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Austrian court rules on pension bond holdings

AUSTRIA - The Austrian constitutional court has ruled that companies no longer have to buy bonds to cover pension liabilities for second-pillar corporate pension arrangements.

The court ruled that the current regulation in practice did not serve the intended purpose of securing pension benefits.

Companies that choose to offer their employees pension benefits in addition to the state retirement scheme - and do not want to do so by using the services of a Pensionskasse - were previously obliged under tax laws to hold domestic bonds amounting to half the company's pension liabilities.

Failure to comply with this regulation resulted in a higher tax burden for the company.

Following a complaint by an accountant the court has now found that this obligation was "neither intended nor fit" to secure the pension benefits in case of the employer's insolvency. It stated that the current regulation's only purpose was to boost the Austrian capital market.

Another concern was that in practice very often the bonds were sold by the employer in case of pending insolvency leaving the pension benefits unprotected.

The finance ministry announced it would revise the regulation and might still consider re-introducing the obligation to buy bonds, only addressing the concerns voiced by the court.

In any new regulation foreign bonds would have to be allowed as securities, as the current regulation could be seen as infringing the EU's principle of free movement of capital, accountant Hubert Celar from the commercial tax consultant office Consultatio explained to IPE.

Fritz Janda from the Austrian Association of Pensionskassen used the court ruling to call for a complete transfer of all pension benefits into Pensionskassen. He fears that the ruling will put accrued benefits at risk.

"We already had some calls from companies thinking about changing to a Pensionskasse," he told IPE. "There is some re-thinking going on especially as the deadline for tax privileged changeover into a Pensionskasse in 2010 is drawing closer."

"Although there has been a major shift to Pensionskassen when they were introduced in the 1990s, some companies are still using the alternative route of direct pension promises for their employees," Celar said. He estimates that there are currently around €9bn accrued under these direct pension promises.

"In my opinion the freedom of choice between a Pensionskasse and the direct pension promise has to be retained," Celar said. He added that if there was to be a compulsory changeover into Pensionskassen this might put companies off voluntarily offering any additional pension benefits in the future.

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