AUSTRIA - A comparison of defined contributions pensions regimes in Europe suggests beneficiaries of the Austrian second pillar alone bear almost the full risk of the capital market, but this is about to change, according to pension expert Gerald Klec.

The economist is currently working at the European Economic and Social Committee (EESC) and found in his comparative study on six European pension systems that Austria is the only country - compared with UK, Belgium, Sweden, Germany and Denmark - where occupational pension systems members do not have some level of protection on their assets at the accumulation or payout phase.

For example, whereas German employers are obliged to pay more if the scheme falls in value and UK and Belgian members are required to buy an annuity with their accumulated pots at a set age, the pure defined contribution approach of the Austrian system leaves pension fund members with a "comparatively high" risk, should investments suffer, according to Klec.

"Capital investment risks and actuarial risks are borne exclusively by the current and future beneficiaries: no guaranteed minimum yield on paid-in contributions, no guaranteed minimum benefits as seen in the insurance products available in some countries," said Klec.

Concerns about the need for some form of protection on pension assets have been raised in Austria in recent months following market falls.

However, the reform commission tasked with reviewing the Austrian pension system has reached a consensus on two major points. (See earlier IPE-story: Allianz rallies against 'safety pension')

The first agreement concerns facilitating individual members' right to switch between portfolios in a lifecycle model as well as between pensionskassen and the insurance-based corporate collective insurance (BKV) policies.

At present, only companies as a whole, but not individual members, can switch between pensionskassen and th the BKV model, which carries guarantees but at a lower return.

"This solution brings more leeway for the clients and also ensures that occupational pensions remain a collective system and are not individualised," commented Fritz Janda, head of the Austrian Pensionskassen federation FVPK.

The pensionskassen are also supporting a call for more transparency in disclosing costs and performance to clients.

But no consensus has yet been reached on old contracts with a calculation rate of 6% or more, and on the question of minimum return guarantees.

Experts from the consultancies Mercer (Austria) and Watson Wyatt (Austria) have warned that re-introducing return guarantees to the system would be tantamount to "bankruptcy" for pensionskassen.

This is especially important as Klec calculated in his study that a minimum return guarantee of 1.02% pa would have to have been granted at the end of 2008, to match the initial pension fund law in the early 1990s, had it been re-introduced.

Mercer and Watson Wyatt pointed out at a joint statement that pensionskassen would have to pay up to 5% of their reserves into the system to achieve this.

Instead, they have urged the authorities to look to Germany and introduce deferred compensation, where part of the wages are automatically transferred to pension funds.

The consultancies have also supported the call for more choice for individuals and urged pensionskassen to diversify their portfolios further.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

Topics