Reform of Austria’s severance pay system in 2000 has led to a curious impasse between new dedicated savings funds and exiting pension funds. Now some are calling time on Pensionkassen, Barbara Ottawa finds
Five years after their creation, mandatory severance pay funds - the betriebliche Vorsorgekassen (BVK) - are due to overtake Pensionskassen in contribution levels for the first time. And some argue they would make the better supplementary pension vehicle than Pensionskassen.
BVKs have their roots in the reform some eight years ago of the Austrain employee severance pay regime. The architect of the Mitarbeitervorsorgekassen (MVK) concept, the precursor to the BVK, was labour and economy minister Martin Bartenstein, who in 2000 devised his plan to transfer employee severance payment provision to a funded basis.
“At the moment BVKs are a pure savings product and should not be seen as anything else,” says Markus Zeilinger, (pictured right) former head of Bonus Pensionskasse, who has set up the Fair-Finance BVK, a severance pay fund focussing on sustainable and social investments. “But the big political question will be whether to continue to try and persuade people to save for retirement through tax incentives or introduce a mandatory pillar for which BVK would be perfect with a few alterations.”
“In many European countries with a significant second pillar, such as the Netherlands or Switzerland, a mandatory system is in place,” agrees Andreas Csurda, chairman of the severance fund federation, Plattform der Mitarbeitervorsorgekassen (pictured below left). Austria is trailing when it comes to occupational pension provision, Csurda adds, and the solution of setting up MVKs as they were then called was not ideal. “Because of pressure from the pension industry the government did not want MVKs to pay out benefits as well,” he says.
“It was a typical Austrian solution, neither black nor white,” notes Zeilinger.
Nevertheless, there is a cannibalisation effect. “Companies now have to join a BVK and therefore might decide not to offer a Pensionskasse to their employees,” explains Csurda, who is also running a multi employer Pensionskasse at Allianz.
However, other members of the industry see the development less drastically. Rudolf Böhm, managing director at the ÖPAG Pensionskasse, is convinced that “paying into a severance pay fund will become as natural to employers as paying other social contributions.”
Still, there seem to be reservations about, and in some cases open criticism of, Pensionskassen. This might hinder their development.
“Pensionskassen are dead - they are not really growing and because of their reputation for poor performance as well as a lack of political commitment they cannot function as a substantial pillar in the supplementary pension sector,” says Zeilinger.
“Pensionskassen were created in 1990 under pressure from state industries, which wanted to modernise,” says Csurda. “Some now seem to think they have done their duty and Pensionskassen are often getting beaten for things they cannot influence, such as high actuarial rates promised by the employers.”
In the current market environment the Austrian media have frequently portrayed Pensionskassen as the safest way to lose money as high actuarial rates mean the return target is often missed, leading to pension cuts for some members.
On average, Austrian Pensionskassen managed to return 2% in last year’s difficult markets with an annualised average performance since 2003 of 6.8%. Last year membership numbers increased 2.6% to 539,000.
However, it is not only this bad perception that people and most politicians have of Pensionskassen that, according to Zeilinger, makes them unsuitable as pillars for a mandatory pension system. “It is partly their own fault as they have ruined the market themselves by not being market focussed and aggressive enough,” he notes.
The large shareholders in the Pensionskassen - mostly the insurance companies and banks which set them up - are only focussing on their own employees in the fund, Zeilinger adds. “They are only running the vehicle as a multi-employer fund because it helps them to save costs. Pensionskassen were never designed to make a profit as the owners offered solutions at a very low price, which destroyed the market. What is needed is a full-scale reform or otherwise accept that they are dead.”
Meanwhile, Pensionskassen point out it was they who paved the way for funded pension solutions in Austria. “We also helped negotiate the terms for MVK and suggested the easy solution of collecting the money via social insurance companies,” says Christian Böhm, head of APK Pensionskasse, who is also on the board of the APK MVK.
Over the long run Böhm sees a robust future for Pensionskassen. They offer higher returns than MVKs because of their greater investment freedoms and because the pension fund model is internationally comparable. “MVK is a collective savings system and only very seldom part of supplementary pension arrangements,” he adds.
A few months ago Johannes Ziegelbecker (pictured right) of the ÖPAG Pensionskasse noted that Pensionskassen could cope with additional members and assets should a mandatory pillar be introduced but he added that Austria was not yet ready for such a step. “Switzerland only introduced its mandatory system at a time when already two-thirds of employees had access to occupational pension funds,” he told a seminar. “In Austria, we are a long way off from that.”
