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Barbara Ottawa reports on why Austria is still waiting for an amendment to the law on Pensionskassen and what the industry is doing in the meantime

It has been almost exactly two years since the Austrian government put in place a reform commission made up of retirement provision experts to compile suggestions on how to reform the second pillar.

The problem of past over-optimistic return promises had become an issue once again in early 2009 when Pensionskassen reported an average -13% performance for 2008.

Pensioners went on the barricades as they saw their pension payouts drop by as much as 40% and they demanded to be freed from the system. Their very expensive DB promises had been transferred from company balance sheets to Pensionskassen in the 1990s at discount rates of around 6% or 7% in order to save costs.

Among the suggestions the reform commission came up with was more individual choice on guarantees in the Pensionskasse, or a switch to an insurance-based Betriebliche Kollektivversicherung (BKV).

A year ago, it seemed that the reform might be put before parliament the last summer but apart from some rumours, nothing much happened, although union representatives demanded a legal provision for years of negative performance, forcing Pensionskassen themselves to pay the difference.

The largest Austrian pension fund, VBV, tried to reignite the debate by joining forces with pensioner lobbying groups and compiling a list of reform suggestions. Among those was to place a pensioner representative on the board of separate so-called investment and risk communities within a Pensionskasse, as well as an exemption for pensioners to pay into buffers for as long as performance falls below the required minimum interest rate.

And then silence fell, which means Austrians are still waiting for a reform that may or may not help to strengthen the second pillar - which anyway currently only covers 20% of the working population - depending on the extent to which the proposals are watered down.

"This figure has to get up to 80% by 2020 - and this is not us, the Pensionskassen industry, wanting to boost business, but a demographic requirement," says Andreas Zakostelsky, managing director of the Valida group and head of the Austrian pension fund association FVPK.

But what is missing is political will and consensus. To date, no Austrian politician has openly acknowledged that the first pillar will not suffice in the long term. Unlike in Germany, the second pillar is not on the political agenda in Austria.

"It is not dead - I don't think so, but we do not know what is going to happen next," one industry expert said when asked what had become of the plans for an amendment to the Pensionskassen law.

So Pensionskassen have been left on their own to try to boost business. And indeed they are growing, slowly but surely.

After a major boost in membership numbers from 500,000 to over 720,000 in 2008-09, mainly fuelled by both the federal and some provincial governments signing contracts with Pensionskassen, the industry saw around 50,000 new people joining over the last year.

Both collectively as well as individually, Pensionskassen are now trying to gain ground among businesses in Austria. Many have introduced a life-cycle model to improve risk adjusting.

And for its first birthday under the new brand-name Valida, the former ÖPAG Pensionskasse revealed a new simplified occupational pension product for small and medium-sized companies of up to nine employees.

"Around 83% of all Austrian companies fall in this category," Zakostelsky said, adding that regarding the number of employees these companies made up around 20% of the workforce.

Currently, only 11% of these companies offer their employees an occupational pension scheme, mostly because people think the area is too complicated or they have too little information on issues like tax incentives, Valida found in a survey.

Assets under management in the second pillar rose from €13.7bn at year-end 2009 to €14.9bn a year later and for 2010 Pensionskassen generated an average return of 6.6% (9% in 2009).

So performance-wise it does not look too bad for Austria's Pensionskassen. However, the media debate regarding the second pillar is still focused on the losses generated during the financial crisis and the ensuing pension cuts.

The financial supervisor FMA reacted to the more difficult market environments by cutting the interest rate used by Pensionskassen to 3%.

Known as the Rechnungszins, the rate had been capped at 3.5% for DC schemes and 5% for DB schemes since 2003.

The new cut was taken to bring interest rates in line with capital market conditions, as well as ensure profitability "at the highest level of security for beneficiaries", the FMA argued.

Zakostelsky "welcomes this step as a precautionary measure" and points out the new interest rate was a more realistic figure with which to calculate pensions and that it would lead to more pension increases, as the performance was more likely to exceed the lower threshold.

Even last year's 6.6% average return only led to a pension increase, is legally capped at 2%, for around 45% of all retired members - most of the rest received the same amount of pension pay-outs as last year and a few suffered cuts again.

But the new interest rate will only be applied to new contracts and does therefore not solve the problem of older contracts with a Rechnungszins at too high a rate. Even new joiners to an existing scheme are granted the old interest rate unless the company decided to close the plan to new members.

An FMA spokesman explained that in order to make changes to existing contracts "we will have to wait for an amendment to the law on Pensionskassen".
 

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