There are a handful of markets in Europe where the reverie far exceeds the reality and Austria is one of these. Last year’s pension fund law simplifying the process for companies to implement single employer pension fund arrangements sparked hopes of a pension asset explosion and should have catapulted Austria into the pensions gold-mine category – not as high priority to international asset managers as Italy perhaps, but of solid interest to them all the same.
Austrian companies opting out of book reserves and either taking out insurance contracts, joining betrieb-liche pensionskassen (single employer schemes) or überbetriebliche pensionskassen (multi-employer schemes) is taking longer than expected, however.
The deadline for the implementation of funded arrangements has recently been extended to 2009 which means companies are, not surprisingly, moving more slowly to set up their arrangements. This also means that the limited levels of existing investible pensions assets aren’t really shifting much either.
Austria’s E5.2bn pension fund industry is controlled by a handful of domestic banks, not an unusual situation faced by international asset managers looking to crack into a new market. There are currently seven überbetriebliche PKs operating within the market, licensed to run multiple company pension funds, three of which are foreign-owned: Allianz; BVP – owned largely by Creditanstalt and Erste Bank; ÖPAG – run by the Raifeissen Group; Vereinigte – Bank Austria’s operation; Victoria - whose key player is Volksbanken; Winterthur and APK. Out of all these ÖPAG, APK and Vereinigte are by far the biggest. Many see APK as the only independently minded of these operations as with its 100 plus shareholders, it is not linked to any bank in particular, indicating a fairer RFP process. The multi-employer PKs have a tendency to award mandates to their own Kags and this has been a great bone of contention within the Austrian asset management scene. “APK have no need to please any of the banks,” says consultant Paul Röttig of Hewitt Associates-owned Röttig & Rutkowski in Vienna. “The likes of VPK are more obliged to choose.”
“In the case of ÖPAG we get a lot of the money ,” says Hans Rapatz, head of institutional sales at Raifeissen in Vienna. “In other cases of course, they share with other companies, maybe CapitalInvest.”
Between Raiffeisen, Bank Austria and Erste Bank over 70% of this market place is tied up. Out of these three players, Raifeissen in particular stands out. This insurance company-cum-pensionskasse-cum fund manager (this multi level structure is by no means unique in the Austrian market) runs ATS200bn (E14.5bn) in mutual fund business giving it a market share of 22%. Capital Invest is not far behind with ATS150bn in its funds giving it a market share of 19%. Raifeissen’s Kag, however manages assets for six out of the 11 betriebliche PKs and four out of the seven überbetriebliche PKs giving it a staggering 45% share of the entire Austrian pension fund market, as of March 1999.
The concentration of the market in the hands of so few players has recently led the only so-called ‘independent’ PK to taking two of the offending players to court for price fixing in order to hold on to these assets. APK has accused ÖPAG and Vereinigte of retendering for a recent mandate as a combined force at a lower price to secure the business, after the first bids were turned down, and after all of the other tenders had been filed.
“They said they would offer their services as a combined provider,” explains consultant Wolfgang Ettl in Vienna. “So APK are saying it is illegal to tender for a second time and to combine services at the end of the tendering process.” ÖPAG and Vereinigte are denying any impropriety, though Rapatz at Raifeissen does admit that often mandates are shared between the two or three larger providers for reasons other than risk diversification or performance. “Sometimes what also happens with very large clients, they give the money to different PKs – part to ÖPAG and part to VPK. They want to diversify the risk, but also for political reasons.”
The influence of these providers is not to be underestimated, according to many in the industry. Some of the country’s largest companies are said to have been pressurised to outsource their pensions assets to multi-employer schemes instead of setting up their own. In the banks’ favour is the cost advantage- multi employer schemes are more cost effective and in the absence of any performance measurement process in Austria, the selection of pension fund managers, therefore pretty much boils down to a question of price.
