The Austrian Ministry of Finance is consulting with the investment industry on the set up German-style Spezialfonds as part of a wider reform of investment fund legislation, which should come into force in the new year.

Draft amendments to the Austrian investment fund act have been sent to the social partners for consultation, before being put to parliament by the Ministry of Finance, possibly within the next few weeks, in what is clearly a very tight schedule.

However, the tax issues involved will not be considered until a general review of taxation is held in the new year.

The amendments, as well as covering Spezialfonds include funds of funds, roll-up funds and in the most radical reform, the set up of pension investment funds for individuals. The latter, Austria's first third pillar pension vehicle, is opposed by the life insurance industry which currently provides much of the second pillar cover.

The text for the Spezialfonds amendment which in its original form was drafted by the Austrian investment funds association is not yet public, but Adam Lessing, a member of the board of the association says that it does not represent much of a change from the current position but rather a clarification".

"The German Spezialfond is essentially an institutional version of a mutual fund with a segregated account. Austria already has Spezialfonds: half of our investors in funds are from institutions, but currently they are not called Spezialfonds."

Lessing believes that the pension investment fund is the most significant development pointing to the fact that Austria's first pillar is under pressure while estimates of unfunded liabilities dwarf the amount of assets currently under management.

The current draft includes various limits on asset classes such as a 30% minimum investment in bonds and a 50% maximum for non-domestic assets but the most significant is a minimum equity holding of 30%.

The investment restrictions, especially in terms of equity content, make it suitable for long term investors," says Lessing.

In the draft currently under consideration, any subscriber needs to enter into a long term savings plan, but that is being discussed and the banks believe that this aspect should be voluntary.

Lessing expects the final version to require investors to retain their units until age 55 or pension age, which ever is earlier, after which they can withdraw money but only in a staggered way involving between 5-7% of assets at a time.

John Lappin"

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