Pre-pension programme extended to private sector

The Hungarian government has extended its Premium Years Programme to the private sector, in an effort to support both older employees who are threatened by redundancy and companies facing major structural reform. The amendment was passed, despite the reservations of the social partners.

'Many small steps will open the road to real change and reform', outlined Hungary’s Prime Minister when he introduced the new 100 Steps Programme. The first 50 measures, or 'steps', were announced in May and June 2005, 15 of which will target the area of employment and labour (HU0506101N). It is hoped that one of the new measures, the Premium Years Programme, will help both senior employees facing redundancy and companies in need of rejuvenation.

Main provisions

The Premium Years Programme, originally limited to public administration and service institutions, was designed to guarantee a fair and gradual retirement for older civil servants and public employees who were made redundant due to modernisation of the oversized public sector.

According to Act CXXII of 2004, a public employee facing redundancy may continue working part time, for a maximum of 12 hours a week, in a job that matches his or her educational attainment and work experience. The target group of the programme is senior employees reaching retirement age within three years (men aged 56 to 59 years, women 53 to 56 years of age), who have worked in the public sector for at least 25 years. The government will recompense them for lower earnings and also pay social security costs, so that they receive a full pension once they reach retirement age. Joining the programme guarantees a maximum of three additional years in employment, however, participants are not entitled to receive severance pay from their employer. The law also established the procedure by which an employer may propose, and the employee may accept, joining the programme. The Premium Years Programme came into force on 1 January 2005.

Eligibility criteria

The government’s '100 Steps Programme' aims to extend the scope of the Premium Years Programme to the private sector, to non-profit organisations and to state-owned enterprises. With regard to the eligibility criteria for employees, the conditions are nearly the same: they must be close to pension age and employed for over 25 years. Nevertheless, there are major differences between the pre-pension programmes of the public and private sector. According to the 2004 legislation, employees in the public sector have to work a maximum of 12 hours (instead of the regular 40 hours in full-time jobs) to receive 60% of their former salary; according to the new law, however, private sector employees in the programme have to work at least 20 hours a week, and their remuneration is proportional to their actual working hours. Instead of full compensation, the government pays the social security contributions only to ensure that participants receive a full pension, in line with their previous full-time wage. Naturally, the employer in the private sector should also take the initiative to use this scheme also.

This measure is designed to support companies facing major structural reforms. However, it is not that easy to join the programme: companies opting for the scheme, for example, have to prove that the structural reforms are relevant and will impact on the working conditions of at least 50 employees, or that they plan to take on at least five new employees. Nevertheless, the new law - Act LXXII of 2005, passed by the Parliament on 27 June 2005 - leaves this question open and authorises the Minister of Labour and Employment and the Minister of Finance to specify the conditions of government subsidies in a joint ministerial decree at a later date. The extended Premium Years Programme is to be launched in early October 2005.

According to preliminary expectations and model calculations, if 20% of the target group join the programme, this would be the equivalent of 11,000-12,000 applicants and HUF 2.19 billion (EUR 876 million) in additional public expenditure. Originally, the central budget was supposed to cover the costs, but the final legislation stipulates that the Labour Market Fund, i.e. the source of passive and active labour market programmes, will pay.

Reservations of the social partners

Despite the fact that the Prime Minister personally appeared at the Interest Reconciliation Council (Érdekegyeztető Tanács, ÉT) on 13 May to promote the 100 Steps Programme, it was not welcomed by the social partners. While, at subsequent meetings of the national tripartite body, the employers’ associations and trade unions expressed their support for the concept in principle, both sides also expressed some reservations. First, in the competitive sector, the criteria to enter the programme are said to be overcomplicated and unnecessary. According to the trade unions, it does not make much sense to restrict the participation of companies that are about to undergo extensive structural reforms and to limit the impact to only 50 jobs. Such restrictions can act as a disincentive for employers, proving too high a price to pay for the benefits. The other major criticism is that participating employees will lose their entitlement to any form of redundancy payment or unemployment benefit when they do finally retire. As a result, both sides have proposed a renegotiation, once ministers have drafted the decree on implementation.

In 2004, the introduction of the programme in the public sector met even greater opposition from the public sector unions in 2004. For instance, according to the estimates of the Labour Union of Home Affairs (Belügyi és Rendvédelmi Dolgozók Szakszervezete, BRDSZ), it is only worthwhile for employees to join the programme if they have at least three years before retirement. For older employees, in the event of redundancy, severance money and other allowances can amount to 60% of their salary throughout the remainder of their working years, so the Premium Years Programme does not seem to be any more favourable. In addition, because participants of the programme are no longer full-time employees, they are not entitled to a range of other bonuses, such as food, holiday vouchers and travel benefits.

Commentary

According to the Minister of Employment and Labour, the programme will be beneficial to sectors with high fluctuation and/or facing structural changes, since it allows for greater flexibility in the employment system. Critics, nevertheless, point out that the Premium Years Programme does not provide a real alternative to the existing pre-pension schemes. Furthermore, it is not yet clear if this programme will evolve into a more flexible pension system. In this context, it is worth noting that consultations over the re-regulation of the early retirement system used in certain occupations was a recurring theme at OÉT meetings. This was due to a 1997 agreement on pension reform, which stipulated that any change in the pension system requires the consent of OÉT (HU0502105F).

Nonetheless, the main objection to the programme is that it does not affect real growth in employment, which is badly needed in a country with an extremely low employment rate. This is because the programme only requires companies to hire new employees in proportion to the gradual lay-off of their senior employees. No doubt, such a moderate reduction in the number of employees hardly meets the 'active ageing' principle of the European Employment Strategy (EES).

It is too early to assess the effects of the programme (in the competitive sector it has not even started yet). However, it is worth noting that only a handful of employees in the public sector have been involved in the programme so far, even though the conditions were originally more favourable than in the private sector. (Ágnes Fiedler and László Neumann, Institute of Political Science, Hungarian Academy of Sciences)

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