“These PKs and the lobbying and influence groups behind them, don’t want companies to have their own funds,” explains Markus Zeilinger at Winterthur, which has ATS600m in PK assets under management. “The banks don’t want them to give the money away to someone else.”
There are currently only 11 single employer pension funds in Austria and interestingly, the majority of these are international companies - BMW, IBM, Porsche, Philips, Shell, Siemens and Unilever. Two notable domestic organisations will be joining this predominantly foreign grouping by the end of this year: the Austrian Chamber of Commerce is in the process of establishing a PK and the Bundes PK will be up and running at the end of 1999, catering for government employees.
Increased transparency is being steadily introduced into the Austrian asset management scene which should bode well for the future however. Following a meeting of the counsel of multi-employer PKs who decided a standard form of performance measurement was necessary, controlled by the Austrian Kontrolbank, the indications are that over the next few years track records should dictate more than costs. To compound this move, the post-euro impact on pension funds’ equity allocations has place increased pressure on the Kags to display impressive track records against the international competition. Pension funds are now allowed to invest up to 40% of their portfolio in equities, with a maximum 25% exposure to international markets. Also, 40% can be invested in fixed interest, with a 20% ceiling on foreign investing, and 20% in property of which half can be invested outside of the home market.
The signs are already positive for international players when looking at Austria’s mutual fund market, which has been its biggest success story by far. Over the past year alone, the market has seen around 30% growth with assets of around ATS400bn in Austrian funds, as well as a significant increase in investment in foreign funds. The foreign interest in Austria is further strengthened by the fact that out of the 1,200 plus mutual funds registered in Austria, around 600 of these are run by non-domestic providers. And according to Raifeissen figures, out of the E5.2bn in invested pension assets, E4.4bn of this has been invested via mutual funds.
Some international managers have already found favour with the PKs by offering their international equity expertise. The Porsche PK recently hired ABN AMRO, and APK has recently awarded mandates to Flemings and Schroders, according to Winterthur. And Raifeissen has taken the decision to outsource its entire international equity business to US player Capital International. “It helps with risk diversification,” says Rapatz.
As far as Capital Invest is concerned, it is a simple question of economies of scale, explains Helmut Sobotka, the chairman of Bank Austria/Creditanstalt’s merged fund operation. “The big difference between management in London and in Vienna is the size. You won’t find 300 or 500 analysts which the Merrill Lynches or Morgan Stanleys have – this is not possible in Austria so that means in terms of research we are reliant on foreign sources.
“At the end of the day the only thing that is important is the performance and this is the target for all of us.”
The market for independent investment consultancy in Austria remains limited, as the advisory function is primarily provided by the banks and insurance companies. One of the smallest players, Winterthur has found a niche in this area and is in fact the leading organisation in Austria for advising and implementing betrieb-liche PKs on behalf of companies, its most recent addition being AT&T’s Austrian scheme.
Consequently, international players have found little aid from advisers in winning the hearts and minds of Austria’s pension fund community. And according to Waltraud Viehbock at global consultancy player Aon in Vienna, the status quo does not look likely to change. “Investors are used to being sold to by advisers instead of being given advice,” she points out. Not surprisingly in such a market, independent advice is not always independent and it is not unheard of for fund managers to pay greater commission levels to ensure a favourable response from their advisers. “So-called independent advice is not always independent as they are always thinking where there money is coming from.”
While the typical Anglo Saxon approach may not flourish in such conditions, at least the likes of Frank Russell who has in fact been marketing its multi manager product in the market, has a higher chance of being well received.
However in an interesting move from a domestic player, APK is considering taking ÖPAG to court in a separate matter of offering consultancy services where it is putting itself forward in beauty parades, claiming a clear breach of any Chinese walls, which the Austrian asset management community will unofficially admit do not exist anyway. “You cannot be part of the tendering on one hand, and be a consultant on the other for the tendering,” says Mercer’s Ettl. “That is clearly illegal, and this will be a much more important case.”