The move into defined contribution schemes in Austria had been driven almost entirely by the desire of businesses to remove their pension fund liabilities from their balance sheets.
Until 1990 all occupational pension schemes in Austria were book reserve schemes. During the 1970s this created the problem of hidden liabilities Unknown pension fund liabilities threatened to bankrupt some of the large state-owned industries and also prevented companies being listed on the US stock exchangers
Companies which operated DB schemes were victims of a double jeopardy, says Fritz Janda, managing director of the Austrian Pension Funds Association in Vienna.
“Their defined benefit schemes were linked with the first pillar social security pensions. The schemes were also indexed to the consumer price index. That meant that when there was high inflation the money in the social security fell and the company had to pay more to make up the difference.”
The resulting crisis, Austria’s Big Bang, led to pressure for a reformed pension system which would enable companies to move pension fund risk off their balance sheets. “Companies needed to know what their future costs would be. The industries had a good lobby and employees knew they had no chance to refuse because there was no possibility that new DB contracts would be negotiated,” says Janda.
The new ‘Pensionskassen’ system, introduced in 1990, created free-standing single employer and multi-employer pensions funds which offered a choice of DB and DC schemes to companies. Membership of these funds is voluntary, and only 10% of the working population are members of Pensionskassen. However, numbers are growing. Last year membership of Pensionskassen increased by 28 % to 361,442.
It is not known how many of the 8,200 plans within the Austrian Pensionskassen system are DC schemes. However, Janda estimates that, of the 38,000 people currently receiving company pensions, some 26,000 belong to DC schemes. And some 95% of all new schemes are DC. “Most of the DB schemes are from old contracts, while most of our new contracts are defined contribution,” he says
At a fund level, the picture is clearer. Martin Cerny, customer services director at multi-employer fund Vereinigte Pensionskasse, says “In total we have about 1,100 clients and 95% of these are defined contribution. About half of these have changed from DB plans.”
Cerny has noticed that pension plans are particularly popular with new economy companies. “Companies in electronic data processing for example have started to establish company pension schemes because it has become usual, and they have a problem because they don’t have a pension plan.”
He says that employers are also using DC schemes in lieu of salary increases. “Instead of increasing the salary of the employees they implement a pension fund scheme as a defined contribution scheme. This will save costs because there is no social security on the contribution and there is lower tax if the benefit comes out of the pension fund company.”
The demographic debate has also helped raise public interest in DC schemes in Austria. The current ratio of workers to pensioners is 3:1 this will fall to 2:1 by 2030. Although this is less dramatic than the situation in other European countries, it has concentrated thinking. Waltraud Viehboeck, consultant at Aon Jauch & Huebener in Vienna, says: “Since the mid-1990s there has been a very heated discussion in the media about our social security system – it is too costly, it is better to make changes sooner rather than later and we cannot expect to get the same pension as our parents were getting. Nearly every day there has been something in the papers about these problems.
“The pension funds have traded on this fear to market their own systems. That is why pension funds are becoming more popular. And also it is a little bit fashionable to have a pension fund.”
Employers have needed little convincing that DC plans are preferable to DB. Thomas Biedermann , a board member of the Victoria-Volksbanken multi-employer pension fund says: “There was never really any dispute about which scheme would be the more appropriate for the company because from the company’s side of risk assessment defined contribution is always better. You know your risks and you know your cash flows.
“And from the employees’ side it wasn’t really an issue until 2001 because we had very good capital markets up to then. And it’s not a problem for companies that have had a pension fund for a couple of years. The only problem that arises is with the companies that came in from 2000 and later and only saw the bad times.”
The new official mortality tables, which assume increased longevity, have made matters worse, he says. “There is a gap between the old mortality table and the new mortality table and this gap is in some cases quite substantial – up to 10% or even more. And the pension funds now have to fill this gap. They are faced with three choices – they can cut the pension, or the company can pay more, or the pension fund can, if the returns will allow, fill this gap with the surplus returns. But although there is some surplus left in funds that started very early in the 1990s, there are no surplus for funds which started after 1999. You need to put in fresh money.”
Employers that have contracted to provide DC schemes are not obliged to put in new money. “One of the reasons they got rid of their pension liabilities was to know their risk, to get rid of their risk. That risk doesn’t only mean investment risk. It also means mortality risk.”
However, if the market continues to underperform they may not be able to produce the returns of up to 6.5% on which the calculations are based – and on which the plan was sold to the employees.
Kurt Bednar, managing director of Mercer HR in Vienna, says that the pendulum may have swung too far towards DC schemes: “In the first phase of the new pensions fund system, many companies switched from DB via book reserves to DB via pension fund. So they keep the system but changed the financial instrument. Then in the second phase the companies said they wanted not only a change of the financial instrument but also a change of system from DB to DC, especially for younger people.
“The third phase started two or three years ago when the performance of funds went down and the pension funds have a negative performance. If the company did not switch from DB to DC then the company has a problem. If the company switched from DB to a DC scheme the people in the plan who get less money have a problem.”
The question now is whether the low returns will cause people to re-think the respective benefits of defined and DC schemes. The employer who offers a DC scheme rather than a DB is under no obligation to increase their contributions if markets do not perform.
Biedermann says everything will depend on what happens on the capital markets over the next two years. “The people who are affected by lower pensions right now are very few and the pensions paid on average are not very substantial. So if we get back to normal markets and we are able to pull in investment results of 5% to 7% for the next couple of years then nothing particularly striking will happen.
“But if the capital markets do not pull out the returns required in the next couple of years then we’re certainly going to have some discussion about the defined contribution scheme and the Pensionskassen as such, because in Austria people are not used to thinking in terms of risk capital or even prepared to take the risks associated with capital markets with regard to their pensions.”