Moody's Criticizes Pension Reforms in Hungary

Ratings agency Moody's has weighed in against Hungary's renationalisation of its pension funds.

(February 17, 2011) — Moody’s has criticized Hungary’s decision to bring the majority of private-pension savings under state control.

The ratings agency said that Hungary’s pensions reforms are “unambiguously negative” for the country’s credit quality. In December, Moody’s downgraded Hungary’s bonds to BAA3 – ranking it just above junk status. Standard & Poor’s and Fitch Ratings also rate the country one step above junk, with negative outlooks.

“The Hungarian measures will effectively dismantle its private pension system in the course of this year,” Moody’s analyst Dietmar Hornung said in a statement.

Moody’s said the reason for its decision was influenced by the fact that Hungary’s pension reforms reduce fiscal transparency. Moody’s analyst, Dietmar Hornung told Financial News that the “dismantling of the private pension system will adversely affect the liquidity in domestic bond and equity markets”.

Separately, in the US, Moody’s Investors Service provided a combined look last month at debts and pensions for the first time to analyze states, showing that some US states face such intense pressure to fund pensions that it could hurt their credit ratings.

The report is a result of escalating concerns over the ability of many states to fund their pensions following the recession. “Large and growing debt and pension burdens have been, and will continue to be, contributing factors in rating changes,” Moody’s said.

According to the ratings agency, state pensions, which are underfunded in the aggregate by at least $700 billion, face issues that include low returns on investments, an inadequate amount money being saved, the impending retirement of “baby boomers” born in the late 1940s through the 1960s, and Americans living longer than expected.

“Unfunded pension liabilities have grown more rapidly in recent years because of weaker-than-expected investment results, previous benefit enhancements and, in some states, failure to pay the full annual required contribution,” the report said, adding that states may understate their pension liabilities and that pressure to fund retirements will continue to have a “negative impact” on ratings. “Moreover, pension liabilities may be understated because of current governmental accounting standards.”



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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