With working life span getting longer, state pensions getting thinner and media discussions on pension reform raging in the media, Austrians seem to have become more aware of the need for extras in their old age.
As Fritz Janda, of the Association of Austrian Pension Funds, says: “The saving behaviour in the field of pension provision is increasing steadily.”
In 2004, the Austrian pension market still appears to be going through a developing phase. Konrad Kontriner, chief investment officer of Innovest Finanzdienstleistungs, sees it as “young” compared with the Netherlands and the UK ones.
“Setting up a pension fund is not compulsory and by law it is not allowed for a company with less than 1,000 employees to run its own corporate pension plan,” says the CIO of the firm.
Innovest manages assets for Siemens’ Austria pension plan and two more big Austrian corporate pension funds, besides other institutional clients in Austria and Germany.
But as the civil service could be given the go-ahead to set up its own pension fund, the market could soon grow. At the moment the Bundespensionskasse (BPK), the pension fund for a part of public employees, has about 40,000 members.
The government is set to work on a draft to allow the civil service to join a pension fund, as a part of the broader scope of pension harmonisation. The next step would be introduction to parliament for discussion.
Paul Kocher, the head of the fund, says if civil servants are allowed to join a pension fund, 50-100,000 more workers could join one, possibly BPK.
And while new pension arrangement seem to be in the making, current pension schemes are getting shrewd. “Pension funds are becoming more and more sophisticated. They usually require more data and they differentiate much more than a couple of years ago,” says Martha Oberndorfer, board member of the joint venture Kommunalkredit Dexia Asset Management in Vienna.
As well as requiring more detailed communication with their asset managers, pension funds are opening up to innovative investment strategies too. “At the moment we still see a demand for bonds,” Oberndorfer says. “With that I mean they pension_funds seem to be more opened to different bonds categories. We have more indices available now and the bond market is more segmented.” She adds that there is also a demand for structured notes. Pension funds’ attitude to equities is different. “Considering that Austrian pension funds have to return about 1.5% they do not take many risks,” she says.
According to an estimate by the Association of Austrian Pension Funds, at the end of June 2004 Pensionskassen have allocated an average of 65% in Euro-zone and non-Eur-zone bonds, twice as much that the average equities allocation, which amounts to 34%.
Alternative investments in the shape of real estate investments, perhaps
in the wake of bad stock exchange returns, have carved their own niche, with an average allocation of 1%.
Robert Hau, head of continental Europe at Bank of Ireland Asset Management, says: “Austrian pension funds are now facing the issue of alternative investments,”. Hau sees the exposure to alternative investments like hedge funds more as a means of leveraging risks than creating higher returns. “In addition, many Austrian pension funds are increasingly interested in property portfolios with a European bias and long-term globally as alternative investment,” he says.
A ‘move’ towards real estate is currently taking place at the e1.9bn multi-employer pension funds Oesterreichische Pensionskassen OEPAG AG, which is also investing hedge funds. Walter Schmoiger, chief investment officer, says there has been “some movements” towards the asset class. “We intend to invest at the beginning of October, we have also brought in funds of hedge funds. We are still in a phase of low return and that affects some asset classes, like bonds and equities. They have not generated the income we expect.”
The money going to the new investments has been mainly diverted from bonds, says Schmoiger, adding the fund allocated 60-65% in corporate, government and high-yield bonds, and 30-35% in equities.
Guenter Schiendl, head of investments at the e1.6bn APK, whose coverage ratio varies from 98% to 110% depending on the scheme, says the real estate market is inspiring on-going interest in pension funds.
Schiendl says of alternative investments: “I think pension funds may increase their asset allocation to real estate.” APK itself allocates broadly3% in real estate as a mixture of indirect investments while its enthusiasm for hedge funds is “cooling down”.
He adds: “Pension funds are realising that hedge funds are not products that return 10% irrespective of the market situation, there is a correlation between markets, interest rates and hedge funds.”
APK’s allocation to ‘traditional assets classes’ is 33% to global equities, and bonds, 60%, of which 40-50% is tied up in fixed income and 10-20% basic swaps.
While happy with its 12 equity managers, Schiendl says “some consideration about bonds”, which are partly managed in house, was going on at APK.
“What we have done so far is taking part of the fixed income bonds to various bonds, this is for us a major move and is part of a strategy for investment environment where interest rates might rise” he says. “We are always asking for a strongly active management.”
