One of the most dramatic developments in the Austrian market is new legislation aimed at substituting mandatory employment indemnity payments with funded arrangements. According to Thomas Keplinger, responsible for employee benefits at insurance company Wiener Stadtische Allgemeine Versicherung, the government is earmarking the new funds as potential second pillar pension arrangements aimed at offsetting the fall in social security payments by the state.
The new proposal recommends a DC system as a substitute for the indemnity and the government is apparently contemplating a contribution rate of anywhere between 1.2% and 2.5%, subject to negotiation with unions and employers. The main advantage of the new system will be that employees will receive the benefits even if they leave the company themselves. Who will manage the assts remains undecided but understandably, pension funds, insurance companies and banks are all interested in taking on the new business.
Rather like the German system, Austria’s is in need of reform yet some have criticised the changes. Back in March the influential lobby group, the European Round Table of Industrialists criticised Austria’s approach, as well as those of Germany, Belgium, Finland and Italy, as being a palliative and insufficient to alleviate all problems facing much of Europe. Mini reforms, as it calls them, and tweaks can lead to higher increase contribution rates without solving the problem in the long run.
Equally dramatic for Austria, as well as the rest of Europe, was the European directive. Following the initial draft at the end of last year, Fritz Janda, managing director of the Austrian Pensionskassen Association declared it suitable for the Austrian market, apart perhaps from the issue of lump sums. At the time though he did express concern at the tax regulation and labour issues. Obviously the European Parliament’s decision to back it has been a personal success for the Austrian MEP Othmar Karas.
Elsewhere and one of the country’s largest pension funds, the E1.6bn Vienna-based APK Pensionskasse early this year announced it was reviewing its investment strategy. It announced it was firing an active US blue chip equity manager (who it chose not to name) in favour of Vanguard to whom it gave a $30m (E33m) brief, benchmarked to the S&P500 index.
The fund announced that, first and foremost, it was unhappy with the manager’s performance and that given the downturn in equity markets, it was turning its back on them in favour of corporate bonds. Gunther Schiendl, head of investment at the fund says they will invest in high quality corporates and perhaps even high yield income.
It also announced it was considering investing in global sector-based exchange traded funds (ETFs). Existing ETFs are
predominantly either US or Asia/Pacific funds and Schniendl stresses that European ETFs still lack sufficient coverage of equities to make them attractive.
Changes to Austria’s investment regulations have opened the door to yet another investment tool, the index certificate. Supplied by banks, they give exposure to an index and although they are similar to an index fund they are structured differently, the advantage being that they can be traded like equities.
In a separate development, the E280m Vienna–based Verbund Pensionkasse has announced it is looking to merge with one of the seven open funds in an effort to cut costs and concentrate on its core business. Earlier in the year the fund put its administration and investment management out to tender but it has since postponed RFPs until a merger partner is agreed, hopefully some time this month. Austria has seven open, non-company owned funds and according to Franz Paulus, a board member of the Verbund PK, they are in negotiations at the moment
On the consulting side, the market remains relatively undeveloped, largely because many of Austria’s pension funds are affiliated with either banks or insurance companies. Many funds also like to keep the work in-house as it is cheaper but changes to pensions legislation and the increasing number of companies restructuring and looking for advice are likely to increase demand.
William M Mercer’s purchase of Constantia, previously its representative in Austria, was completed last month. Edouard Merette, head of Mercers in Ireland and continental Europe said at the time of the deal that the acquisition would help to establish a strong presence in Austria. Kurt Bednar, co-founder of Constantia, will run the new set up and work closely with the German office.