The average performance of all 16 Austrian Pensionskassen was 5.14% for 2013. This is the figure published by the Austrian Kontrollbank (OeKB) and presented by the Austrian pension fund association (FVPK). But it says very little about how any of the pension funds actually performed.
First there is a major difference between the seven multi-employer funds, which on average returned 5.3%, and the others, which are company pension funds. For those, an average return of 3.91% was reported.
The vast majority of the €17.4bn in assets in the second pillar lies with the three largest providers – VBV with €5bn in assets under management, Valida with roughly the same amount in two pension funds and APK with €3.8bn.
According to Michaela Plank, principal at Mercer Austria, the “decisive lever” for multi-employer schemes’ outperformance was their equity allocations, which stood at 28.23% on average in company pension funds and 36.72% in multi-employer funds.
Then there is the problem of the various portfolios within each pension fund. According to the law governing pension funds – the Pensionskassengesetz (PKG) – each multi-employer fund has to offer clients with more than 1,000 employees its own risk/return portfolio, a so-called Veranlagungs- und Risikogemeinschaft (VRG).
Under an amendment to the PKG, implemented last year, each employer can also now offer its staff a choice of different risk profiles, a so-called life-cycle investment, or a security pension portfolio with an extremely low discount rate, set by the financial supervisory authority to guarantee a certain level of pension payout at minimum risk, but with lower returns.
All this means there are currently 96 different VRG portfolios among the Austrian Pensionskassen, all of which must file annual accounts.
This number is down from 134 last year due to mergers, although including various sub-portfolios the number still comes to well over 150.
The VBV Pensionskasse has actively used the implementation phase of the amendment to the PKG to reduce its VRGs from 48 to just over 40. “We want to make further mergers to achieve a better risk balancing in our liabilities,” says Karl Timmel, managing director at VBV. A larger pool of people in one portfolio means liabilities can better be hedged and the longevity risk is reduced.
Last year, Pensionskassen were able to secure a further amendment to the PKG. The Financial Market Authority (FMA) initially issued an interpretation note to the effect that, in its opinion, VRG and sub-portfolios could only be merged if the new portfolio included the same level of choice as the old one. Pensionskassen rejected this, arguing that it would have made it impossible to merge any portfolios.
But APK and other smaller pension funds never intended to combine portfolios in the first place, and Valida only reduced the number of its VRGs from 41 to 40.
“It is an administration effort but customer benefit is very important to us”, says Andreas Zakostelsky, chairman of the Valida group which manages the Valida Pensionskasse and the Valida Industrie Pensionskasse, the former Siemens corporate pension fund in Austria.
Only 26 of the VRGs across all Pensionskassen are actually open to new companies, the others being closed portfolios for specific customers who can individually choose their risk profile and investment preferences. According to figures compiled by Mercer. VRGs open to new entrants returned 5.2% on average, just shy of the market average for multi-employer funds.
Within the various risk portfolio categories there are wide spreads in returns and by law, Pensionskassen can offer up to five different risk levels with different equity exposures.
In 2013, VBV’s best performers were its defensively invested portfolios with an equity allocation below 16%. The spread between the best and the worst performer in the category was between 2.48% and 3.97%.
Günther Schiendl, CIO at VBV, emphasises that it was mainly his funds’ commitment to Europe – especially in the government bond sector – which “contributed the most to our outperformance in the segment of defensively managed portfolios”.
In all other categories, the best performer was the €500m Allianz Pensionskasse. The largest spread was recorded in the portfolio with the highest risk, so-called dynamically managed portfolios with an equity allocation of over 40%, where returns ranged from 5.1% to 9%.
According to the overall market average VBV was the best performer at 5.85%, although, Schiendl points out, that many portfolios returned above 6% in 2013.
As with all Austrian pension funds the overall average annual return gives little indication of how the portfolios within each fund have performed. At VBV returns ranged from 6.7% to 2.5% depending on the risk category.
The individualised risk/return structure within Austrian Pensionskassen’s portfolios is due to the fact that pensioners can suffer cuts in their payouts if the return target associated with the discount rate applied to their individual account is not met.
Some of the first pension benefits transferred to a Pensionskasse in the early 1990s were transferred at a discount rate of 6% or higher. The FMA, later capped the rate at 3%, but until last year only for new portfolios, not for new entries into existing portfolios.
This means Austrian Pensionskassen must focus on loss aversion in their investment and risk management.
“Risk management is key and in Austria pension funds are mostly focusing on drawdown management,” says Claudio Gligo, head of asset management at the Victoria Volksbanken Pensionskasse. “It’s about constructing an asymmetric return profile where parts of the positive performance are hedged within the portfolio,” he notes. And sometimes a simple protective put strategy suffices.
Introducing a safer option for pensioners is also a priority at the €250m pension fund for Austrian lawyers. Currently, the safest choice and the one most made is the AVO Classic fund jointly managed by Macquarie Investment Management, Spängler IQAM, Lazard Asset Management and DALE Investment Advisors, and chosen for their low correlation.
This fund aims for a 100% capital preservation, or in other words a 0% downside risk over two years, and because of this it returns below 3%.
This is a problem for pensioners whose benefits are calculated at a 3% discount rate and who therefore suffer cuts each year if the fund’s returns fall short. Additionally, they currently do not have the right to choose another vehicle once they are retired.
Therefore, the pension fund wants to introduce another vehicle, the AVO plus with a downside risk of just 5% per year, which pensioners should be able to choose. The vehicle will be the fourth choice given to the members apart from the classic fund, the AVO 30 with a 15% downside risk and the AVO 50 with a 25% downside risk.
Looking back at 2013 Christian Winder, chairman of the pension fund’s investment board, notes: “Only now, with the equities rally last year, have the AVO 30 and the AVO 50 decoupled from the AVO classic in their performance”.
Christian Böhm, managing director at APK, also notes in hindsight that “more risk could have been taken in 2013”. But, he stresses that this was not the remit of a Pensionskasse which has to ensure it does not lose too much in bad times even if it means that it cannot fully profit from bull markets either.
This also means that the risk parameters for 2014, and with them the investment strategy at APK will not change: “Our basic scenario is cautiously optimistic, the interest rates will not move much and we all have to learn to live with equity volatility,” says Böhm. “We will optimise our existing portfolio, but we do not have to change the asset allocation concept on an annual basis.”
Timmel takes a similar approach saying VBV wants to leave its investment strategy unchanged in 2014. The equity allocation is on average between 25% and 30%.
But the fund is looking into possible emerging markets investment opportunities, having “pulled out just in time” prior to the early 2013 market downturn: “It might be the right time soon to go back in,” Timmel notes.
At the Valida Pensionskassen, Zakostelsky wants to focus on high-yield investments and peripheral European bonds, although, not Greece. Further, Valida has increased its equity allocation from 33.3% to 35%. In 2012, it had been less than 30%.
In fact, it was pension funds’ “record exposure” to equities at 35% last year which boosted performances. As for bonds, which made up an average of 56% of the portfolios, returns mainly came from fixed income issued by non-core European countries.
Exposure to Portugal, Italy, Greece and Spain was between 8% and 10% of total portfolios, while only two years ago investments in bonds from the region had been “below 1%”, the FVPK notes.