Austria is witnessing more and more investment in equities and alternative investments as opposed to fixed income although – unlike in neighbouring countries – this is not due to the adoption of an equity culture. Rather it’s low interest rates and poor returns on fixed income that are driving the trend. Rates have risen marginally of late but are still around 5.5%. Austrian institutions have traditionally followed a conservative approach, with many having a significant bond portfolios and the fall in returns has naturally led to the shift.
Asset management in Austria grew in the 12 months to June to E94bn, up from E82bn over the same period a year previously. Both retail and institutional investors are moving into fund of funds with the market now at around E6bn and institutional investors are showing interest in alternative investments. “Alternative investment is going more and more mainstream,” says Georg Klein, head of the association of foreign funds in Austria, citing Deutsche Bank’s decision to offer hedge funds to retail investors.
Institutional and retail investors have enjoyed handsome returns from stock markets in the past few years but realise such growth is unsustainable. They have also seen significant drawdowns in their stock portfolios so diversification is a sensible solution. According to Helmuth Frey, chief executive of Invesco’s Sch30bn (e2.2bn) operation in Austria, the emphasis remains on domestic funds but investment in offshore sales is also increasing.
There remains a limit to the amount funds can invest in equities since pension funds are subject by law to return a fixed amount per year. “They are reluctant to invest aggressively because they have to meet the minimum interest,” says Kurt Bednar, co-owner of local consultant Constantia. Although the level is relatively low, currently around 2–3%, it is sufficient to restrict ambitious investment strategies.
Foreign managers doing significant business in Austria include many of the German managers, Invesco, Fidelity, Flemings and Paribas. Klein says the Austrian market has reached sufficient size that many of the foreign asset management companies are now able to justify setting up a local office. Fidelity, for example, set up a sales office in February but some managers prefer to run their operations from Frankfurt.
There have been concerns recently that the government would introduce capital gains tax on private investors but Austria’s new coalition postponed the move. It is also discussing the taxation of foreign-owned assets in Austria and of private trusts. It is understood the government is considering placing a 25% withholding tax on foreign-held assets, something that would have serious implications. “This would definitely change asset management industry in Austria,” says Klein. Foreigners hold Sch300bn with Austrian banks mainly because there is no tax deducted at source. Klein says the introduction of a withholding tax could quite easily lead foreign asset owners to switch to Switzerland, Liechtenstein or any other country without such a tax. Negotiations continue, but new legislation could emerge before the end of the year.
Austria has seven multi-employer Pensionskassen and 11 single company schemes with assets totalling Sch110bn. According to a report by Constantia and William M Mercer, of the multi funds APK, Vereinigte and OPAG have grown the fastest and Vereinigte has overtaken APK as the largest multi-employer fund. Vereinigte received a boost this year when Bank Austria, the county’s largest bank and a shareholder in the fund, switched from a defined benefit scheme to defined contribution and decided to allocate Sch7bn to the fund. Most of the assets and liabilities will transfer this year with a smaller tranche next year.
Austria has had socialist governments for the past 30 years but the new government is a liberal/conservative coalition and Klein is convinced it seems to be tackling problems. “It seems now that someone is willing to make changes and I haven’t got this feeling for many years here,” he says. Since August Pensionskassen have had the restriction on equity investment raised from 40% to 50%. “More and more funds will go up to a higher equity level,” says Wolfgang Ettl, head of Dr W Ettl consultants. Constantia, Mercer’s partner in Austria, has recently surveyed the balance sheets for the country’s seven multi-employer funds. One of the findings is that none of the funds has reached the 40% equity level let alone 50%. Constantia’s report doesn’t cover the 11 single company schemes and Bednar says they tend to be extremely secretive about their investment strategies.
There’s a radical change around the corner if the government decides to proceed with changes to the country’s obligatory termination indemnities. Employees are entitled to a year’s salary after they have worked for 25 years, even if they retire early. The system is defined benefit, according to a worker’s final salary and the lump sum is subject to 6% tax. Austria’s trades unions are discussing the matter with the government and there is talk of converting it into a defined contribution system. Ettl says the two sides are in agreement and likely to deliver by the end of the year at the earliest and certainly by next year depending on whether old contracts are included in the transfer.
Up to E20bn may transfer but the two sides have yet to thrash out the minutiae. Still undecided is whether to transfer only new contracts or include existing ones. Transfers will not be obligatory but according to Ettl, whatever the volume transferred, most of the assets will go to pension funds opposed to insurers. Larger solvent companies and those with a lot of capital-banks, oil companies and electronics companies-are likely to make the switch first.
Last year APK accused Vereinigte and Raiffeisen-owned OPAG of price fixing and threatened to take the two to court. APK stands out from the other multi-employer funds in that it is more of a co-operative with over 80 stockholders. The other six tend to be associated with banks and insurance companies. Despite the threat, APK’s board decided not to pursue legal action and according to Ettl, the two sides reached an informal, out-of-court settlement.
Pension funds’ market share has increased as most of the new schemes are defined contribution. Total assets have doubled in the past three years and the total occupational market is set to grow considerably over the next three to five years. “Pretty much everyone realises they cannot rely too much on the state pension system,” says Klein.
A lot of the recent growth has come from transfers from book reserve to external funds but Bednar says this is slowing down. “As it turns out the advantages of this transfer process are not as large as expected. Many financial officers in international companies aren’t satisfied with the investment return, they expect two digit returns and the figures are lower than that,” he says. Many of the finance officers are unused to working with investment guidelines along the lines of the Austrian system. Companies are also hesitant as once they have shifted assets off their books into a pension fund, although it’s possible to change funds, it’s impossible to revert to the book reserve system.
Although Austrian asset management has changed in the past year and the government is pushing second and third pillar pensions, the market remains relatively conservative and further change will take time. “The market is very immature though and the people that are insured in the funds are rather old. We have quite a lot of people that have already retired and that means you cannot really go into equities as much as you want because from an asset liability point of view you have to have secure assets to fulfil your liabilities,” says Bednar.