Germany & Austria: Is choice an option for scheme members?
The ongoing shift towards DC pensions and increased member options results in a culture of inertia, according to Barbara Ottawa
It would be interesting to know the participation rates in TV polls and online voting. Given the increase in rankings and audience choice awards, it seems people are more willing to express their preferences concerning minor celebrities than about their retirement provision.
According to the 2015 Towers Watson Global Pension Asset Study, DC assets have grown at a rate of 7% per annum over the last decade, compared with 4.3% for DB assets. Overall, DC assets make up almost half of global pension assets; in 2004, it was at 39%.
Individuals have a choice within many DC systems with a default option if they do not exercise it. According to studies, the default option is the most widespread because of inertia, or anxiety about making the right decision.
In Austria, this is confirmed by the recent statistics on people’s choices within pension plans compiled by Mercer. Prior to the introduction of life-cycle portfolios in an amendment to the law governing pension funds (the PKG), some employers were reluctant to offer their employees choices that might lead to sub-standard results. Now the various risk categories are defined in law and the number of switches is limited.
At a glance
• Only few choices are made within Austrian life-cycle plans.
• Flexible benefit plans are slowly coming to Germany.
• Unsolved: the problem of how to get people to choose.
In 2013, just 285 out of 800,000 active members of Austrian Pensionskassen made a choice to change their life-cycle portfolio – although, to be fair, not all were eligible to make a choice. A year later the number had almost doubled. “The willingness to make an active decision within the framework of occupational pensions is still low,” comments Michaela Plank, principal at Mercer Austria. However, her research shows that between 50% and 60% of those that consider a switch in their life-cycle allocation and then look into it subsequently switch portfolios.
The issue is information, but the problem is that this often has to be actively sought. According to Plank the issue is a much deeper one: “Many Austrians do not even know they have an occupational pension and even if they do, many are not aware of the choices they have,” she says.
Those Pensionskassen actively offering a life-cycle model inform their members about the possibility to switch on the annual account documentation, notes Plank. Some Pensionskassen offer an opt-out clause whereby each member is automatically placed into a risk profile according to their age. “If they do not want that, they actively have to say so,” notes Plank.
However, many workers’ representatives are reluctant to agree to such a model in the negotiations with the employer and the Pensionskasse on the design of the pension plan. “Because this actually constitutes making a choice for the employee, this is something workers’ representatives do not want to do out of principle because of liability reasons,” explains Plank.
Other choices in the Austrian second pillar as part of recent amendments have also found little traction. Almost no-one has opted for the so-called ‘Sicherheits-VRG’, a conservative fund offering a guaranteed minimum starter pension at retirement. The promised payout is too low for most people to even consider it – and so only 21 did in 2013 and one more in 2014.
Sometimes people make decisions or actively decide not to switch or change arrangements in another way. And even the number of people in default funds has to be reviewed critically. According to the US academic Cass R. Sunstein, co-author of Nudge, in a 2014 paper: “In the area of retirement savings or health insurance, informed employees might welcome a default, at least if those who choose can be trusted.”1
How to make lawyers choose
In the end 31% of members made the decision to switch – actively. But how did the €250m Austrian pension plan for lawyers achieve this result? They set a deadline. “Lawyers are used to settling things by a certain date,” explains Christian Winder, chairman of the investment board at the pension fund.
Via the official electronic data transfer system used between lawyers and in their correspondence with judges, the form for switching to the new pension fund portfolio was sent to each member with a note saying ‘To be dealt with by 30 November’ – and the date was then automatically entered into each lawyer’s diary. “This way we ensured secretaries would nudge their bosses to look into the matter when the date came closer,” Winder says.
As of this year, the lawyers’ pension plan, which was shortlisted at the 2014 IPE awards, introduced another risk portfolio, the so-called Avo Plus to expand its investment offerings. So far, most lawyers were in the Avo Classic, a conservative product, many by default. “We found that over the long-term this vehicle was not the best option for 80% of our members,” says Winder. Few actively chose the riskier Avo30 or Avo50, named after the percentage of equity exposure.
The Avo Plus is designed as a total return product with a 95% capital protection rate to be observed by the manager. Additionally, the minimum period for staying in each fund was reduced to a year to offer greater flexibility.
Once the deadline approached, Winder and his team received numerous phone calls. “People were interested to learn more,” he recalls.
Avo Plus, which returned 5.4% last year compared with 1.4% for Avo Classic, will become the default for new entries from 2016. This calendar year Winder expects the new fund to return well above 3%.
This is what the German government is banking on with its proposal to introduce sector-wide pension plans to be determined by the social partners (see Pensions In Germany). But, until introduced, individual companies and pension arrangements have to find ways to make people decide – not only when it comes to pension investment strategies, but in planning the make-up of their benefits.
Deutsche Telekom has introduced a so-called ‘benefit budget’ for some employees, which means they can choose from different benefit levels within a certain budget. The information is provided via an online portal and people have to make an informed decision.
On the other hand, Henkel, a consumer goods and adhesives multinational, applies ‘soft pressure’ with its opt-out model for most employee benefits, including the supplementary pension plan, according to Martina Baptist, head of pensions management for Germany. “We make the decision for our employees and for newcomers we make attendance at advice sessions or information seminars compulsory once people have signed up,” she says.
In a survey conducted by Mercer among German companies, over half said they had already introduced a flexible benefit choice programme. However, 86% said administration hindered implementation. This highlights the importance German companies attach to flexible benefits in the light of demographic changes.
Uwe Buchem, Mercer’s market business lead for retirement in Germany, says a good online portal with information and interactive calculation tools is paramount. He also warns employers to be aware that “less is more” before they create a vast palette of benefits that is not appreciated in the end because of its complexity.
1 ‘Active Choosing or Default Rules? The Policymakers’ Dilemma’, Harvard Law School Discussion Paper 786, Cass R. Sunstein, July 2014