Martin Cech, senior investment manager at Vereinigte Pensionskasse, which had recently merged with the e1.2bn banking and insurance sector pension fund BVP-Pensionskassen, says it has also enhanced its exposure to real estate investments.
“The western European real estate fund started in August 2003 had additional contributions and purchases this year.” APK has also “slightly enhanced” its exposure to funds of hedge funds but has also cancelled one mandate because of dissatisfactory performance.
Chech also spoke enthusiastically of the fund’s Socially Responsible Investing. “The global SRI equity fund, that was launched in July 2003 beat benchmark and international competitors. There were large contributions to this fund this year. By sticking to this philosophy we also switched a passive global equity fund to a passive equity mandate that is measured against DJ Sustainability,” he says.
VK has also changed a passive euro-government bond fund into a euro-SRI fund called VPK Ethik Bond that invests in government bonds, agencies, supernationals, financials and corporates. “SRI is a topic which is receiving more and more attention,” says Oberndorfer.
Oberndorfer says the SRI market is being buoyed by severance funds, Mitarbeitervorsorgekasse (MV), created in Austria two years ago. “Eight out of 10 Mitarbeitervorsorgekassen are opting for SRI and it is interesting since they are not obliged to – it is their own decision. The SRI market will get bigger in the future, I guess. After all, the MV market in still young and it is growing at an exponential rate.”
Oberndorfer‘s positive assessment of MV’s future is confirmed by OEPAG and APK’s assessment of their own MVs. Schmoiger says that OEPAG’s MV, started with Uniqa and Raiffeisen Bank, was going “quite well” at the moment, while Schiendl says: “Mitarbeitervorsorgekassen business is growing more or less automatically we are now in the second year of activity and very successful.”
APK is one investor yet to be convinced to go for SRIs. “We have seen several presentations to date but we are not certain” says Schiendl. “Every approach seems to have weakness and in the end we thought it was not clear what the SRI products were really about. The problem is to understand hows and see the facts clearly. We have not yet found a product provider that would implement the SRI investment the way we feel fully certain,” and adds, “we are observing this process.”
APK’s cautious stance does not mean that the pension fund is completely new to SRI. “We have provisions which are showing up as SRI. In this sense we are not new to SRI,” Schiendl says.
The issue of SRI investments is a bone of contention and pension funds’ attitude is different from fund to fund, says Andreas Paar, analyst at Ertse Sparinvest. “Some of them are active in this field, in both equities and bonds, while others do not engage at all “ he says. “I am sure SRI will grow in the future, those who invest in this area will continue, but those who have not invested at all, may not. They have made their own different strategies to get returns,” Paar says.
If there still are some doubts about whether pension funds will take to ethical investments, there seems to be little doubt that they expect asset managers, Austrians or foreigners, to abide by high ethical standards.
Corporate governance is another investment aspect where pension funds and asset managers seem to have differing views and adopt different policies. Cech says: “As an investor, VP looks for decision making process on corporate governance.” In 2004, VP supported by the Institute for Sustainability of the Vienna University, published its first annual report on sustainability.
Cech says: “As far as we know, we are the first pension fund in Austria and one of the first financial institutions in Austria to release such a report. We think that having taken this step, competitors will also move toward to sustainability and SRI-investment.”
OEPAG is not ‘explicitly’ into corporate governance yet, and Schiendl says the fund’s attitude depends
on the geographical area of the investment.
Speaking of the domestic markets, he says: “In the Austrian market, politics come in the scene very soon and we do not enter the politics arena.” APK is not entering the consultant arena either: “We do not really use consultants , we have not yet seen a really new approach. We tend to keep an open dialogue with our asset managers” says Schiendl.
He adds that consultants have done a good job raising awareness and starting constructive discussions. “But these things take a long time. It takes time to decide on a new set up.”
OEPAG does not yet use consultants either, but Schmoiger says they have been active since they have entered the pension scene a couple of years ago and the fund might hire one.
“Maybe it will happen in the future, but we have not yet decided,” he says. Asset managers are decidedly more optimistic on the role consultants will eventually play. “Consultants play an important role and they are going to be even more powerful,” forecasts Paar, while fellow asset manager Kommunalkredit sees the field opening to foreign consultants.