Austria is still perceived as a country with one of the highest pensions resulting from a Social Security system within Europe. There is a belief that the Austrians will receive 80% of their final gross salary after a full career from the Social Security system. This is not always the case.

For employees with an income exceeding the Austrian Social Security Contribution Ceiling (currently E4,110 annual salary) and for those who will not reach 40 to 45 years of service there usually is a huge gap between their last salary and retirement income. In reality, the replacement ratio can be below 30% depending on the employee's individual situation. The maximum gross pension payable from the Social Security system in 2010 is E2,826.47 annual salary.

The expectations regarding pension amounts from a social security system are always used as an argument as to why employer-sponsored employee benefit prog-rammes are not widely spread in Austria, although employee be-nefits are common among multinational companies and local companies of a certain size. Even private provisions are rare compared to other countries.

Pensionskasse history
In 1990 a new system of funded employer sponsored pensions
was implemented - the Austrian Pensionskasse system, a pension fund with a specific Austrian legal framework. The implementation was the result of financial difficulties to fund direct pension entitlements within the Austrian state owned industry. The aim was to allow a switch into fully funded pensions but also to allow more flexibility than the previous systems.
The system allows defined contribution (DC) plans as an alternative to the previous defined benefit plans. For DC plans the employer is not obliged to take any guarantee for the invested contributions however the Pensionskasse providers have to provide a minimum interest guarantee. This guarantee is linked to the bond yields in the Austrian bond market on a five year average and is historically 1-2%.

The economic crisis in 2002 resulted in two amendments in 2003 and 2005 of respective regulations within the Austrian Company Pension Act which allowed providers to charge additional contributions to fund the guarantee and also established the possibility of opting out of the minimum yield guarantee by the employee.

In 2005 a new funding vehicle was established: the occupational collective insurance. This funding vehicle offered by insurance companies is comparable to the products available by the Pensions-kassen. It is based on a classic insurance tariff including an interest guarantee amounting to the technical interest rate and the guarantee of the accumulated yield. The occupational collective insurance offers a more conservative approach to DC plans but the implementation has not been a success story so far.

After the economic crisis
The economic crisis in 2008 has led to serious discussions regarding the performance of the Pensionskassen especially with the existing retirees. On average the investment result was -12.9% and therefore resulted in reductions up to 20% of pensions that are due to be paid out and more for DC plans because of calculation issues as there is no interest guarantee included in the Pensionskasse model.

In most cases where the minimum yield guarantee still applies no pension payments of the Pensionskasse have taken place because the interest over the respective five years consideration period still exceeded this guarantee. The minimum yield guarantee is not preventing reductions but only offer a certain cap for the reductions.

Within the discussion about the future of Austrian Pensionskassen arguments were brought up that only a pay-as-you-go system would prevent from future shortfalls of pensions that are due to be paid out. Discussions came up to strengthen the Social Security system and to increase the level of benefits and replace externally funded employer sponsored benefit promises and even private provisions.

Studies regarding the funding of the Social Security system clearly indicated that significant additional contributions would be required if the system remains unchanged. It was also discussed to strengthen the employee benefits as important source for future wealth.

As an immediate solution for the future of the Pensionskassen a reform of the Company Pension Act was promised by the Austrian government. This act should have been implemented at the beginning of 2010. However, the political discussion took longer than expected and the representative body for the retirees within Pensionskasse solutions (pekabe), supported by some members of Parliament, brought a lawsuit to the constitu-tional court with the aim to allow the possibility for retirees to cash out a lump sum payment instead of the annuity. This lawsuit postponed the promised reform.

The aim of the proposed reform is to allow more individual investment decisions, especially to reduce investment risks and to switch into the classic insurance product; the occupational collective insurance. The reform is also meant to increase the security of the invested contributions into the Pensionskasse. It was originally planned to put the amendment into force as of 1 January. However, because of the lawsuit it is now unclear when and how the reform will be continued. There seems to be a consensus on the idea to improve the security of Pensionskasse solutions and the idea to offer an advanced life cycle model to the employees.
In the meantime the average investment result of the Austrian Pensionskassen is approximately 9% which has helped the Pensions-kassen to partially recover from the deficit of the year 2008. According to the information provided by the Pensionskasse Association there will be increases for approximately 50% of the current retirees because of the good investment results.

If the amendment comes into force in the proposed form or in a slightly different version, an adoption of most benefit promises covered via Austrian Pensionskassen will be required. On basis of the final wording of the amendment an individual check of the benefit promises is highly recommended to prevent from risks and uncertainties.

From the perspective of an independent consultant in the field of employee benefits an integrated solution is preferred which should include required amendments for the future stability of the Social Security system regulations to provide a sound basis for employee benefits including the option to offer deferred compensation solutions and corresponding regulations for attractive private provisions.

The whole package needs to allow future generations to save money for a wealthy retirement.

Changes to the Pensionskasse system
The amendment of the respective acts contains the following major changes:
Reduction of lump sum payments instead of the payment of annuities
to vested leavers.
For employees where the minimum yield guarantee is still applying
the funding regulations shall be changed.
The possibility to implement three sub investment groups within one investment and risk community, the respective employees shall have the option to switch once after the age of 50.
A so-called security investment risk community can be established where the starting annuity plus an increase of the starting annuity calculated on a five years average will be guaranteed which is a significant change of the Pensionskasse system because of the included guarantee.
The transfer amount in case of cancellation of a Pensionskasse contract shall amount to 100% of the policy reserve plus 100% of the contingency reserve.
For new hires in companies where a Pensionskasse contract with a technical interest rate exceeding 3.5% is existing the technically interest rate will have to be reduced to a maximum of 3.5%.
The Pensionskassen will be allowed to hold investment-grade corporate bonds as held to maturity bonds and therefore prevent from any mark-to-market valuation risk.
Variable contributions depending on fiscal results of the Company will be allowed up to a maximum of 10% of the salary of the participating employees if a minimum contribution of 2% will be paid by the employer.
The non-forfeit ability period will be reduced from five years to three years.
Employees will have the opportunity to switch from the Pensionskasse to the occupational collective insurance with the ongoing contributions at the age of 51 and additionally with their full policy reserve at the age of 56.
All current retirees should have the opportunity to switch into the occupational collective insurance within a limited time period.

Written by Gerald Moritz, Manager Consultant at Towers Watson in Austria

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