Austrian institutions are finding new ways of dealing with low interest rates but are still waiting for reform, writes Barbara Ottawa
Austria has got larger fish to fry it seems: a third bank will to be part privatised, vari-
ous cases of alleged corruption are being looked into by parliamentary commissions and then there is the “stability package”, a set of austerity measures to ensure Austria regains its oh-so-precious AAA-status soon.
That means that the amendments to the law governing Pensionskassen (PKG) which were unveiled with pomp and circumstance in November, have been put back into the drawer and no-one knows when they will see light again.
“The PKG-amendment has become a sub-chapter of the austerity measures,” Günther Schiendl, CIO of the VBV Pensionskasse, notes.
As this article went to press it was uncertain whether the amendment might be passed in late March, whether it will be altered again or be postponed indefinitely.
The proposals led to mixed reactions but all of them were subdued and nobody expects the reform to bring major changes to a second pillar that still only covers around 20% of the Austrian working population.
Stefan Eberhartinger, head of the Siemens Pensionskasse, says the new law would undermine the collective nature of occupational pension provision and “turn it into an individualised pension under an occupational pension roof”.
Michaela Plank, pension specialist at Mercer Austria, says introducing guarantees to Pensionskassen would only lead to higher costs for members, but “unfortunately no advantages” as pension funds were “not made for guarantees”.
Eva Salomon-Girsch, managing director of Towers Watson Austria, sees the reform as a “step in the right direction” and thinks the increase in choice is a “good thing in principle” but adds that what the system really needs is “less complexity”.
Practical proof for this comes from Andreas Zakostelsky, chairman of the board at the Valida group which introduced a standardised Pensionskassen-option with fewer choices last year to reach more SMEs.
“Interested companies soon realise that they actually need additional options and provisions and so they become interested in a standard Pensionskassen contract,” notes Zakostelsky.
Pensionskassen also have to deal with low interest rates. As always, Schiendl at the VBV is very cautious about hype and well trodden paths in the markets.
Accordingly, Austria’s largest Pensionskasse has started to buy Italian bonds again since the beginning of 2012, following its announcement at the end of last year that it will be investing in “re-emerging Europe” once the markets have stabilised.
“For us it makes more sense to buy Italy at 5.5% without currency risk and with securities from the ECB than hyped emerging market debt with a currency risk,” says Schiendl.
He is convinced that the ECB’s three-year LTRO programme “has changed the situation” as it has a similar effect to the Fed’s QE programmes in backing banks.
“News of a Greek default are not impacting equities and the spreads to Italy are not widening,” Schiendl explains.
He also wishes to reduce exposure to covered bonds (Pfandbriefe), in which the Pensionskasse had been heavily invested over the last three years “as a substitute for government bonds”.
He says the portfolios available to banks as collateral for covered bonds is “somewhat stretched already” and “German Pfandbriefe are yielding 1.8% compared to a 5.5% return from Italian bonds”.
The Valida Group, which manages a €3.8bn Pensionskasse as well as a €1.8bn Vorsorgekasse managing mandatory severance pay savings (see box), has turned to the social infrastructure sector for new sources of stable return.
Among those investments are a participation in a listed company running nursing homes in Austria and housing loans in the form of bonds issued by building loan banks and investments in housing co-operatives.
It also includes taking over a loan from the Kommunalkredit, an Austrian bank specialising in infrastructure investments and one of the three Austrian banks so far that had to be part-nationalised since the crisis.
Valida chairman Zakostelsky, explains that the loan is “safe” as it is guaranteed by Austrian energy giant EVN. “Some banks have liquidity problems and we can provide liquidity,” he reasons.
Over the year he is planning to take on or issue further loans to the public sector or companies servicing the public sector, for example in the fields of infrastructure and energy.
For this year, the group has earmarked €57m for these social investments. “This is just a start to help us understand these markets and gain experience. Eventually we are aiming to invest around 10% of our assets in these areas,” says Zakostelsky.
He expects these investments to provide “stable returns with high security” and sees them as “part of our social responsibility to the Austrian economy and society”.
Zakostelsky forecasts the nursing home and public sector loan investments to return 4-5% annually and the building loans to add 3.25% to the performance.
While Pensionskassen are looking for innovative way of adding return without too much additional risk, the government has found a way of tapping some of their assets to help save the Volksbanken group.
Instead of paying taxes on their pension pay-outs, retired Pensionskassen members are to be given the option of paying a one-off discounted tax on their pension capital this year which will bring between €400m to €500m to the coffers of the finance minister who needs around €900m to save yet another bank.