Laying the foundations
At the end of last year, an era in Austria pensions came to end, as Helmut Kapl retired as head of the APK-Pensionskasse group he had done so much to build up. But, he is not going quietly into the twilight of retirement. He has a number of irons in the fire he intends to hold onto and perhaps use to stir things up.
In the course of last year, as part of the discussions about the reform of Austria’s pay-as-you-go (PAYG) first pillar pension system, he decided to make his own contribution. This he did through the Hayek Institute, the economic research forum in Vienna, which resulted in a study that could prove to be very influential – as have other pensions intitiatives he has made during his career.
“What I proposed was that employees be given the right to opt out with their own contribution, into a funded pension system.” Their entitlement to the state benefits under the PAYG systems would decline as a consequence. “I have made a number of presentations to political figures, such as our ministers of finance and social affairs. They were very interested, and already there are signs they may have taken some of this thinking on board.”
The employers associations support such an approach and a survey carried out by the University of Innsbruck showed that some 75% of the Austrian public are in favour of such a change, says Kapl. “Such a level of support makes politicians very interested!”
The change would work through a system of ‘transition bonds’ offered to pension funds, which would be state guaranteed.
He believes that it is very appropriate that he and APK, the largest of the country’s six multi-employer funds, take a leading role in this debate on pensions. “APK was the pioneer of pension funds in Austria. We started in 1989, in anticipation of the new occupational pension fund act coming into effect in 1990.” Up to then, the only provision was the traditional defined benefit through a book reserve approach as part of collective agreements.
“Before then, I had been the finance director of Austria’s biggest industrial group and we wanted to avoid building up more hidden liabilities for pensions on our balance sheets. We wanted to have an externally funded system.” This was the Oesterreichische Industrie Holding AG (OIAG), the holding company of the nationalised industries, comprising over 700 different companies.
Austrian companies were handicapped by the reserving internally of pensions and termination liabilities, he says. Now both can be externally funded. That this has come about is in no small measure due to Kapl’s efforts. “For some companies, their existing liabilities for pensions and termination payments are equivalent to the value of their equity. The ratio of liabilities-to-equity of Austrian companies are much higher than in other countries. So, it is very important for these to be removed from the balance sheet. We have been pushing very hard for this.”
The background to APK’s formation was very much these state owned companies. In the mid-80s, these companies were in poor financial condition, he says, but at that stage, tax payers were no longer willing to subsidise them. “In 1986, I made a proposal to the government for privatisation of these companies and within this context I proposed the external funding of the pensions reserves.” Since the idea at the time was to go to New York for floatation of some of the companies, this wouldn’t have been possible with pensions liabilities still on the balance sheets.
Then in 1987, there was a virtual collapse in the value of these companies, driving them almost to bankruptcy, when they had even to disregard all the pensions rights accrued. “The government then accepted my proposals and went for external funding. I was given the mandate within the group of building up a pension system.” There were moves too on the taxation side which fitted in with the development on pensions legislation. “Interestingly, it was the social democrats who had to undertake privatisation and open the door to pension funds at the same time,” says Kapl.
Also, he readily acknowledges the influence on his thinking coming from his contact with George Russell, head of the international consultants Frank Russell. This was as a result of contact a colleague made when in the US attending board meetings of a company in the group, where Russell was also on the board. “I was then sent to the US to meet up with George Russell.” From this came the concept of external management, selecting from and monitoring the best managers worldwide. “Russell are our role model.” 1 to this philosophy, APK has built up a battery of 25 managers worldwide currently. “We control these through our very good monitoring system.”
So, in 1989 when it started, APK had only one shareholder and client, the OIAG. “The idea I had was that each client should become a shareholder in APK, but only in proportion to the number of beneficiaries.” But after a couple of years, with the privatisation of different parts of the group, by trade sale or flotation, this had to be modified. “We did not get all of these as clients at APK automatically, we had to acquire them. Our biggest client is now OMV, which joined in 1994.” APK is the largest fund in Austria, with assets of E1.6bn and over 70,000 beneficiaries.
Now the company has over a100 shareholders, but a greater number of clients, as not all clients want to become shareholders. Kapl envisages that the next step could be to float on the stock exchange, when they next need to raise capital. “We are very open about such things,” he maintains. “So far our shareholders want us to make money just for them and give us what we need.”
He thinks the principle of being owned by clients is a very good one. “Because we are independent we have been able to add an extra 1 percentage of performance each year compared to the average.” Since then, the group has launched a life insurance company, which after the third life directive was able to offer unit-linked funds for pensions contributions at a third pillar level for individuals. “These products were unique in Austria at that time.”
