The IORP directive brought new investment freedom and possibilities for pension funds in Europe. But it also brought more risk management requirements, which can be an insurmountable obstacle especially for smaller pension funds and for a young pension systems - including the regulator.

A new Austrian risk management directive was issued in the wake of the implementation of the IORP directive in autumn 2005. This allows pension funds to go into alternatives such as hedge funds, but it also demands a higher transparency, reporting and sophisticated risk management - and that within a few months.

“Following the implementation of the IORP directive the new reporting standards were raised almost over night,” Stefan Lässer, client relationship manager at Raiffeisen Capital Management (RCM), says. “Usually it takes time to set up reporting structures but this had to happen within the next quarter.”

Indeed, a few points in the directive suggest that it might have been drafted too hastily, such as in the definition of risky assets. “The regulator FMA is very cautious when it comes to structured products,” Markus Zeilinger of Bonus Pensionskassen explains. “These have to be counted into the most risky asset class, which is equities. This also includes for example a bond issued by the World Bank with a guarantee on the invested capital - only because there is a hedge fund participation.”

Lässer and his colleague Elke Ebner confirm that this regulation is a problem: “Equities, corporate bonds and alternative investments are counted as one under the risk management directive. Together they must not make up more than 70% of the portfolio. This was a problem for many Pensionskassen and they are negotiating changes.”

Lässer sees the problem in terms of a lack of experience with the new investment freedoms.

“It remains to be seen whether the FMA can and will use all the data it receives from the Pensionskassen under the risk management directive,” Michaela Plank of Mercer notes. “A problem that will have to be solved is that we know of one case where a Pensionskasse has raised its fees because of the increase in risk management costs. In connection with this we and the companies would like clarification as to who will pay for the ALM-studies required under the directive.”

Under the law, Pensionkassen with a defensive asset allocation, including many smaller company pension funds, are not legally obliged to implement the directive. When they do, however, “the regulations are a real problem for some smaller company pension funds as they now need to split functions and re-assign staff duties because the investment director must not also fulfil the function of risk management director, and they both also need deputies,” Martha Oberndorfer of the BPK explains.

“Many company pension funds are looking to outsource their pension arrangements to a multi-employer Pensionskasse,” Claudia Rübig from Hewitt says. “However, while some are only putting the administration up for tender, others are also outsourcing the assets and the management.”

Missed opportunity on severance pay

Since 2001 statutory severance pay reserves, similar to TFR in Italy, must to be put into separate funds, so called Mitarbeitervorsorgekassen (MVK), which some say is a missed opportunity to strengthen the second pillar.

“The problem was that when the Abfertigung Neu was introduced in 2001 the Pensionskassen had major image problems as the young system had been hit very hard by the crash,” Markus Zeilinger of the Bonus Pensionskasse explains.

“Abfertigung Neu should have been used to strengthen the second pillar and the Pensionskassen,” Claudia Rübig at Hewitt stresses. “But the way it is now, running parallel in two different companies, with different names, people do not view the severance pay as part of their retirement provision.”

Another problem is that by law the money can be taken out by the employee after three years. Therefore the investment strategy has to be very short term. The MVK of the Raiffeisen-group, ÖVK, is demanding changes.

Although all new employees get their severance pay put into a MVK, Fritz Janda, representing MVKs, does not think that MVKs will ever become larger than Pensionskassen because of the drawdown provision, which he is convinced will be attractive. In May 2006 there was €1.5bn in the system and 4.5m people. “This also includes the Polish harvest helper who is only in Austria for a few months,” Janda points out.