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Austria: Pensionskassen under construction

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Austria's coalition partners will outline a reform to the Pensionskassen system this autumn, finds Barbara Ottawa

Investments on the capital markets have never held much appeal for the average Austrian and the financial crisis was a confirmation for many that they were simply involved in high-risk speculation.

This attitude is also widely held with regard to pension funds, among members, employers and politicians.

Deteriorating public opinion about funded pension provision also forced the government to act, after it was revealed that Austrian pension funds returned -13% on average last year.

In mid-July the coalition between the social democratic SPÖ and the conservative ÖVP agreed on a reform outline to be presented to parliament in the autumn.

One of the major changes will be the introduction of the Sicherheitspension, a ‘safety' portfolio that will assume a minimum annual return of around 2.5%, to be set by the supervisory authority, the FMA, and then guarantee members a minimum level of pension pay-outs for the first few years of their retirement. After that, pay-outs may vary.

But the safety portfolio will be invested very conservatively even once markets have recovered, and this might lead to criticism in future, says Christian Böhm, head of Austria's APK pension fund and of the Pensionskassen association.

"In principle it is a good idea to satisfy people's obviously considerable need for safety and the suggestion on the safety pension was made by the Pensionskassen association itself - but personally I believe once the markets have recovered there will be complaints why too little is invested in equity," adds Böhm.

However, unions and retiree representatives have welcomed this proposal under which retired pension fund members will also be given a one-off chance for a certain period in 2010 to switch to the safety pension.

This will be the second time the government has tried to introduce a guarantee in the Pensionskassen system. The guarantee introduced when the second pillar was created was eventually discontinued in 2003 when it became clear that the extra costs for the guarantees would considerably diminish pension pay-outs.

This time, the extra costs for the guarantees in the safety pension will be taken on jointly by the Pensionskasse and the employer.

In a recent comparative study of the Austrian pension system, Gerald Klec from the European Economic and Social Committee (EESC) notes that all risk lies with the employee in the case of Austrian Pensionskassen.

He points out that in countries like Germany or Belgium with similar DC systems, risk was partly offset either by employers being required to make additional payments in case of underfunding or by the compulsory purchase of annuities on retirement. Neither of these mechanisms is mentioned in the current reform proposal in Austria.

Instead the government wants to see the so-called life-cycle model put in place by all Pensionskassen to introduce more individual choice in the otherwise strictly collective DC system.

Each member of a Pensionskasse will then have the choice between three portfolios with different risk profiles according to the asset allocation. No details have yet been agreed on how often members will be allowed to switch or whether there will be age limits to choosing the riskiest portfolio.

Similarly, details remain sketchy on the proposed facility to leave a Pensionskasse in favour of a Betriebliche Kollektivversicherung (BKV), an insurance-based pension scheme introduced in 2005.

The BKV vehicle offers a minimum return guarantee but this has to be paid from contributions. Should individuals decide to switch out of a Pensionskasse they might have to sacrifice some of their accrued funds to finance this guarantee.

For Böhm, all the proposals are "manageable" from the viewpoint of a Pensionskasse as the funds themselves had been part of the preliminary discussions of the reform proposals.

However, one point of dispute between members and Pensionskassen might be increased buffer requirements to be set by the supervisor. "Members always like money to go straight to them rather than in reserve funds," notes Böhm. He also mentions a possible mandatory extension of the hold-to-maturity principle within Pensionskassen portfolios.

No other changes to investment regulations are planned by the Austrian government for the second pillar but the discussion on the current mandatory 40% equity quota in state-subsidised third-pillar funds got new fuel when they reported an average performance of -15.3%% for 2008.

What remains completely unresolved is the problem of around 60,000 retirees who saw their supplementary pensions cut by as much as 40% because of the financial crisis.
These were mostly among the first to join Pensionskassen, whose employers at the time outsourced their pension liabilities providing the newly created second-pillar funds with only a minimum funding.

Instead, an annual return of up to 7.5% was assumed which - even when found to be unrealistic - was still applied to contracts for new employees in these companies. This is now set to change under the new regulations and new entrants to Pensionskassen will only receive the so-called Rechnungszins of 3.5%, which was set a few years ago for all companies joining a Pensionskasse.

But pensioners who saw their benefits dwindle are now campaigning for the restitution of their benefits and want the government to step in, as it did in the case of some domestic banks.

Critics argue that the former employers of these retirees would have been insolvent now had they not outsourced their pension liabilities in the 1990s - and in that case there would not be any supplementary pensions at all.

Unions are supporting these demands against what is termed ‘casino' capitalism, but the government has committed to retaining the Pensionskasse model.

"The second pillar has been created for a reason and we must not turn it back into a pay-as-you-go system now," says Josef Pröll, vice-chancellor and head of the conservative ÖVP.

"With these reforms the Pensionskassen, as an important part of the second pillar which already 550,000 people have joined, will be strengthened," adds Reinhold Lopatka, minister in the finance department.
 

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