The new pensions system is also particularly useful for the funding of the ‘severance payments’ system. “Here, when a contract of employment is ended by the employer, the employee has then the right to a lump sum payment, and similarly on retirement a lump sum equal normally to one year’s earnings, after 25 years.” But short term contract employees, such as those in the tourism-based industries were getting nothing from these provisions, he points out, as they needed to stay at least three years in a job for their rights to vest.
The new system, which will affect all new contracts of labour, when the law comes into effect will require that 1.53% of payroll is to be paid for these termination payments into appropriate institutions. “There is a struggle in the market as to who might be able to manage the ATS15bn each year in contributions country-wide,” he points out “We think the pensions funds are most in favour, then the insurance companies and finally the investment companies.” The full details of how the new system will work depends on the detailed legislation due later this year. One aspect, Kapl said he is particularly pleased about as he brought it into the discussions was that the new rules would apply to employers in smaller companies that had previously been excluded.
Another recent development is the agreement to allow for external funding of the existing termination rights, but this can only be done through an insurance company. “In fact, our insurance company’s products are particularly well suited to meet these needs through their unit-linked characteristics, since there is no element of hidden reserves in the contracts, as there are with traditional products.” A feature of this external funding is that a proportion can be in the employers’ own shares, which Kapl regards as sensible since under the previous system these termination payments were accrued for internally- up to a half within reserves and the balance matched by securities. “So up to 10 to 20% can be in the employers’ shares.”
Looking back, he thinks the key event was ability to develop a new model of pension provision for Austria. “The defined contribution approach was a revolution here.” He pays tribute to the part IBM Austria played, as the biggest fund in the country before being overtaken by APK. “Their finance director pushed for change from the multinational side.” Once the banks started their own multi-employer pension funds the revolution was well underway. “But a number of them failed so it was very important that some of the multi-employer and a number of the new single employer plans, such as BMW, started. It showed the ideas were prospering.”
In 1996, Kapl says the Austrian pensions funds managed to get an ammendment so that the employers could join the these pension plans. “Up to then, they had been excluded.”
The next issue that emerged in the public discussion of pensions was that of the politicians, who could obtain high pensions after just four years as a member of parliament. “The official state auditor examined and the idea came of providing a DC system for politicians – the result as that this became the practice for new members. This means that they are part of the pension system.” Kapl has seen the concept of external funding spread to public employees both at federal and local level. “So I see this as an ongoing process.” While at the other end of the spectrum, many smaller employers are becoming involved with pension provision through externally funded DC plans.
But he attributes the main spur for new ideas came from the problems he confronted in the accounting department at OIAG. “I saw all these problems arising out of the system. So I thought it was necessary to try to reform things by asking ‘What did Austria need?’” A great advantage his background has given him is contacts in the administration, enabling him to bridge the world of government and of industry.
Even now the latest changes on the termination contracts, these are necessary for the companies and good for shareholders, but it will also be good, he hopes for APK, which has a 25% share of its market. “We have managed to retain this position for a number of years and if we stick to our approach of managing investments we will succeed even more. Our approach has been broader than just pensions and we have seen other products. A step in future might be to form its own KAG, but that would require much deliberation.”
Since APK’s main clients are multinationals, Kapl sees a need to tackle the ‘European pensions passport’ as well as the issues arising from greater internationalisation. “We have asked the German supervisors if we are able to offer our services in Germany. They refused, as there was no directive permitting this. So we are very limited since the cross-border competition is excluded, but we hope to be pioneers here. And I hope my colleagues will continue to press for this.” APK has European clients that it would like to help. “For example, we can build funds for them they could use in other countries such as the UK. Things would be much clearer if there were a directive. The Germans say it will be possible in 2004!”
He puts his overt contribution in to a different perspective: “My contribution has been putting together a book of essays, mainly contributed by officials in different departments, which came out around 1990. Then I wrote a book looking at the international scene and comparing the different systems, in Europe and the US, at the first, second and third pillar. It covered tax issues and an examination of matter at EU level, as to what is needed for a European passport.”
For Kapl, retirement is not a disappearing trick. He has many hobbies, including sailing and piloting light aircraft. “I am very interested in history and art history, but I hope to make progress on a number of projects, including my books. I have a little office in the Vienna Woods, so I can choose what I would like do.”
One project harkens back to his corporate days. “This is a project to develop tools for finance directors to help companies to steer in respect of duration, to minimize the equity and the bond costs. In Europe we rely on US tools from the rating agencies, what we need to do is to make a combination between the equity side and the liability side. There is a lack of tools here and I have been asked to take this one on – they say ‘I have the broad over view’.” How right they are.