Building blocks

Peter Davy explains the challenges Austria faces in building its second pillar for pension provision

It's tempting to think Austria had little need for the OECD's reminder in July of the challenges presented by an ageing population.

Pointing to an ageing population (official projections are that a third of the population will be 65 or over by 2045, up from less than a quarter now), a retirement age close to the lowest in the OECD, and to the generosity of its pensions (traditionally 80 per cent of a worker's final salary after a full career - among the highest in Europe) its economic overview warned that "significant efforts are needed if pension expenditures are to be contained".

"On unchanged policies, additional pension costs will be very high from 2020 onwards, when the 'baby boom' generation retires and the old-age dependency ratio increases significantly," it staged.

Yet these, surely, are the very issues the country's Pensions Reform Commission's 34 experts, politicians and social partners, have been considering for two years.
Yes and no, says Christian Krischanitz, managing director of consultancy arithmetica and president of the Austrian actuarial society (AVÖ).

It is true that there are discussions ongoing, but progress has been limited. "The output of the commission is not very satisfying so far, and the level of consensus within it is very low," he says.

Partly that's probably due to the number of members involved. Indeed, the social minister Rudolf Hundstorfer has said he's keen to reduce the size of the commission to make reaching decisions easier, and there's still hope of agreement on proposals this year.

However, there's also a distinct lack of urgency.

"We get the discussions on the social security system popping up from time to time but it isn't really giving the impression there is a huge pressure on the system," says Gerald Moritz, managing director of Towers Watson in Austria. He also points out that for all its generosity, the state pension is already inadequate for very high earners, capped as it is at approximately €40,000 a year.

You can see this in Hundstorfer's response when the commission yet again failed to agree on adjustments in April. He took to Austrian TV the following week and reassured the young of the safety of the first pillar, as well as ruling out any possibility of raising the retirement age beyond 65. The commission's most recent meeting concluded the effective retirement age of 58.2 years must be raised by 6.5 years between 2012 and 2050. How or if this will happen remains uncertain though.

"Nobody expects great things from the commission anymore," says Gunter Schiendl, chief investment officer of VBV Pensionskasse, the country's largest multi-employer pension scheme. He adds that talking about the inadequacy of the state system remains largely taboo politically.

"I'm not overly optimistic of real reform until we get to the point -- and I expect it to come sooner rather than later -- when rating agencies start explicitly focusing on state pension systems when making their assessments."

This reluctance to admit to the insufficiency of the first pillar also means there's been limited attention given to boosting the second pillar: the recent suggestion of the Association of Austrian Occupational Pensionfunds (FVPK) to include occupational and personal pensions in the commission's discussions was rebuffed.

This is a mistake, it insists, because, long term, workers will not be able to rely on the first pillar: today it accounts for up to 90 per cent of the pensions in payment. That figure is likely to be closer to 60 per cent eventually, the FVPK suggests, with 25 per cent coming from occupational schemes and 15 per cent private provision. (Krischanitz proposes similar proportions - 70:20:10.) Likewise only 20 per cent of the workforce are currently covered by the second pillar. That needs to rise to 80 per cent.

"Currently the occupational pensions sector is quite a small business in Austria, but in the future it will be more important because first pillar pensions will decline," explains FVPK managing director Dr Fritz Janda.

By no means certain
Two other factors are also potentially working against development of the second pillar, however.

The first is international regulation. Solvency II, for example, could impact on insurance-based occupational pension vehicles such as Betriebliche Kollektivversicherung (BVK), company collective insurance schemes. This is only a small part of the market though, with an estimated €450 million in assets against €15 billion to €18 billion in Pensionskassen.

IAS19, meanwhile, could be more significant given that companies are estimated to still have €20-30 billion worth of defined benefit liabilities on their books. However, those running book reserve pensions also tend to have fairly strong equity, says Janda.

Much more damaging to the development of the market has been the financial crisis. Pensionskassen, for instance, saw investments fall almost 13 per cent in 2008. Despite a recovery since, they also fell 1.2 per cent for the first half of 2011. This has done nothing for public confidence, says Leo Sklenica, board member of Allianz Pensionskasse AG and BAWAG Allianz Vorsorgekasse, the pension fund and severance payment affiliates of Allianz Group in Austria.

"Most schemes in Austria are defined contribution so the risks are mostly on the beneficiaries," he explains. Those beneficiaries have now seen two crises in the space of a decade (the first being in 2001/2).

"People aren't used to high volatility in pensions. Because the state pension is stable we expect all pensions to be."

Krischanitz agrees: "The financial crises of 2001 and 2008 burned a lot of money in Pensionskassen, with the effect that there is no public acceptance for occupational pensions in general."

There are, though, still reasons for optimisim. First, new regulations for Pensionkassen are likely to address some of the concerns around volatility. One proposal is for an option of a guaranteed minimum return of 2.5 per cent and guaranteed benefits in the first years of retirement. Others, complaining of duplication with the insurance based BVK, which already offers a similar level of guarantee, would prefer if the system was simplified to make it easier to switch between the systems.

"We shouldn't build up Chinese walls between them," says Sklenica. "We should harmonise them and let the beneficiaries decide what is best." Many are keen to avoid further complicating the system to make it rival its neighbour Germany for incomprehensibility.

The increased use of life cycling - a relatively new development in Austrian DC schemes - is also expected to help deal with the impact of volatility on retirees' incomes. (It is worth noting that investment decisions in the Austrian DC model are taken by the employer, not the worker, and remain very restrictive.) Of course, it's probably not enough. To really boost saving would require tax relief.

"What could really increase the spread of occupational pensions would be to have a more flexible approach with regards to salary sacrifice schemes," says Moritz. "At the moment it is very difficult to implement a deferred compensation scheme because it can easily be considered as creating taxable income."

Doris Gartner, senior associate at PwC in Austria, thinks the same. "Based on that ratio of 60:25:15 there is a need for change," she says.

However, even without this, public opinion is gradually shifting - particularly among the young.

"We have had a lot of negative press and media on what happened after the financial crisis but younger workers particularly are very keen to have pension funds agreements and are unhappy if they aren't covered by a fund through their company," says Christian Boehm, CEO of the €2.6 billion APK Pensionskasse.

A recent poll for FVPK confirms this. It showed 80 per cent of workers under 30 worried about first pillar provision, and three quarters of those in companies without a pension want their employers to offer one. Seventy per cent also wanted the government to subsidise occupational pensions.

"This study showed that occupational schemes will become an important aspect of employee branding and securing key talent," says Janda.

In truth though, few doubt growth in the market will eventually come. The only question is how long it might take.

Written by Peter Davy

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