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**Table 12:  Average Gross and Net Real Rates of Return and Wage Growth, 1998 – 2005**

|**Average Weighted Real**<br>**Net Rate of Return**<sup>**1**</sup>|**Average Weighted Real**<br>**Gross Rate of Return**<sup>**2**</sup>|**Average Real Wage**<br>**Growth**<sup>**3**</sup>|
|---|---|---|
|3.85%|4.85%|5.27%|

Notes: 1/ Difference between the Average Net Rate of Return (weighted by 2003 – 2004 average assets) in Table 14 and the Average Inflation Rate (Dec); 2/ 100 basis points spread have been assumed between the net and gross rates; 3/ Difference between the Average Wage Growth and the Average Inflation Rate (Aver). Source: NBH and HFSA raw data, IMF 31. The lower average rate return of Hungarian pension funds begs an explanation, as pension funds in other reforming countries also invested conservatively during this period. One possible explanation for the lower returns in Hungary is the lower risk premium of Hungarian Government securities that translated, _ceteris paribus_ , into lower real interest rates on these securities. As shown in Table 13, Hungarian sovereign issues had one of the best credit ratings and paid the lowest spreads among other reforming countries, with the possible exception of Chile. For this reason, it is not surprising that real rates of interest on Government securities were one of the lowest among other reforming countries, and that pension fund returns were also relatively low.<sup>11</sup> Chilean funds would also have generated low returns if they had invested primarily in Government securities. Their higher returns were generated fundamentally by a much more diversified portfolio, consisting not only of domestic and international equity, but also of mortgage, corporate, and infrastructure bonds paying a premium over Government bonds.

**Table 13: Average Historical Rate of Return and Sovereign Risk**

|**Country**|**Average**<br>**Accumulated**<br>**Real Gross**<br>**Rate of Return**<br>**(% p.a.)**|**Average Real**<br>**Int. Rate on**<br>**Government**<br>**Securities**<br>**(% p.a.)**<br>**(2000 – 2004)**|**Average**<br>**Sovereign**<br>**Spread**<br>**(%)**<br>**(2000 – 2004)**|**S&P**<br>**Sovereign**<br>**Rating**<br>**(2000)**|**S&P**<br>**Sovereign**<br>**Rating**<br>**(2004)**|
|---|---|---|---|---|---|
|**Hungary**|**3.9**|**3.9**|**59**|**BBB+**|**A-**|
|Argentina|9.9|-|3,574|BB|SD|
|Bolivia|10.4|7.7|-|B+|B-|
|Chile|10.2|4.0|156|A-|A|
|Colombia|6.9|11.6 1/|579|BB|BB|
|Costa Rica|6.7|-|327|BB|BB|
|El Salvador|9.9|-|315|BB+|BB+|
|Mexico|7.7|4.2|299|BB+|BBB-|
|Peru|7.6|-|531|-|-|
|Poland|8.6|8.1|165|BBB+|BBB+|
|Uruguay|12.9|-|723|BBB-|B|

Notes: 1/ 2001-2004 arithmetic average of coupon of gross internal debt. Sources: HFSA, AIOS, World Bank, S&P, and IMF 32. In addition to the lower risk premium on Government securities, the return performance of MPFs was also affected by factors specific to Hungary, such as the drop in equity prices that resulted from the Russian crisis, and the steep increase in interest rates in recent years that produced a capital loss on the portfolio of fixed income assets. The 11 Ex-post real interest rates were computed for only a sub-set of reforming countries due to data limitations.