Getting through a rough patch
It’s been an unusually tense year in the normally sedate world of Austrian pensions. The Austrian parliament finally passed its controversial pension reforms bill, despite strong opposition – both in parliament and on the streets, (including the largest strike seen in Austria since World War II) that led chancellor Wolfgang Schüssel to concede on key points to calm rebellion.
As part of the reforms, the age of retirement for men will be increased from 61.5 years to 65 years, and the age of retirement for women will be increased from 56.5 years to 60 years. The increases are to be introduced gradually from July 2004 to 2013.
On top of this, Austrians that decide to retire early will see reductions in their gross pensions increased to 4.2% from the current 3.75%, with early retirement being abolished by 2013.
More importantly, however, for Austria’s institutional investors has been the impact of a law from over a decade ago – 1990 to be precise – decreeing that Austrian pension funds had to guarantee to members approximately 1.5% per annum over a rolling five-year period. Few thought about this while markets were good.
Today though the guarantee has become a major point of concern, as Albert Reiter, managing director at e-fundresearch.com Data in Vienna, points out: “Due to the prolonged poor state of the markets and the fact that some pension funds are rather young – especially corporate pension funds – there have been a number of schemes that have actually run into problems with this guarantee.”
Reiter believes the issue has also impacted significantly on funds that are part of the country’s well-developed pooled pensions system.
As a result there was intense discussion in the first half of this year between Austrian companies complaining that the pooled pension funds were delivering poor performance and threatening to go it alone.
These companies had also started to form into pressure groups that were shining an uncomfortable light on the country’s pensions system.
From the pooled funds side, representatives argued that the markets were particularly difficult. They also faced the prospect that if they did not make the 1.5% guarantee, then their banking and insurance parents would have to make up for the shortfall in pensions money, which would have been extremely costly.
All parties managed to avoid this confrontation by introducing an innovative reform, which guarantees that pensions paid out will have earned the minimum return. The reform then passed into Austrian law.
With these issues in mind, Reiter says he is somewhat positively surprised at figures released by the Austrian pension fund association showing the equity figures are still at around the 30% mark.
According to official figures from the association, pension fund (pensionskassen) assets amounted to E8.3bn at the end of 2002, while total insurance assets came out at E40.7bn. The equity allocation figures for Austrian pension funds represented 30%, which is around 10% lower than its peak in 2000, while life insurance equity portions came out around 5-7% with more than 75% in bonds, 4.4% in real estate and the remainder in other asset classes.
Monika Stur, head of Austria at UBS Global Asset Management says that much of the equity quota is now being outsourced by Austrian funds, as are more specialist bond briefs, with the accent on better returns: “Institutional investors in Austria outsource well-defined regional equity mandates and special strategies in the bond market such as high yield corporate bond funds, corporate bonds, emerging markets bonds and convertible bonds”.
M&G as a leading UK manager for corporate bonds could benefit from this structural change in the Austrian market. William Nott, chief executive officer of M&G International Investments comments: “Corporate bonds continue to draw benefit from a number of supportive factors. Low inflation and low interest rates provide an ideal macroeconomic backdrop for bonds, and with companies increasingly focussing their efforts on debt reduction and balance sheet repair, corporate bonds represent a sound choice.”
Karola Gröger, director of sales for M&G in Austria adds: “I am convinced that corporate bonds are already an important means to diversify efficiently the bond portfolio of institutionals like pension funds, insurance companies or corporates in Austria. Corporate bonds will become an integral part of the bond allocation of Austrian institutional investors.”
This search for return and diversification has also led Austrian pension plans into the world of absolute return strategies. Reiter notes that pension funds appear to be reconsidering their approach to alternatives, although they are looking more at areas such as managed futures rather than hedge funds, which can be tricky to invest in under Austrian law.
“I’m seeing Austrian funds looking for interesting products such as currency overlay and/or derivatives, or very good active managers reflecting a move towards specialist rather than balanced houses.”
Alternative assets and absolute return strategies will undoubtedly play a larger role in the future and are seen as one way out of the dilemma of falling equity markets and rising risks on the bond market. The educational process has just started.
Independent from short or mid-term market developments, Austrian Spezialfonds will also gradually move part of their assets invested in bond funds into more innovative fixed income strategies.
The big question still remains if the tide has already turned again and markets recover – which would not necessarily benefit absolute return strategies. The temptation to go for absolute return is there. But institutions don’t want to get caught on the wrong foot again.
To this end, property is being touted as a surer ‘alternative’ asset class.
Patrik Röeder, managing director of Henderson Global Investors in Germany – a leading players in the Austrian market also, says that recent ALM studies have shown that the allocation to property should be around 5-10 % of pension fund assets and that stable income from property investments could well contribute to more consistent returns for Austrian funds.
Such advice may come as a result of a growing advisory market in Austria - albeit from a small base.
While consultants haven’t played a major role to date, it is expected that on the back of this year’s pensions problems there will be an increased push for pensions transparency and accountability by Austrian corporations.
On top of that, the manager selection process in Austria has evolved over the years. Philipp Baar-Baarenfels from Baring Asset Management observes: “We receive more questionnaires today compared to previous years. The selection process became more objective, transparent and professional”.
What is clear is that pressure within Austria is opening it up to foreign managers with wider product ranges and a tempting array of return possibilities.
Looking ahead, Austria’s niche players will need to stay focused to compete against global asset managers pushing down management fees to gain market share.