In Austria, pension funds created a storm when they were forced to cut the pension promises they had made to scheme members. The market slump at the start of the decade meant they had to do it. But the funds are still having to deal with the fallout, and consultants have been handed much of the work associated with it.
Paul Röttig of Hewitt Associates in Vienna, says the poor performance of Austrian pension funds during the last few years is probably the main issue that concerns them at the moment.
The funds are still relatively young, having come into being in July 1990, he points out. Before that, the pensions environment was very similar to the German model, with second pillar provision mostly in the the form of defined benefit (DB) plans that were book reserved. Immediately after that implementation, companies started transfering their book reserves into pension funds.
Transferring the book reserves is not always a simply matter. “It is always a question of what assumption you make to fund those DB promises,” says Röttig. “Most of the transfers that have been made from book reserves to pension fund were not enough. They were sufficient up until the end of 2001, but during the last few years, some of the pension funds have had to be reduced.”
This has caused huge problems in Austria, but Röttig says most of the trouble which ensued boiled down to poor communication. “The pension funds promised too much. They didn’t put the right information forward to employees and employers. There was no bad intention there, it was simply that people thought they could secure returns of 6.5% for the next 50 years.”
A lot of consultants are involved with this issue now, he says. They are cleaning up in the wake of all the trouble and finding out what the real differences are in the pensions funding. There are some legal issues pending, he says.
Apart from this, consultants are busy looking at small- and medium-sized companies that have not yet implemented second pillar provision for their employees. Though more is done than under the German system, still only 13% of the working population covered by company pension plans. However, the reasonable replacement rate offered by social security system in Austria means that there is not such a great need for second pillar provision, he says. Retirees can receive up to 70% of their working salary in state pension.
As an international firm, Röttig says Hewitt tends to deal more with international clients. Local consultancy firms tend to take care of the needs of the local companies, and there is no great competitive imbalance noticeable within the marketplace.
Kurt Bednar of Mercer in Vienna says international firms do have a competitive edge in that they have more to offer clients, but on the other hand they do charge more. Mercer’s investment consulting is growing, he says, and the international group has opened a new practice, Human Capital.
Röttig says clients are becoming increasingly aware that pensions promises are part of a whole package. “For the member of a pension fund, it is a question of the total reward package.” More and more companies are aware that they shouldn’t look separately at any of the elements of this.
They are moving away from short-term benefits towards long-term benefits. “That is a strategic direction that we can observe,” he says.
Some consultants in Austria are still involved with work associated with the reform of the severance pay system. The system is being transformed into new employee welfare funds - Mitarbeiterversorgekassen (MV-Kassen) - to which employers will contribution a proportion of employee gross pay.
But the moves are not happening very fast. Gerald Moritz, managing director of Heissmann consultants in Vienna says around 50% of Austrian employers have not yet decided which MV-Kasse they will use.
“Some of them are very slow,” he says. But it should be remembered that the average size of employer is very small compared to other European countries. Around 80% of employers havebetween one and five employees, he says.
Bednar says MVK has now become a dead issue. “We expect this to become of interest at the end of next year when employees are allowed for the first time to take money out when leaving their employer.”
However, some trends arising out of the change from the old termination indemnity contracts spell more business for consultants. This changeover is a switch from DB to defined contribution (DC) for at least part of the employee benefit package. And in many cases, employers are taking this as an opportunity to make a broader switch to DC for the whole of the pensions offering, says Moritz.