AUSTRIA – The only way forward for pension funds in a low-interest-rate environment that “could go on for decades” is to restructure liabilities by creating separate portfolios for certain age groups.

Speaking at the recent EAPSPI conference in Vienna, Günther Schiendl, CIO at VBV, Austria’s largest pension fund, said the major problem now was “a liability and asset mismatch”, adding that there was no way to change the “asset side of the equation”.

Thomas Url, an economist at the Austrian Institute of Economics Research, largely agreed, saying: “We will live in a low-interest-rate environment for a couple of years, maybe decades, and we need to prepare for this.”

Schiendl’s solution was “to modify the liability side” of pension funds.

He also called on actuaries to “be a bit more creative” in plan designs.

“We have to go back to the beginning of plan design and organise plan members differently, dividing the portfolios into retired and active members,” he said.

Schiendl pointed out that the equity hedging that must be applied to mixed portfolios at the VBV – to “minimise short-term losses for the sake of pensioners” – cost 8-9% of the fund’s asset value.

“In a portfolio with only young people, we could apply a 50% equity ratio for the next decade without a problem,” he said.

For new entries, VBV introduced a lifecycle system five years go where people were organised into risk profiles according to their age.

All of Austria’s pension funds will have to follow under new regulations recently introduced in the country.

But, according to Schiendl, the biggest problem remains the existing contracts, some of which have been set up assuming a 6% discount rate that “cannot be reached” in the current environment and subsequently cause frequent pension cuts.

He confirmed that the VBV was “negotiating changes”, but acknowledged that not all of its members were convinced they were the right thing to do.

He said life-cycle schemes had “never been as important as they were now” and called for the Europe-wide introduction of the model as a default option for members not making a choice.

However, a Swiss pensions expert told Schiendl after his speech that such as system would fail in Switzerland, where the concept of pension funds as “solidarity pools” was far too engrained.

Meanwhile, Url suggested a number of other changes to make pension systems more sustainable, including linking retirement ages to longevity and removing “uncertainties” about pension income in order to get young people to “engage”.

He urged the European Commission to allow cross-border pension funds to exploit economies of scale, although he warned against high expectations on cost effectiveness. 

He also called on the industry to develop products that were “not so sensitive to low interest rates”, and “to get rid of guarantees in the system that cannot be achieved”.