Breaking down barriers
Written by David Adams
David Adams reports on the Austrian pensions system’s economic, regulatory and demographic issues that need to be addressed
At the time of writing, Austria’s ruling Grand Coalition – the Social Democrats (SPOe) and the more conservative People’s Party (OeVP) – is set to return to office following the country’s General Election. It is not yet clear what the result might mean for pensions in Austria, because the coalition partners managed to argue about social security and pensions during the campaign without making any major policy pledges in relation to the latter. But it must be hoped that pensions will receive a fair share of attention from the new administration, because there are a number of difficult economic, regulatory and demographic issues relating to the current pensions system that need to be addressed.
The most fundamental issue is an ageing population. A 2013 economic survey of Austria by the Organisation for Economic Co-operation and Development (OECD) concluded that this “may threaten the fiscal sustainability of the large public pension system”. At present, the first pillar provides the majority of retirement income in Austria. There is a clear need to boost other sources of retirement income over the next few decades.
Third pillar provision has had a limited impact and been criticised for delivering mediocre returns. The second pillar of the system is formed by the country’s occupational pension schemes (Pensionskassen). There are 16, including six multi-employer funds. Most are run on a DC basis for the country’s larger employers. Only about 24 per cent of the country’s workforce (about 739,000 people) is a Pensionskassen member.
During 2012 the returns generated by the Pensionskassen (collectively they invest around €16 billion) averaged 8.39 per cent, with growth due in part to high exposures to equities and corporate bonds, according to the Pensionskassen industry association, the Fachverband der Pensionskassen (FVPK).
However, figures compiled by Mercer during the first half of 2013 suggested that the six multi-employer funds created on average a 0.85 per cent return between January and June, while the single employer funds generated 0.97 per cent. All funds showed some improvement in July, with the entire market generating 2.5 per cent. There were significant variations in performance within risk categories: from 0.14 per cent to 1.1 per cent for the most defensive portfolios and -0.45 per cent to 2.93 per cent in the most dynamic portfolios.
Mercer’s report noted that many Austrian employers are still reluctant to create a pension fund. “Without political back-up and incentives,” the company concluded, “we see the stagnation in the Austrian second pillar continuing”.
The attitude of Austrian employers towards occupational pensions may also be influenced to some extent by the existence of the mandatory severance pay funds, backed by insurers – the Betriebliche Vorsorgekassen (BVKs) – into which every company has to pay a share of each employee’s salary. These funds have to invest more conservatively than do the Pensionskassen, but returned 4.27 per cent on average in 2012 and were managing €5.3 billion by the end of that year, a 23 per cent increase on 2011.
The entire system is also now operating under new conditions, following implementation of the Pensionskassengesetz-Novelle, new pensions legislation that passed through parliament in November 2012. Key changes include the obligation for Pensionskassen to introduce the Sicherheits-VRG, or ‘security pension’ pools. From November 2013 pensioners who have suffered losses can choose to move to these pools, or leave the Pensionskassen and transfer to a BKV instead. They will need to notify the Pensionskassen of their decision by the end of October 2013, with any changes to become effective from January 2014.
Benefits provided by the Sicherheits-VRG must be guaranteed by the Pensionskassen. But discount rates will remain low (1.75 per cent at the time of writing), calculated on the basis of a minimum earnings formula.
“The employees have the opportunity to transfer their capital into safer pension funds, but their benefits will decrease,” says Towers Watson Austria, team leader, retirement, Eva Salomon-Girsch. “Everybody is waiting to see what will happen. We do not know how many people want to have guarantees and if they want to pay for it.”
FVPK legal officer Stefan Pichler says his organisation does not expect many people to transfer to the Sicherheits-VRG. Nor does the Austrian Actuarial Society, Aktuarvereinigung Osterreichs (AVO) chair of the pensions committee and Valida Pension actuary and board member Hartwig Sorger. “You have to switch to a discount rate of 1.75 per cent, [so] if you were on a discount rate of 6 per cent you have much less pension,” he says. “Maybe in the future, if you come from a discount rate of 3 per cent there will be more interest?”
Another major change is the introduction of a lifecycle model for Pensionskassen. Some already offered this, but it can now consist of up to five different sub-funds operating under different levels of risk. Scheme members can choose to change their risk level up to three times before retirement, including switching to a riskier sub-fund. One Pensionskassen, VBV, has updated its lifecycle model to include five categories, ranging from one invested 50 per cent in unhedged equities and 50 per cent in bonds, to one 100 per cent invested in bonds. “We think this is very useful: giving choice to individual plan members is increasingly beneficial,” says VBV-Pensionskasse CIO and member of the board Gunther Schiendl.
The Pensionskassengesetz-Novelle also increased flexibility around variable additional employer contributions. An employer paying a fixed 2 per cent contribution can now add up to 10 per cent. It is hoped this will encourage more SMEs to offer a company pension.
Further changes include a com-mitment to extend transparency. Pensionskassen must now provide scheme members with more detailed information on asset management; and members are entitled to request a representative performance comparison. Pensioners must be provided with detailed explanations of changes in pension amounts.
The Pensionskassen may also be affected by regulatory changes imposed from further afield. In February 2013 the FVPK called for an exemption from the proposed EU-wide financial transaction tax. “The inclusion of transactions of pension funds in the financial transaction tax would be extremely counterproductive and would decrease pension benefit,” says Pichler.
There have been attempts to reform the public pension system in recent years, aimed at increasing retirement age and at using some of the resources spent on disability pensions on rehabilitation or retraining instead. From the age of 55 Austrians will also now be able to view their own first pillar ‘accounts’, to see how much money they have accrued so far for retirement and calculate their possible retirement income when retiring at different ages. Current official retirement ages are 60 for women and 65 for men, but in reality many Austrians retire before 60. It seems certain that there will be attempts to raise the retirement age in future.
Towers Watson Austria actuary in the benefits group Stefan Brandner can think of other things politicians might do to improve the situation, but fears such measures are unlikely to be implemented in the foreseeable future. “No politician wants to increase contributions or decrease pensions,” he says.
One change that might help to encourage saving for retirement would be to make all pension contributions exempt from income tax under the exempt-exempt-tax (EET) principle, currently being promoted by the European Commission and demanded by the FVPK.
Sorger thinks the BVK could also play a useful role if the tax regime was altered. “It would be useful to have better tax incentives for conversion of the amounts accrued into a pension, to avoid people taking those lump sums, because for retirement income that becomes lost money,” he says. “Hardly anybody puts it into a pension plan.” He also advocates a more integrated view of the three pillars within the retirement system.
But Brandner finds it hard to believe much will change during the next five years. It took three years of negotiation to pass the Pensionskassengesetz-Novelle. The OECD survey made some very positive statements about Austria’s economy, but it may well be dangerous to assume that a positive economic outlook will last forever. Those fundamental problems related to the challenge of looking after the country’s growing number of pensioners cannot be kept at bay forever.
Written by David Adams, a freelance journalist