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Pension schemes prove shaky pillars for capital markets in CEE

It is easy to see why economists love second-pillar pension schemes. Making workers pay into privately managed funds not only addresses the issue of unfunded state pension liabilities, it also creates a ready-made institutional investor base that can support the development of local capital markets. If only it were that simple.


Unfortunately, an ever-increasing weight of evidence from emerging Europe suggests that, however good the second-pillar idea may be in theory, it is never long before it bumps up against hard political realities. 

Hungary, the first country in the region to opt for the system back in 1998, was also the first to lose it when Viktor Orban’s Fidesz party appropriated the funds to boost the state budget in 2010. No other government has gone quite that far. Nevertheless, the last eight years have seen the steady erosion of second pillar schemes across central and eastern Europe. 

The Baltic states cut contribution levels after the financial crisis. Poland nationalized half its funds and made participation optional in 2014. Bulgaria also moved to an opt-in model in 2016, while Slovakia has oscillated between mandatory and voluntary systems. 

Most recently Romania has been in the spotlight. Second-pillar contributions were cut last year by the ruling Social Democratic Party, which followed up in May with proposals to suspend payments altogether. Politicians subsequently rowed back on the announcement, but were still talking in late June of switching to an opt-in system.

Each new incursion has been greeted with consternation by economists and development bankers – and with good reason.

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