directors • to prepare the decisions of the general meeting • to decide the business strategy • to decide the mode of operations, select the contracting partners • to approve the regulation of asset management and the services of the Fund • to ensure that the books and records are kept in accordance to the rules • to exercise the ERs rights over the managing director Comment : the members of the Board of Directors are often representatives of the interest of founding institution

9. The corporate governance • Same corporate forms different governance roles • The role of governing bodies depends on the working structure • The more diversified structure the less need for expertancy of fund corporation

10. Pension Fund Operations Portfolio record-keeping Control of asset managers Physical custodianship Investment and asset valuation Custodian Service Record- keeping Book keeping Data processing Investment recording Administration Banking Operational Management Maintaining current account Cash handling Marketing Communication with members Communication with employer Liquidity management Control of outsourcing partners Statutory reports Establishment of pension benefits Transfers Asset Management Investment activity Investment account maintenance Investment valuation Security account maintenance Professional works Report on market trends Executive accountant, Lawyer,Actuary, Investment specialist Auditing

11. Some typical working structures of Hungarian Private Pension Funds I: Plain structure Pension Fund Corporation Commercial Bank Auditor Comment: Only Banking and Custodonian Services are contracted out

12. Some type of working structures of Hungarian Private Pension Funds II: Specialised structure Commercial Bank Pension Fund Corporation Asset Management Company Auditor Comments: Investment activity is also out-sourced Often more paralel contracts

13. Some typical working structures of Hungarian Private Pension Funds III: Racionalised stucture Commercial Bank Pension Fund Corporation Asset Management Company Administration Service Company Auditor Comments:Founders are often the owners of both the Asset Mngmt. Co. and the Admin Service Company

14. Some typical working structures of Hungarian Private Pension Funds III: Diversified structure Bank Custodian Service Company Pension Fund Corporation Asset Management Company Auditor Administration Service Company

15. Some lessons from the practice • Self-governance vs. Corporate governance • the professinalism of governing bodies • conflicts of interest • formal decisions • selection of contracting parties • market competition

16. Thank you for your attention ! Dr Agnes Matits Senior consultant at the International Training Centre for Bankers Independent Actuary and Pension consultant of several Private Pension Funds Chairperson of the Board of Directors, Ráció Voluntary Pension Fund Address : International Training Centre for Bankers 1022 Budapest,Csopaki u. 6.-8. phone : ( 36 1 ) 22 40 710 or 21 20 705 fax : ( 36 1 ) 20 11 330 mobil : ( 36 ) 30 9410 699 e-mail : amatits@itcb.hu or matits@matavnet.hu