The effectiveness of recent law changes to increase participant choice and attract more members to Pensionskassen remains unclear, finds Barbara Ottawa. Employers are waiting to see who will move first

Last year, Andreas Zakostelsky, chairman of the Austrian pension fund association FVPK and chairman of Valida Vorsorge, predicted challenges ahead. “2013 will be the year of information,” he said. “And it will be a major effort for Pensionskassen to comply with the new regulations on transparency, as well as to explain to people the new choices they have.”

The FVPK welcomed the Pensionskassengesetz-Novelle, which finally passed parliament last autumn after three years of negotiations, which will bring greater security and flexibility into the system by amending the law governing Pensionskassen, the Pensionskassengesetz (PKG).

Three months later, FVPK-chairman Andreas Zakostelsky is optimistic but concedes that there is a lot of work for Pensionskassen, not to mention costs.

Karl Timmel, managing director of the €5bn pension fund VBV, expects the “phone lines to run hot” when people receive an information pack together with their account information this spring. He says the new information requirements will create a 12-page document for each member but the VBV “will also be providing a two-page executive summary”.

Gerald Moritz of Moritz Consulting says that the changes are “a step in the right direction” making the Austrian system “easier to understand for foreign companies which are used to giving their employees several choices” in pension plans in their home country.
Furthermore, these choices “somewhat ease the burden on the employer” and transfer responsibility as well as risk to the employee.

But necessary changes to the Pensionskassen’s IT systems will place a “very, very large” financial burden on the funds, according to Zakostelsky.

Pensionskassen will have to introduce a new portfolio with a very low acturial interest rate, a very conservative asset allocation and guarantees, the so-called Sicherheits-VRG or ‘security pension’ pool. By November, pensioners who have previously suffered losses can opt to transfer into this new portfolio, or leave the Pensionskassen altogether and join one of the insurance-based Betriebliche Kollektivversicherung (BKV), if companies are offering their employees this choice.

“It looks like everybody is waiting for someone to make the first step and if one industry starts to introduce the choice others will follow,” says Eva Salomon-Girsch, managing director of Towers Watson Austria. She adds that employers are often worried about the additional information they might have to provide if they offer more choice and that employers decide against the BKV because benefits are vested immediately.

But Timmel says insurance agents are already pushing firms to sign a contract with their insurer. In Austria this situation is actually tantamount to cannibalisation as most Pensionskassen are subsidiaries of one large bank and one large insurer.

Salomon-Girsch wonders how people will react to this greater flexibility but expects that a “lack of understanding will lead to inertia”. However, Timmel says his customers welcome greater flexibility in the life-cycle model – which some Pensionskassen have had for some years – but which can now be composed of up to five different risk levels.

“This model is easier to understand than the guarantees in the Sicherheits-VRG as more equities also mean more risk,” Zakostelsky says. He thinks some pension funds might introduce an opt-out model in which people could be assigned to a certain risk level according to their age. Under the new regulations people can only change the risk level three times during their membership but are now also allowed to choose a riskier sub-fund.
VBV has already updated its life-cycle model to include five different risk categories, with the riskiest investing 50% in unhedged equities and 50% in bonds, while the least risky is only invested in bonds. The funds in between offer various degrees of hedged equity exposure.

Some pension funds are using the restructuring to reduce their sub-funds. Under Austrian law, companies with 1,000 employees can ask a pension fund for an individualised portfolio known as an investment and risk pool, or Veranlagungs- und Risikogemeinschaft (VRG). As a result, there are currently around 160 sub-portfolios to be found within the 16 Austrian Pensionskassen.

“If everybody halves their number of VRGs, as we are doing, this would bring us below 100, which is certainly a good thing,” says Timmel. Fewer sub-funds means a more efficient mitigation of the actuarial risk.

Salomon-Girsch expects co-operation between Pensionskassen in order to increase the number of members in the Sicherheits-VRG, as she does not expect many people to opt for this portfolio because of its low-level guarantee and cost. The fact that only those over 55 can join these portfolios will create an old membership structure and a high level of longevity risk.

But as pension funds will not know how many pensioners will opt out of Pensionskasse until November 2013, there are currently no planned adjustments to strategic asset allocations. Timmel confirms that the VBV is “cautious not to build up illiquid portfolios too greatly” in the rather unlikely case the fund has to transfer large sums to insurance-based competitors.

The proposed European-level financial transaction tax, which the Austrian government supports, is another factor blocking major re-structuring in portfolios as it is unclear whether pension funds will be exempt from the tax on securities trading.

Although not expecting any great changes to the strategic asset allocation, Michaela Plank, principal at Mercer Austria, sees some shift on a tactical level as Pensionskassen hike their equity exposure “much earlier than in 2012 and to a greater extent”.
Apart from that she expects inflows into corporate bonds to continue as well as more outflows from alternatives as some funds have reached the legal limits.

An even greater administrative burden on Pensionskassen could come from the flexibility in contributions they will have to offer companies. Moritz welcomes this improved flexibility, under which employers can use profits to increase their contributions in good years. “But many international companies do not have profits on a local level, so for them this model is not attractive,” he says.

In general, however, he is optimistic for Austrian pensions as “more and more employees are asking about supplementary pension benefits” and occupational pensions “are becoming a must-have rather than a nice-to-have”.

Many in the Austrian pension industry expect more consolidation of the pension fund industry as the administrative burden grows.

After Valida incorporated the Siemens Pensionskasse in March 2012, other corporate pension funds might follow. While some market participants expect smaller multi-employer funds to struggle, Moritz is convinced the number of company pension funds will drop but that the six multi-employer funds will survive.