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Mandatory private pensions are still in focus in Romania after the Government thought about suspending contributions to them:

The Government may suspend the contributions to mandatory private pension funds (Pillar II) from July 1 until December 31, according to a draft law that is part of the Government’s legislative project for this year.

Some journalists and analysts argued that this decision might interfere with right to private property. This was also an argument used in Poland:

The Polish pension funds’ organisation said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation.

Also, Hungary managed to nationalize the private pensions.

Question: How did Poland and Hungary governments manage to take over (nationalize) mandatory private pensions without breaking private property right?

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    "without breaking private property right" -> are you sure this holds? – Caleth May 29 '18 at 9:09
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    "Eminent domain" or "public interest" can be used to trump property rights (although courts may prevent abuse). Additionally, a possible defense is that the assets belong to the fund contributors and the funds only manage it, if the government assumes the obligations it could be easier to interpret is as more of a "change of management" than of ownership. – SJuan76 May 29 '18 at 9:14
  • @Caleth - I am not sure. But this would be a serious allegation, so I assumed they found a trick to stay on the constitutional side. – Alexei May 29 '18 at 9:15
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    From what I've heard, that was one of the main reasons why the PO government got thrown out in the 2015 Polish elections - Ordinary Poles feel that their money was stolen from them... – Nick C May 29 '18 at 9:23
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    The devils is in the details. Bare in mind that, in the situation of pension fund management, the immediate benefactors are NOT the pensioner, but "fund manager" that get a cut by using the fund to trade. More money pour into the fund will not improve the performance, it can be abused instead. It is quite common that active funds around the world create unwanted trades with fancy tools to justify it, and help the trading house to get a good cut from trade. This kind of "cost leaking/siphoning" is the main reason that some fund perform worst than the index funds. – mootmoot May 29 '18 at 15:05
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For Hungary the private accounts were not technically forcibly taken over by the government, however between November 2010 and December 2011 all payments to the private accounts were suspended and those with private accounts had to opt-out of the government plan to merge the private accounts into the public ones. The 8% of a persons paycheck that once went to the private account was redirected to the public one, and maintenance fees still had to be paid on the private accounts. (source)

Additionally, four years after this event, a law was enacted that stated that any private pension operating companies must show that over 70% of their private pension account members had been regularly paying the above-mentioned payments or they would be shut down and the accounts absorbed into the government plan. As it was known that only 10% of private account holders were doing so, this was essentially a law enacted to nationalize what was left of the accounts (source)

In other words no laws were broken as the government gave the option to opt-out of this, but the arguments being made against this method is that it initially both took advantage of the less fiscally literate (with the opt-out) and punished those who retain their private accounts (there are still fees but the payments are forcibly discontinued), and later on essentially retroactively entrapped private fund groups and took the remaining assets.

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In Poland, few years after the new mandatory private pension system was established, some citizen requested to withdrawn his funds, arguing that those were his private savings. Eventually the case hit the supreme court, which fearing that this precedence would result in collapse of the system, ruled that the money collected by the state and transferred to the private financial institutions are not owned by the people on whose behalf they are stored.

~10 years later the government had no problem transferring the funds to the national pension system, because of this ruling.

Which of course makes sense, the old system worked as following: - the government taxed citizens - the government transfers the money to private institutions owned by western banks - institutions invest in government bonds - government buys back the bonds with tax payers' money, - private institution takes 2-4% transaction feed and transfers it to the western parent

e.g. tax payer was taxed e.g. 100 eur, the money was lended to the government, the government used the money to pay pension, the next year government taxes the same citizen for additional 5 euro and returns 105 eur to the institution. The institution takes 2% fee = 2.1 euro, of which 0.5 euro covers the cost, and 1.6 euro is transferred abroad to some German bank.

  • +1. I did not hear of a similar case in Romania (a court ruling that pylon II pensions are not private property). However, AFAIK one can withdraw funds only after a minimum period which is more than 10 years and not all the money at once, so that the system cannot be affected by large withdrawals. – Alexei May 30 '18 at 8:56
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    This answer could be improved by mentioning the case number of that court ruling so that it can be independently verified. – Philipp May 30 '18 at 11:56
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Answer :

Those countries did not break the private property right, since none of the say article say the country is going to forfeit all the fund. In fact, those claims are carefully craft by the media as lobby for whoever they served.

(update) If one inspect the whole claim closely, it is similar to various banks bail out claims, such as UK Northern Rock scandal, which the depositors funds are intact because it is guaranteed by the UK government.



Not related to the answer, but background of fund management controversy :

Now to expand the later concern. I am always skeptical when come to "journalist and analysts" from country with immature market economics . Where the country lack of intellectual to study the topics and allow media to manipulate the topics into propaganda for whoever side they served (Either their neo-libralism economics master or the politicians).

I don't see any of these country forfeit the pensioned funds. However, there is always something to read between the line : risk and abuse.

Whether private or state managed, pensioned funds are always subject of abuse.

For both private and public managed funds:

  • Scheme similar to the infamous Madoff investment scandal. (guess what can goes wrong when Royal Bank of Scotland, HSBC, Deutsche Bank, JP Morgan Bank, and Citibank, ICAP involve in brokerage )
  • fund managers may collaborate with outsider or cronies to conduct pump and dump scheme
  • Unhealthy boost of "political connected" stock

(update) Such misconduct in Sovereign wealth fund are well reported.

For private managed funds :

In fact, if a newly develop country is in the right track of development, passively trade exchange-traded fund(ETF) is sufficient.

note : it seems many fund manager & alike lobby hate this answer.

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    "I don't see any of these country forfeit the pensioned funds." While this may be, I think it doesn't answer the question. The point is not forfeiting the funds, it is making private funds public, thus depriving the owners of at least part of their property. I can't judge if this is correct, but this is where the question is going. – Thern May 30 '18 at 8:08
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    This answer would likely score higher if it would contain less unsubstantiated media bashing and more explanation why what Romania and Poland are doing isn't violating property rights, preferably backed with non-partisan sources. – Philipp May 30 '18 at 8:25
  • @Philipp I just include some example. I don't put them because the whole answer will end up become "How an unscrupulous fund manager can defraud you". – mootmoot May 30 '18 at 11:33
  • @Thern No, it is not making the private fund public, indeed, it is just move the fund from the private fund manager to nation authority. It is similar to some government bail out banks/companies by moving the whole entity under the institute. – mootmoot May 30 '18 at 11:43
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    @mootmoot Maybe, but this is not essiential for the question at hand, especially if you want to refute the question. The OP has provided enough sources to show that it at least is a relevant point of view, although it may be wrong. – Thern May 30 '18 at 12:42

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