Hungary is among the original group of 10 countries to participate in Aegon’s Retirement Readiness Survey, which now includes the responses of employees and retired people in 15 countries. With an index score
this year of 4.93 out of 10, Hungary is performing below international standards.
A key component of the study is the Aegon Retirement Readiness Index (ARRI), which assesses employees’ attitudes and behaviours in relation to planning for retirement. While Hungary’s 4.93 puts it only ahead of Japan, there has been an improvement on last year’s score and retirees in Hungary benefit from several positive aspects of retirement provision not reflected in the index.
For example, Hungary has one of the lowest rates of old-age income poverty in the Organisation for Economic Cooperation and Development (OECD), which is directly linked to high levels of income replacement and home ownership.
Yet like most European countries, Hungary has not been able to avoid the consequences of the financial crisis and population ageing. A public distrust of the private pension market and spiralling costs led the government in 2010 to nationalise mandatory second-pillar pensions. A controversial measure, critics have noted that the government’s actions will lead to lower benefits for future retirees and an exit of many pension providers from the Hungarian market. Irrespective of what results from these reforms, it is clear that the nature of the retirement landscape in the country has dramatically changed in recent years.
The findings used in the report are based on the Hungarian responses of a 15-country online survey, in which 16,000 adults aged 18 and over were surveyed. The range of issues covered in the research includes attitudes to retirement preparedness, which serves as the basis of the annual ARRI, as well as the role of the government and employers in providing retirement benefits.
In Hungary 900 employees and 100 fully retired people were surveyed to provide a contrast between the responses of current workers and those already in full retirement.
Retirement aspirations and expectations
Expectations for the economy remain tepid even though the country exited from recession in early 2013. Nearly half of those surveyed (44%) still expect the economy to worsen, with a further 32% expecting no improvement in the year ahead. Just one in six (16%) expect the economy to improve in the next 12 months.
Attitudes are marginally more positive when considering respondents’ own finances, with a more modest 34% expecting their financial situation to worsen. Nevertheless, 41% see no change and only 19% expect things to improve. An overwhelming majority of Hungarians (78%) believe that future generations of retirees will be worse off in future than those currently retired (the second-highest percentage among the 15 countries surveyed), with only 3% believing that retirees will be better off.
Attitudes towards retirement in Hungary are often negative. When asked to select words associated with retirement, half (53%) of workers choose “insecurity”, while to a lesser degree “poverty” (37%) and “ill health” (22%) are also common. Not all associations are negative, however, with “leisure” being chosen by two-fifths (40%) and “freedom” by 27%.
Planning for retirement
To better assess how well employees view their level of retirement preparedness, Aegon developed the ARRI, which incorporates three broadly attitudinal and three broadly behavioural questions covering personal responsibility, financial awareness, financial capability/understanding, retirement planning, financial preparedness and income replacement. As well as these questions, a dependent variable question is asked which is concerned with approaches to saving, for which five broad saver types have been identified: habitual, occasional, past, aspiring and non-savers.
Employees’ financial readiness for retirement is rated on a scale of zero to ten. A low score is anything below 6, a medium score is between 6 and 7.99 and a high score is 8 or higher. There has been universal improvement in the index scores year-on-year. However, retirement readiness scores remain low.
Hungary’s Index score of just 4.93 out of 10 means that the country has slipped behind Spain in 2014 to become the second-lowest scoring country of those measured (Japan continues to be ranked lowest). India and Brazil were introduced this year and lead the global rankings.
While Hungary’s retirement planning score has improved marginally on last year, there still remains considerable room for further progress. Nearly half (45%) of workers claim not to have a retirement plan. Half (50%) say that they have a strategy for retirement planning, albeit only 5% say it is in the form of a written plan. When asked whether they have a back-up plan in case they are unable to work before reaching retirement age, three-quarters (75%) of employees claim they do not, higher than in any other country in the survey.
Making saving easy
Most Hungarian workers (83%) say a lack of money is an obstacle to saving for retirement – the highest percentage of all countries surveyed. However, nearly two-thirds (65%) say a pay rise would be an incentive to save for retirement. It is thought that a cultural barrier to saving exists in Hungary, where low financial education and family habits are not conducive to proper retirement preparation.
However the survey reveals that employees are more aware and knowledgeable than this sentiment would suggest. Two-thirds (67%) feel either somewhat or very able to understand financial matters when it comes to retirement planning, and two-fifths (41%) consider themselves somewhat or very aware of the need to save for retirement.
Hungary has experienced a steady population decline, from 10.7 million in the mid-1980s to 9.7 million this year, countered by a relatively flat rate of claimants drawing on the state pension since the millennium (rising by two million claimants to three million between 1980 and 2000, but not rising beyond this number since). Hungary also currently has the lowest poverty rate among the over-65s of any other country in the OECD, save the Netherlands. This is helped, in part, by over 90% of Hungarian over -65s owning their own home outright.
These factors combine to create a façade of stability which belies the acute demographic strains on Hungary’s pension system. An increasingly ageing population will add tensions to the pay-as-you-go system, but the survey also exposes a different and marked concern about the sustainability of the status quo among current Hungarian workers.
When asked what proportion of their current earnings would be needed as income in retirement, nearly one-third (31%) of Hungarian workers replied, “more than 100% of what I currently earn”. This is a far higher proportion than in any other country surveyed (the global mean is just 10% of workers).
Hungarian workers would prefer their retirement income to come from a mix of payment forms, with 38% opting for a regular payment income (such as an annuity) and 24% preferring a mix of a lump sum and a regular payment. A further 21% would choose an overall lump sum (14% for reinvestment purposes). Note also that 13% state that no option would be applicable due to not having any retirement savings – the highest among the surveyed countries.
Most working Hungarians do not expect to enter full retirement immediately, with 43% of those surveyed stating that they would continue working to some extent (for example part-time or on temporary contracts). However, 38% would stop working altogether, with only 6% saying they would continue working in their current form regardless of passing the retirement age.
Nearly all (96%) of the workers surveyed in Hungary believe that their employer has in the last three years failed to improve the provision of information and support to help retirement planning services. One in ten (11%) state that their employer now does less to help them. The 4% who believe that information and support has increased contrasts with the 19% who are unaware of any change and the 26% who state that their employer does nothing to help them plan for retirement at all.
Recommendations of Aegon
1) Translate awareness of the need to save for retirement into action: individuals are increasingly aware of the need to plan for retirement but this alone is not sufficient to initiate better savings habits. Governments and employers should provide individuals with a concise and clear statement of projected benefits which the individual may expect in retirement, as well as tools and information that individuals can use to determine their own retirement savings goals.
2) Embrace active aging and working longer: workers envisage staying active longer in later life, including through work. Working longer, beyond mandated or expected retirement ages, can only help individuals to bridge gaps in retirement savings. Governments should make the required changes to labour laws and employers should adjust their workforce policies to this new reality. Making these changes will be vital for flexible retirement to become a success.
3) Plan for the unexpected: to avoid depleting retirement savings, individuals should include in their retirement plans unexpected events such as job loss, caring for others, disability or illness. A back-up plan could include establishing a personal emergency fund or obtaining insurance for income replacement upon disability or unemployment where offered. This will help individuals to weather short-term financial difficulties without sacrificing their retirement.