Natalie Hahn reviews the implications of the recent second-pillar pension reforms for pension members and their funds
Rising dissatisfaction among Austrian
pension beneficiaries led the finance minister to create a working group in 2009 to rework the legislation governing pension funds – the result has been available for Parliament to review since 2011. The finance committee was the first to agree to the statutory amendment recommended by the government, followed by the National Assembly in May 2012. What follows is an overview of the most important amendments that came into force on 1 January 2013.
• More leeway for employers regarding variable contributions
Until now employers have been able to make extra contributions to company pensions in addition to their fixed contributions – to a maximum amount equal to the existing contribution. Now, employers paying fixed contributions of 2% of total salary can pay further amounts of up to 10% of the total. This applies to holders of accrued rights, depending on the development of specific operational key figures. If the fixed contribution amounts to at least 2%, variable contributions may be even higher than fixed contributions in future.
• Introduction of a security investment and risk pool
The amended legislation creates a so-called security investment and risk pool (Sicherheits-VRG or security pension), in which the amount of the initial pension must be guaranteed at a lower actuarial interest rate. Switching to the security pension is possible on an individual basis from age 55 to the benefit start date. When applying this scheme, the benefits are calculated on the basis of a low actuarial interest rate and the fund must guarantee the amount of the initial pension. This is an implicit guarantee of the actuarial interest rate and provides protection from decreases, for example on grounds of longer life expectancy. With a high degree of probability, this guaranteed initial pension will be markedly lower than under other pools because much less risk can be entered into under the investment scheme and pensions are calculated on the basis of lower actuarial interest. The amount of the guaranteed pension is increased every five years according to the minimum earnings formula. Minimum earnings currently amount to 1.02%. When setting up a security pension pool, 5% of the transferred assets must be used to form a fluctuation provision.
• Introduction of a life-cycle
Individuals may switch up to three times between different investment models (from conservative to dynamic). The pension fund can thereby better take into consideration the individual interests of holders of accrued rights and benefit entitlements.
So, for example, it is quite sensible to choose a more conservative investment strategy before the pension phase. The pension fund must be informed of any change by 31 October to become effective on 1 January of the following year.
For those already retired there will be a one-time, fixed-term switching opportunity, if they are subject to an actuarial interest rate higher than the maximum rate currently permissible. Until 31 October 2013, these pensioners may switch to either (i) an investment and risk pool or an asset sub-scheme which offers the currently permissible actuarial interest rate, or (ii) to a security investment and risk pool, or (iii) to a corporate group insurance contract. The change will be effective from 2014.
Since the switch to a lower actuarial interest rate entails a decrease in benefits based on the new calculation, it is not presumed that great advantage will be taken of the option. No switching option is available in those cases where an employer has unconditionally committed itself to making additional contribution payments. The pension fund contracts are to be supplemented by the security investment and risk pool as well as any and all associated voting by the end of 2015.
• Performance-related asset management costs
If the pension fund’s annual performance is negative it may only deduct half of the asset management costs. These costs may only be re-charged in years in which performance exceeds the actuarial interest rate. The pension fund is granted a time period of 10 years for such re-charging.
• Lower actuarial interest for new employees
The actuarial interest rate for new employees is geared to the current requirements of the Financial Markets Authority (FMA). These requirements reflect current economic developments and the prevailing market situation in the financial markets concerned, and are intended to avoid a situation in which the actuarial interest rate becomes so high that it could disadvantage future recipients of company pensions. Therefore, new employees in companies with old contracts using a high actuarial interest rate (over 3%) will automatically be subject to the maximum actuarial interest rate currently permissible.
• Pensioner participation
In future, those entitled to benefits may delegate a representative to the pension funds’ supervisory board. This will allow the recipients of company pensions to represent their specific interests.
• Extended information on transparency
The amendment to the Pension Fund Act introduced markedly extended information rights for beneficiaries.
Now pension funds must provide any beneficiary with information on asset management, including the costs and charges for the investment and risk pools in the form of a total expense ratio. This information must be provided upon enquiry, but only for the preceding three years.
There is also an entitlement to obtain a representative performance comparison.
Employers and pension funds must also provide beneficiaries with a copy of those parts of the pension contract covering the relevant representations and commitments. In addition, those with benefit entitlements must, upon enquiry, receive a detailed explanation of the reasons for any change in the pension amount.
• Improvement of collective switching options
When changing from one pension fund to another the beneficiary must be given at least 100% of the coverage provision and 100% of the fluctuation provision. Handling the disbursement cost reserve remains a matter of contract design. Previously, according to the relevant legislation, only 98% each of the coverage and fluctuation provisions needed to be transferred.
• Easier switching between pension funds and corporate group insurance
Individual switching from pension funds to corporate group insurance is now possible.
From age 55 contributions can be paid into a corporate group insurance contract instead of a pension fund (and vice-versa), retaining the capital acquired to date. Since individuals can switch once from a pension fund to an insurance scheme and vice-versa, the option of switching back exists up to the time benefits are due, provided that such an option is contained in the relevant labour agreement or stipulated under labour law. Corporate group insurance contracts carry a guaranteed actuarial interest rate (currently to a maximum of 2%) and guaranteed benefits. The interest consists of two components: the guaranteed minimum interest rate and variable profit participation.
• Shortening of the vesting period
The maximum vesting period has been shortened from five to three years. The new arrangement applies to employment relationships contractually negotiated to begin after 30 December 2012.
Austrian pension funds have responded positively to the new arrangements, as the amendments have made the current system more attractive and are encouraging greater participation in occupational pension plans.
By international comparison, Austria has a lot of catching-up to do as only about 800,000 employees are currently entitled to corporate pensions. The annual long-term investment return of pension funds was 5.52% at the end of 2011. Altogether, the 17 pension funds have recently invested about €15bn and constitute Austria’s largest private pension payer.
Natalie Hahn, is a partner in the employment group at the Austrian law firm Kunz Schima Wallentin, a member of the Ius Laboris alliance of HR and employment law firms