As in other European countries, the Austrian government is cutting state liabilities and encouraging private provision. The new coalition elected last year has launched a pension reform programme Pensionskonzept 2000 and is discussing other changes to boost third-pillar contributions. Many of the new initiatives have received a lukewarm reception but consultants and fund managers are unanimous that the government is taking reform more seriously than its predecessor.
Of the three pillars – state, occupational and private provision – state benefits constitute around 90% of all payments, so reform is particularly pressing. Austria is starting from scratch though. Until 10 years ago, occupational schemes were run on a book reserve basis. According to the Fachverband der Pensionkassen, the organisation overseeing Austria’s Pensionkassen, tax provisions to those reserves were only about 50% deductible, unfavourable enough to kill the occupational sector. New tax, labour and funding laws have breathed life into pillar two and most multinational and local companies now belong to either a single or multi-employer Pensionkassen.
Fritz Janda, head of the Fachverband, is lobbying the government and pushing second pillar schemes. Austria has seven multi-employer and 11 single company schemes. In total, Pensionkassen have 300,000 members and a total of Sch110bn (e8bn) under management yet only 11% of the private sector belong to them. Janda says many companies have joined the multi-employer funds and volumes should be up by 20% this year, a trend he believes will continue. “We started 10 years ago and more and more companies now realise the need to do something for their workers and their pensions,” he says.
One of the most high-profile changes in the past year is Bank Austria moving into the country’s second largest multi-employment Pensionskasse, Vereinigte, which it owns jointly with Die Erste Bank and insurance company Wiener Staedtische Vesicherung. Austria’s civil service set up the only new single pensionskasse in the last year. Bundes Pensionkasse launched at the beginning of the year and represents over 30,000 members.
At present companies employing less than 1,000 are prevented from setting up their own fund and, given the size of the Austrian market, few qualify. Instead, many are joining multi-employer funds and according to Waltraud Viehboeck, a senior consultant at Aon Jauch & Hubener, those setting up or joining schemes are without exception opting for defined contribution. Those with existing defined benefit schemes are considering the switch to DC.
Austria’s government has helped occupational pensions by relaxing investing rules and as of 1 August Pensionskassen can invest 50% in equities, up from a previous allowance of 40%. Insurance companies are more restricted with a limit of 30%. Pensionkassen will use the extra flexibility and this will enhance competition between the two. Companies wanting to provide pensions can either invest in a fund or draw up a reinsurance contract which can only be done on a book reserve basis. “Pension funds will use this increase as a tool to promote themselves,” says Waltraud Viehboeck, a senior consultant with Aon Jauch & Hubener. In practice, the competition will be less than on paper as six of Austria’s seven multi-employment funds have close ties with insurance companies. APK, the E1.45bn fund for privatised state industries is the only one without an alliance.
With regard to state provision the government is reining in its liabilities by upping the age for early retirement. Official retirement stays the same at 65 for men and 60 for women. Previously early retirement was 60 and 55 but over the next 18 months this is set to rise incrementally to 61.5 years for men and 56.5 for women, before which Austrians are unable to draw a state pension. It has also raised the penalty for those opting to retire early. Under discussion are eligibility criteria – Austrians have to contribute for at least 15 years to qualify for a state pension and the government is considering upping this to 18.
According to Klaus Kuhnen, an actuarial consultant at Arithmetica, the government is pushing third pillar contributions and at the beginning of the year it launched Pensions Investmentfonds and Pensions-Zusatzversicherungen or supplementary pensions insurance. Kuhnen says interest has been somewhat lukewarm. The two funds are now income and capital gains tax exempt but this has done little to attract funds. One of the main problems is that funds are locked in until retirement and retirees are unable to opt for a lump sum, only an annuity.
Kuhnen says to realise the capital from the fund you have to pay back all dividends and bonuses received. “It’s in order to make self-investing for real pensions payment more attractive,” he says. Kuhnen says the investmentfonds aren’t really used due to the prolonged period before receiving benefits and because people are unable to realise the assets without paying quite a high penalty. “Most of the people, if they want to invest in third pillar, move towards direct investment in other funds not pension investmentfonds,” he says. Austrians prefer other funds without the bonuses and tax exemptions simply because they can repatriate capital whenever they want. There are rumours the government is looking at a more attractive alternative to the pension-investment fond but as yet details are sketchy.
Investors can also set up a Pensions Vorsorge Versicherung, a newly created life insurance contract. The government contributes up to E1,000 per year to encourage investment but again the policyholder is only able to claim an annuity rather than a lump sum and this has made them deeply unpopular. If a policyholder dies a year after retirement payouts total one year’s benefit, final. As yet the government has made no sign of changing them.
Of Austria’s top pension funds OPEC is the largest with assets of E4.4bn. The five largest are multi-employer funds and BMW’s E530m is the largest single company fund, followed by Siemens on E513m and IBM on E500m. As in Germany the consulting industry remains relatively small with the largest company being Arithmetica with seventeen employees followed by Aon and Dr W Ettl, both employing 10.