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management fee is charged until retirement. There is a trade off between the rate of return and wage growth, as shown by the terms along the diagonals. Note also that the charge ratio increases with the rate of return and decreases with wage growth. When the rate of return increases the incidence of the asset management fee also increases, raising the charge ratio. When wage growth increases, the end of period cash balance without fees increases more quickly than in the case of no fees, lowering the charge ratio.

51. Mitchell and Bateman (2003) report charge ratios for Australia that vary from 5 to 15 percent for employer-sponsored defined contribution schemes, and that vary from 22 to 28 percent for the much more costly open, retail schemes. Whitehouse (2000) reports charge ratios that vary between 15 and 20 percent in most Latin American countries, but that can reach 28 and 35 percent in Argentina and Mexico, respectively. Therefore, the charge ratios for the average MPF in Hungary do not compare favorably with the ratios of most other second pillars.

52. Again, the exercise is admittedly mechanistic but it illustrates the problems that may arise if the current structure and levels of fees are maintained in the longer-run: even a mere total fee of 1 percent over assets would consume the equivalent of 15 to 30 percent of the final cash balance over a full career of contributions and average assumptions on inflation, wage growth and rate of return.

# **VI.   PENSION REFORM AND CAPITAL MARKET DEVELOPMENT**

53. Pension reforms involving the introduction of a second pillar are expected to contribute to capital market development by promoting the growth of institutions with a long investment horizon, such as pension funds and insurance companies. The presence of these institutions is expected, _inter alia_ , to accelerate the development of several financial instruments with long maturities, improve access to finance and risk management to a wider range of investors, enhance competition in the financial sector, and promote better regulations and corporate governance.

54. The contribution of the second pillar to capital market development has been modest so far. As shown in Table 21, there has been some progress in expanding the market for traded government securities and starting a market for mortgage bonds, and institutional investors have made a contribution to these positive developments. However, indicators of liquidity and maturity suggest that the development of the market for government debt has been only moderate, and the stock of mortgage bonds is still very small. Moreover, other financial instruments such as corporate, municipal, and infrastructure bonds have not been developed, nor has private equity.

**Table 21: Stocks of Major Financial Instruments (% of GDP), 2000 and 2004**

||**Traded**<br>**Government**<br>**Securities**|**Public**<br>**Equity**|**Mortgage**<br>**and**<br>**Financ. Instit.**<br>**Bonds**|**Corporate**<br>**and**<br>**Municipal**<br>**Bonds**|**Private**<br>**Equity**|**Infrastructure**<br>**Bonds**|
|---|---|---|---|---|---|---|
|2000|30.0|21.0|0.0|0.0|n.a.|0.0|
|2004|43.0|26.0|6.0|0.1|n.a.|0.0|

Source: HFSA, BSE, MNB, AKK