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Austria plans DC switch for millions of employees

AUSTRIA – Millions of Austrians could begin investing up to two per cent of annual salary in defined contribution (DC) savings vehicles by the beginning of next year, under plans by the government to substitute mandatory employment indemnity payments with funded arrangements.

And according to Thomas Keplinger, responsible for employee benefits and multinational pooling arrangements at Vienna based insurance company Wiener Städtische Allgemeine Versicherung, the government is earmarking the new funds as a potential second pillar pension arrangement to offset reductions in state social security payments.

Current employer indemnity payment to workers in the event of dismissal or retirement amounts to one year’s salary after 25 years of service. The system operates on a sliding scale after three years of service, so that an employee fired after three years would receive a portion of their annual salary.
The legislation does not at present apply to employees leaving a position of their own volition.
“ When the parliament first made this law the idea was to provide some security for people that were fired until they found a new job,” says Keplinger.

He notes that the new proposal is to have a DC system as a substitute for the indemnity and says the government is thinking about a contribution rate of 1.2% up to 2.5%, subject to discussion with unions and the employers themselves.
“ The main advantage now will be that the employee shall receive these benefits even if they leave the company themselves. It is a trade off to have a defined contribution rather than a defined benefit system, which in certain periods of employment will mean that you receive less than you would have received through the old system.
“ On the other hand you have the right to the money even if you leave the company.”

However, he points out that an employee can only actually withdraw the money if they are fired or retire.
“ It’s pretty obvious what the government wants to do in the long run. They want to substitute this indemnity payment with an additional employee pension.
“ It hasn’t really been decided what will happen on retirement, some people say you should be able to take half of it, while the unions, for instance, are obviously voting to be able to take all the money out of the fund.
“ The employers say it should be an additional pension payment and so does the government, because the argument would be that social security pension is decreasing but there is another pension that is funded under the second pillar.”

Keplinger says the question of who could manage the assets has also yet to be decided.
“ Pension funds, banks and insurance companies are all highly interested in having these assets under management.
“ The discussion is that it will either will be a product that is the same for all these groups, or the other solution will be for separate indemnity funds where we as an insurance company would set up a company appropriate to do this job.”

A draft paper on the issue is expected by the end of June and Keplinger says the legislation will probably take the form of a ‘soft change’ meaning that rights accrued in the old system will be retained unless the employee wants to move to the new system.

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