Employees of Austrian companies have two routes into defined contribution (DC) schemes: through an insurance contract or through a pensions fund contract.
Before the introduction of the Pensionskassen system in 1990, the insurance route was the only one open to an employee. The employer takes out what is effectively a reinsurance policy on the funding of the pension. For employers it is a safe method of guaranteeing contributions. However, the tax advantages are small with only E300 per employee per year tax-deductible.
The Pensionskassen system, which offers an DC option with tax deductibility for up to 10% of an employees’ salary, is much more attractive to employers, and is now the preferred choice of DC scheme.
If a company wants to set up a DC scheme within the Pensionskassen system it must draw up two contracts; one with the pension fund company (either multi- or single employer) and one with the employees, or works council, if there is one.
But an employer with less than 1,000 employees cannot set up a single employer arrangement. This contract, the Betriebsvereinbarung, sets the level of contributions, among other things. If a company chooses the DC option, it can contribute up to 10% of an employee’s salary. There is no minimum contribution for employers, and an employee cannot contribute more than the employer. Employers cannot reclaim any of their contributions from the fund at a later stage nor can their creditors.
Within a pensionskasse DC plan, each employee has an individual account and receives an annual statement of how much has been paid in. At the end of employment, contributions are computed and converted into an annuity. Lump sum payments are available only in two situations – when the amount of money contributed is not more than E9,000 and when someone with an entitlement to a widow’s pension remarries.
Companies are free to design their own schemes to include specified groups of workers, and can set entry according to age or length of service. Companies can also choose their own risk/return investment profiles within the investment limits prescribed by law. These have been slowly but progressively loosened. Notably, the limit on equities has been relaxed from 30% to 50%.
Most companies in Austria have fewer than 1,000 employees and will therefore have to choose one of the the seven multi-employer funds to manage their DC scheme. These funds provide a range of mandates or investment and risk units (IRUs) which have different investment and actuarial characteristics. Many of these IRUs are reserved for large individual companies, but there are also a number of open IRUs that offer pooled mandates to multiple companies.
Vereinigte Pensionskasse (VPK) operates 25 closed IRUs and six open IRUs. These offer different risk/ return and actuarial profiles. For example, for one unit, an investment return of 5% at least is required to guarantee a flat pension payment. For another an investment return of 3.5% is required
Wolfgang Pinner, chief investment officer of VPK, explains: “The single mandate IRUs are managed according to the needs of the company and what has been established from the beginning. This usually starts with an asset liability study. But the asset allocation does not only depend on the investments. It also depends on the actuarial characteristics of the scheme. So you cannot put the company into one IRU or another only on the basis of the investment strategy.”
Individual investment choice is not an option in any of the pension funds. Christian Boehm, chief executive officer of the APK multi employer scheme, says that historically there has been little appetite for individual investment choice. “In Austria, we do not really have an equity culture. I think that less than 5% of our employees have equities in their personal portfolio. What we have at the moment is a system where the companies discuss with the employees through works councils whether they want more or less risk/returns.”
This collective approach to investment creates some problems. Thomas Biedermann, member of the board of the Victoria Volksbanken multi-employer fund, says there is an inevitable conflict of interests between young and old. “All employees young and old are in one investment risk community and they share one asset allocation basically.
“If you take a big multinational company with an average age of 30, the majority of people will have to work for a long time before they retire. So, for them a riskier investment approach would be appropriate. Then there are a few aged 55 to 60 years old. From a liabilities point of view, they probably could not afford to be invested 50% in equities. But what do you do? For one 55 year-old there are maybe 10 30-year-olds.”
“That is a situation that is not ideal,”he says. “The best thing would be to allow people to choose their risk profile for themselves. Pension funds themselves were very much pushing in that direction. They wanted more freedom for the individual when choosing the asset allocation for their pension funds. But the authorities said no, it’s a collective approach and there has to be a single investment strategy for at least 1,000 people. I’m not sure whether that will change in the foreseeable future.”
Some are hopeful. Helmut Kapl, the former chief executive office of the APK multi-employer fund and one of the architects of the present Pensionskassen system, suggests that some form of individual investment choice may be on the horizon. “In the last few years it has been constantly under discussion. It may be that the legislature will open fund types that offer two or three different investment strategies, varying from conservative to aggressive.”
However, he acknowledges that recent market volatility has made the government much more wary of investor choice. The idea may have to wait for the markets to settle down before it is seriously considered again.