Approximately 20% of Austrian employees are members of one of the 20 Pensionskassen, and a third of those make the contributions themselves. “We need realistic suggestions to try to boost participation in the second pillar and forcing companies to offer occupational pension schemes would alienate them,” Ziegelbecker added.
However, the system will have to be reformed as the developing demographic situation is affecting Austria’s still very generous first pillar. Zeilinger thinks that BVKs should join the discussion as soon as possible and bring forward ideas. “I would like to see an annual symposium on the issue where discussion could be initiated rather than just reacting to outside pressure such as criticism or changes in EU legislation,” he says. Part of the problem is that there are too few people with real knowledge of the industry to contribute to a real discussion. “And those with knowledge are in a conflict of interest [situation], for example the many board members of a Pensionskasse who are also on the board of an MVK,” he adds. “We also need more academics in the field.”
Zeilinger suggests reforms should change some of the parameters in the legal framework for BVK to make the system more efficient, such as the regulator allowing “more than one portfolio to be run in each BVK in order to be able to adjust the investments more to the individual’s risk appetite”. This would also allow BVKs to offer different investments for people who opted to leave the money in until retirement. This offer could be made more attractive by tax incentives for not withdrawing the money as soon as legally possible.
In fact very few people take the money out after the three-year-period but both Zeilinger and Csurda are convinced that this is more because the sums are too small to be significant or people do not yet understand the system.
Looking at the average return since their inception, MVKs have achieved 4% annually, far off the 6% promised by politicians when the funds were set up. Böhm would like people to understand that guarantees and a high return are not compatible.
He would like to see more investment freedom for BVKs, which are currently limited because of the legal requirement to guarantee contributions on a monthly basis as money can be withdrawn at any time. “The framework needs to be changed but changing a guarantee is a political taboo,” he notes.
Csurda says his expectations for reforms are somewhat modest after so many years in the industry. “The social partners have accepted an average performance of 4% and they do not want to change the legal framework at the moment,” he points out. However, in the future he could see MVKs being opened to additional payments both by employees and employers. “When this happens Pensionskassen will be more or less superfluous,” he says but adds that such a consolidation might be detrimental to product variety and it would certainly take time.
The government wants to first let the system prove itself over time, Csurda says, but notes the inclusion of contributions from self-employed people in a BVK instead of creating yet another fund is “one sign that the government is not completely dissatisfied with the system.”
Around 500,000 self-employed people have until June to choose from one of 10 severance pay funds.
Zeilinger says he hopes to gain as many of them as possible as clients for his fund. Besides a focus on sustainable investments, he will offer his members a share of earnings in the form of cost reductions and a voice in investment decisions via a panel that is open to membership and which will then nominate two board members. Furthermore, by offering a competitive fee structure and a certain level of
annual rates he hopes to convince employers to leave their current severance pay fund.
This last point is what other market participants see as the largest hurdle to a new entrant to the market. “Apart from the self-employed there is no free customer on the market,” says Böhm. “All companies have already joined a BVK and would have to leave that.”
“It will be extremely difficult for this new provider,” Csurda agrees. “When the first MVKs were set up people chose according to the solvency of the company running the fund. So it will be interesting to see how a provider does with various sponsors and borrowed money.”
Csurda adds that one MVK originally started off with guaranteed annual rates but had to give this up because of costs. He also points out other severance pay funds already offer sustainable investment focus.
However, Zeilinger is convinced some clients are unsatisfied with their current provider and will change. “The retirement provision sector in Austria lacks innovative ideas and competition because of a lack of political commitment and because of this stalemate between BVK and Pensionskassen.”
When Austria’s social partners were looking for a solution to ease the burden of future severance payments on companies at the turn of the century they created Mitarbeitervorsorgekassen (MVK) as no political consensus could be found on placing the money with Pensionskassen. Since the beginning of this year, the self-employed also have to pay part of their social contributions into one of the funds, and so they will be renamed company provision schemes or betriebliche Vorsorgekassen (BVK) as they are no longer exclusive to ‘Mitarbeiter’, or employees. Under the mandatory scheme every employer pays 1.53% of a salary to the severance pay funds and employees can withdraw the money after three years. Together with a legally required capital guarantee this leaves the BVK with the problem of having to invest for the short-term without risk. Last year the nine funds currently in the system returned 1.94% on average bringing the average since 2004 to 4%. Membership in the funds has now reached 2.4m.
A few weeks ago a new provider, Fair-Finance BVK, entered the market and its founder sees the BVK developing into a pillar for occupational pension provision.