AUSTRIA – The Constitutional Court has upheld the right of an Austrian pension fund (Pensionskasse) to not compensate its members if, in a given year, the fund cannot pay the guaranteed rate of interest on the member’s accumulated savings.

Three years ago, the government amended Austria’s Pensionskassen law of 1996 to provide the schemes with far greater financial flexibility, especially in times of weak capital markets.

The reform was prompted by the equity market crash at the beginning of the decade. The crash greatly eroded the schemes’ reserves, partly because of the interest rate guarantee.

As a result of the reform, Austrian Pensionskassen are no longer obliged to dip into their reserves to meet that guarantee.

But Austria’s opposition Social Democrats (SPÖ) challenged the reform before the Constitutional Court, arguing that it was tantamount to “expropriation” of the schemes’ members.

In its ruling, the court agreed with the SPÖ’s characterisation of the reform. However, it said the expropriation was not in the least excessive and, more importantly, in the public interest.

“Lawmakers (in 1996) did not originally consider that a crash on capital markets would have serious consequences for the Pensionskassen. With the 2003 reform, they wanted to avoid a situation where a crisis on capital markets would raise the schemes’ obligation to dip into their reserves to compensate the insured,” the court said.

“Such a scenario could have led to the full liquidation of Pensionskassen, which is not in the public interest,” the court added.

Even so, the 2003 reform does oblige Pensionskassen to compensate for undershooting the guarantee by the time their members retire. Austria’s Pensionskassen currently insure 440,000 employees – or one-fifth of the workforce. Their assets total €11.5bn and their average return in 2005 was 11.4%.

Commenting on the court’s verdict, the SPÖ said it meant the “guaranteed rate of interest has been abolished with no compensation” for the schemes’ members.

Fritz Janda, managing director of FVPK, the association for Austria’s Pensionskassen, dismissed this claim, telling an Austrian newspaper that the guarantee would remain in place.

However, Janda also noted that since the government provided Pensionskassen with far greater financial flexibility, an increasing number of companies were offering pensions via the vehicle.