The fund of Verbund is certainly testing the structure of the Austrian pensions industry. In November, it announced that it was no longer going to be a single company scheme, but was going to join the ranks of those in multi-employer schemes, nominating one of the largest ÖPAG, as its preferred provider.
The history of Verbund, the country’s largest electricity supplier, is almost a text book case study of Austria’s pension’s development over the past decade. As finance director, Franz Paulus in Vienna explains: “The Verbund pension fund was established in 1996, when the decision was taken to move from the balance sheet reserve system into a separate fund.” This followed an earlier move to change the basis of the pensions arrangements from defined benefit (DB) to defined contribution (DC), a change that came into effect for new contributions in 1994.
The move to establish a pension fund was seen as logical on all sides, including the unions, which supported the moves, says Paulus. In fact, the scheme started off on a both a DB and DC basis. “We started from a low base with contributions of around ATS50m (e3.6m).”
Then in 1998, the company decided to transfer the pensions reserves from the balance sheet to the new pension fund. The assets involved came to ATS3bn and the scheme at this point covered 4,000 employees. “With such a big step, we first undertook an asset liability study which was carried out for us by Frank Russell. From this we developed our strategic asset allocation and then looked for managers externally”, says Paulus. “We were helped in this by the Swiss consultants Complementa.” He recalls that some 40 managers wanted to manage the assets, and with the help of the consultants, the fund decided on a Dutch, a Swiss, a German and two Austrian managers.
“We started with balanced mandates amounting to ATS3.2bn. All had the same strategic asset allocation with benchmarks for each asset class. The decision was to go for 65 to 70% in euro bonds, with 30% in equities, split 20% in Europe and 10% the rest of the world.” The fund had both a DB and DC section. He explains the reasoning behind such a high exposure to bonds and in particular euro bonds, was that the mandates were starting in 1999 and coincided with the introduction of the euro. “There was a great uncertainty at the time as to what was going to happen to the euro. We did not want any additional risk with the euro in the portfolio.” But at the end of 1999, the fund was comfortable enough with the new scenario to increase the equity portfolio to 35%.
Then came last year’s bombshell: “Our group supervisory board decided that Verbund should concentrate its activities on its core business.” The running of a pension fund was not seen as part of this, so the pensions team was given the task of implementing the decision, including potentially their own demise.
“We then had to decide how to go about this – would we outsource for all administration aspects or for all financial aspects too – including liabilities? We reckoned that probably the best thing to do was to merge with another pension fund.”
From a study it undertook, Verbund decided that there were more benefits coming from a merger than just an outsourcing. “If you outsource, you still have to have a pension function in the future which has to do everything relating to pension matters. But if you merge, everything is outsourced.”
Well, practically everything. As Paulus points out, another plus point for the merger in his view was that it did enable the plan sponsor to still retain control over certain key areas. “We only wanted to be responsible for everything concerned with asset allocation and with selecting the asset managers.”
So, the fund started on the search trail once more, this time for a multi-employer fund partner, again with Complementa as advisers and using additionally the services of an auditing firm. “In Austria, merger is only allowed with a non-company-owned pension fund, one of the multi-employer arrangements.” Of the seven of these active in the market, four said they were interested in having Verbund as a client.
“After all the due diligence, process and everything that was necessary, the Verbund supervisory board decided that ÖPAG is the multi-employer fund they will go with.” Now all the agreements and arrangements are being put in hand and it is hoped everything will be finalised by the end of February.”
For Paulus, an extremely important aspect is that the arrangements with the existing managers stay in place. “Our view of the relationship we have with our managers, is that we want to keep the arrangements in hand for three years – as this strikes us a fair period in which to judge them.” But at some point, this will be on the agenda this year and discussions will be held with with ÖPAG about this.
The review could start with looking at the balanced mandate structure to see if the specialist route is more appropriate. “This is not yet decided,” he stresses. “First we have to do everything about changing over the administration before we get around to looking at the asset manager question.”
For the existing pension fund staff, he says that once the transfer is in place, they will withdraw from the fund and be assigned to other duties within Verbund, but he reckons he will be acting as a “consultant”to the new arrangement for the rest of 2002.
Paulus can see the logic of opting out of all the many activities involved with running a pension fund, with the meetings, compliance, information supply and so on. “A lot of work is required under the pension law.” He points to the fact that Verbund is slimming down, five years ago it had 4,500 employees, now this is down to 3,000. “Our aim is to have a professional administration – so it makes sense to go to ÖPAG since they provide administration for 60,000 members.” While he says it is certainly more cost effective, the real question is one of maintaining high standards. He agrees there could be a certain loss of internal know-how with the outsourcing.
The move has certainly caused flutters in the Austrian dovecotes, as there are just 12 company schemes and six multi-employer arrangements in the country. “Other company funds have been on to us asking us about what we are doing and why, particularly since it is the first time this has happened in Austria, as the system only came into place in 1990. Everyone is really interested.”
There has been speculation about the choice of ÖPAG, particularly since another multi-employer scheme APK, the country’s largest, was said to have been at the top of Complementa’s list.
Paulus is frank in his views: “I think there are three companies who are able to handle our scheme – APK, ÖPAG and Vereinigte. These three are all good companies. But in some respects, ÖPAG has some better points. But it was the board of Verbund as 51% owner of the pension fund that had the final decision. They said in connection with the evaluation and in the interests of the group, it was better to do this with ÖPAG.”
He adds philosophically: “However, we will only know that we have made the right decision in five years’ time – whether it was an optimal or a sub optimal decision.” It certainly is not a marriage forever, he points out. Just as the parent company can cancel an agreement to have its own pension fund, so the arrangement with ÖPAG can be changed. “Under pensions law, after one year you are free to take your assets and go to another PK, with all your reserves. You are your own entity – your assets are not mixed in with anyone else’s. We can take our money and go elsewhere. And we are keeping what as we think it is the most important thing – the control over the investment process!”
There is still the separation of pension assets from those of the employer so there is no difference for the employees in that regards. “As we are acting as consultants for a year, we can influence the direction it goes in,” says Paulus.