AUSTRIA- Austria’s pension funds and insurers have attacked the government’s plans for administering the Abfertigung neu, the reformed severance pay system, as costly and unnecessary.

The Pensions Funds Association, which represents Austria’s 19 occupational pension funds, and the Association of Underwriters, has accused the government of “reinventing the wheel.”

The scheme, which is intended to strengthen Austria’s second pillar pension system, will run outside the existing pensionskassen system set up in 1990. The government plans to set up an entirely new system for handling the reformed severance contribution scheme, called the Mitarbeitervorsorgekassen (MV-Kassen). This will require an initial capital of E1.5bn.

The plan was immediately denounced as a costly duplication of effort. Fritz Janda, managing director of the Austrian Pension Funds Association, said the government was “inventing the pensionskassen for a second time” and that the government’s decision went back on an agreement between the social partners in October that the pension funds would play an important part.

A spokesperson for the OEPAG multi-employer pension fund said they were “surprised” that the MV-Kassen would be administered outside the pension fund system.

Janda also pointed out that the health insurance offices that held information about employees pay and bonuses would have to transfer this information to the MV-Kassen otherwise they would not be able to work out the level of contribution. He said that since the government had set the deadline for establishing the new scheme for 1 July, this would present significant administrative difficulties.

Dietrich Karner, president of the Association of Underwriters, also asked why it was necessary to set upon a new structure when there was already existing structures that could handle the system. He also said that insurers, pension funds, and banks should be able to offer severance pay services directly.

The plans were announced jointly by Karl-Heinz Grasser, the finance minister and Martin Bartenstein, the economics minister on 8 March. Grasser said that he had decided that the Abfertigung neu should have its own administration to simplify the running of the scheme. He said that if it had used the existing structure, some 100 outlets would have been involved. instead of the 10 he envisages. He said this would have meant more bureaucracy and would have threatened the net yield of the fund.

Grasser said he wanted to create a “generally accessible, fiscally attractive social insurance vehicle,” and said that the government’s plan was “the most important reform step for Austrian employees for the past ten years.”

The new MV-Kassen will be supervised by the financial market supervisory authority. The MV Kassen must in each case conclude a co-operation contract with an insurer.

Employees will contribute 1.53% of gross salary The government expects that within 10 years the contributions will total E4bn. A maximum of 40% of this amount (E1.5bn) can be invested in equities and Grasser said he expected the fund to strengthen the Austrian capital markets.

However, some believe that a high level of equity investment is unlikely because of the MV-Kassen’s capital guarantees. The government is guaranteeing that after three years, employees will be free to cash in their funds or transfer them to another employer, minus costs. After five years, they can cash in or transfer their funds including costs.

Thomas Biedermann, a board member of the multi-employer pension fund Victoria-Volksbanken, commented: “With these capital guarantees, I don’t think they will be able to invest in 40% equities.”

There are also doubts about whether people will use MV-Kassen to supplement their pensions – the aim of the scheme. The government has made an important change to the scheme since last October to ensure that they do. Employees can take their accrued severance funds as a monthly pension or as a lump sum. In the original proposal, both options were taxed at 6%. However, the government has now said that if an employee takes a payment as a monthly pension it will be untaxed.