Embracing the law
Written by Ilonka Oudenampsen
Ilonka Oudenampsen speaks to Austrian Association of Pension Funds’ Michael Reiner about the new legislative changes and how this will positively impact future growth of the pension system
This year has already proven to be an important year for the Austrian pension fund industry, as a new amendment to the Pension Fund Act is set to improve the pension system and the Fachverband der Pensionskassen (the Austrian Association of Pension Funds) is hopeful it will also increase public confidence in occupational pensions.
The new legislation has introduced a lifecycle model for occupational pensions, where the risk profile of members will rise according to their age. Scheme members are allowed to change their investment strategy a maximum three times during their lifetime.
Furthermore, a new security model for defined contribution (DC) plans has been introduced, whereby a certain level of retirement income is guaranteed at retirement, depending on the accumulated funds. DC members can opt for this model from the age of 55 until their retirement. However, pension funds open to only one company or group can opt out of this new security model.
Other areas the new legislation has improved include the right of the pensioner members to be represented in the supervisory board of their fund, and information transparency for members. Pension funds will now have to deliver specific communication if members want to change the investment model.
Michael Reiner, an expert at the association, says that the most important consequence of these changes will be more confidence in the second pillar of pension provision. “There will be more options for employees as well as employers regarding the vehicle and investment models, better governance through more participation of the retired people who are most vulnerable, and of course more transparency.”
Against the background of the financial crisis and its negative effects on pension funds, politicians decided to amend the Pension Fund Act. Despite it being a political decision, the pension industry welcomes the amendment, Reiner explains, as it will stabilise the second pillar, improve its image and create more confidence, which is important for future growth.
While the Austrian pension fund sector is currently mainly focusing on implementing this major reform, in the long term it also hopes to fill the gap in the first pillar. Compared to other European countries Austria still has a relatively high replacement rate, but it too struggles with the consequences of an ageing popu-lation, early retirement and public debt, and increasing workplace savings is therefore essential.
“In Austria discussion about pensions is discussion about the first pillar. We have no hitherto culture for an integrated approach and in this regard we want to harness the EU white paper approach,” Reiner notes, referring to the EC’s White Paper on Pensions, which aims to integrate the three pillars of pension provision.
When the first pillar diminishes, occupational pensions will become more important, especially because the third pillar is not adequately equipped to fill the gap and is more expensive than the second pillar. “The third pillar is currently under strong criticism, after a study from the Austrian labour chamber which showed that the costs are very high and the yields very low,” Reiner says.
Furthermore, a recent study from the Austrian Association for Consumer Information found out that the sales agents for third pillar products do not adequately inform customers about their products. “We believe that the second pillar has many advantages compared to the third pillar, for instance regarding coverage, costs and equality,” Reiner points out.
In 2011 a quarter of all eligible employees, or 800,000 Austrians, saved into an occupational pension. With €510.14 million a year, the country’s 17 pension funds are Austria’s biggest private pension payers. Last year, the funds invested a total of around €15.46 billion.
At the moment only employers pay into occupational funds, while employees rarely pay any contri-butions. Reiner believes this might be linked to the fact there are only very meagre tax incentives for employee contributions, as opposed to employer contributions, leaving room for improvement in the future.
However, with only employers making contributions, this begs the question whether members are left with enough savings to retire on. According to Reiner, employers pay higher contributions for managers than for other employees, but contributions start at 2 to 5 per cent. “But there is a trend, like everywhere, to move to DC schemes. That’s the same in Austria,” he adds.
But he emphasises that the starting point is that the first pillar will continue to shrink and that “the pension funds will try to fill the gap with good and sound products. We will have more room for manoeuvre, if this amendment is over and the system is stabilised.” With a view on the responsibilities of the social partners, Reiner adds: “Then we can focus again on growth and coverage which should be driven by the conclusion of the respective agreements.”
Better product design and the implementation of lifecycle models have already been on the agenda of the industry for a while, and innovation is now being boosted by the new legislation. Many funds have also started investing in alternative and social investments, starting with housing and residential care homes for the elderly, which will also make pension schemes more attractive to the public and critical citizens.
Housing and residential care homes for the elderly is a market for growth, Reiner notes, and as a domestic investment it also boosts the image of pension funds. A third advantage is that the government can at the moment not finance big projects, and pension funds would be well-placed to invest in these projects instead.
With the new legislation only having been approved by Parliament in May, it is still early days to comment on the impacts it will have on the pension system and retirement savings. However, so far the pension funds seem well-positioned to fill the gap and to grow into becoming Austria’s main retirement income provider.