The **_normative guarantee_** promises individuals contributing to the second pillar for at least 180 months an annuity of not less than 25 percent of the value of the PAYG pension benefit (nortnative annuity), a benefit that equals about 93% of the benefit that the fund member would have obtained had he not switched to the new system. For a fund member the Private Pensions Guarantee Fund would top up his fund account should the benefit payment at any time after his retirement fall below the normative annuity calculated at the time of his retirement, or should the balance of his account at retirement fall short of the normative funding need to provide the normative annuity.

The risk of the normative guarantee being called and thus the risk exposure of the Private Pensions Guarantee Fund depends on three factors: the pension funds' investment performance, the benefit level in the PAYG and the age and income distribution of the pension fund members. There is a high risk that the guarantee is called with respect to those who opted for the second pillar above the age 45. In their case, pension fund returns shall reach at least real wage growth plus 1.8 percent<sup>9</sup> on average for the guarantee not to be called. At the same time, as even a rather conservative estimate of future pension fund returns averages around 1.5 percent above the expected real wage growth, the fund performance in the long term should not generate risk of the guarantee being called on a large scale.

With respect to the age of fund member, the risk is higher for individuals who have switched to the new system at a higher age, since they may not have sufficient time to accumulate the required resources to meet the normative annuity and funding. Those who switched to the new system at the age of 47 or higher will not meet the guarantee eligibility criteria. Thus the largest risk is posed by individuals who have switched at age 41 to 47 years. To reduce the risk, government public awareness campaign has focused on explaining the negative implications of switching to the new pension system at an older age. The age distribution of fund members will not be know until the end of the transition period (end of year 2000). The first almost one million fund members, however, shows a fairly reassuring picture: almost three fourth of the switchers is 35 or younger, around 15 percent is 36 to 40 years and approximately 10 percent is 41 to 47 years.

Since the level of the normative annuity is linked to the pension benefit offered in the first pillar of the pension system, the risk of the normative guarantee being called also depends on the developments under the PAYG scheme. Changes affecting the benefit level under the first pillar will directly affect the level at which the normative guarantee

> For reference see The World Bank: Hungary Country Economic Memorandum 1999; Fiscal Chapter. The calculation is based on the assumption that average real wage growth equals 3 percent, the average return of pension funds is above real wage growth by 1.5 percent, administrative cost of pension funds is 0.15 percent of the contribution collected. For income, the average individual wage profile was used based on historical data available at the Hungarian social security funds.

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