Agenda Austria has proposed to set up fund of funds vehicles to steer investments of domestic pension funds towards private equity, particularly venture capital.
Austria’s pension funds are currently restrained by regulations from investing in private equity, the institute noted in a report recommending an overhaul of the Austrian pension system.
Through a fund of funds solution Pensionskassen can diversify their portfolios by also investing in unlisted companies, it said. Examples of such investment vehicles include Vaekstkapital and Vaekstkapital II, a partnership between the Ministry of Financial Affairs and pension funds in Denmark.
Agenda Austria’s report found that another reason to deploy capital in start-ups through venture capital investments is to improve returns, even though the risks of taking holdings in young companies are higher.
The Austrian government has introduced a plan to allow institutional investors, including Pensionskassen and Vorsorgekassen, to invest in long-term, innovative types of investments, such as seed financing for start-ups and small and medium-sized firms, but so far progress has been slow.
Agenda Austria described the pension system in Austria as “unfair and unstable”. A “massive expansion” of the second and third pillars and a tax relief on workers’ savings are necessary to change the system.
The combination of new investment vehicles and low taxes may lead to an increase in capital funded levels in the overall pension system.
Only 14% of the Austrians contributed to a capital funded system, compared to 100% in Sweden, 88% in the Netherlands, 84% in Denmark and 74% in Switzerland, according to Organisation for Economic Co-operation and Development (OECD) and Mercer.
In the Abfertigung Neu and investment guidelines Agenda Austria identified two roadblocks that slow the process to change the pension system.
Under the so-called Abfertigung Neu severance pay system, employers pay 1.53% of the gross salary from the second month of employment in Vorsorgenkasse that manage and invest contributions according to strict investment guidelines, the think tank said.
The Abfertigun Neu also carries a “nominal capital guarantee” to payout the amount paid in the fund. After three years, the person entitled can have the severance paid out under certain conditions.
The capital guarantee and the option of withdrawing the severance payment after three years point to risk-averse investments and low returns, the think tank noted, adding that guarantees mean that part of the contributions can only be invested in lower-risk investments such as government bonds.
Agenda Austria recommended replacing the Abfertigung Neu with a pension fund contract, or Pensionskassenvertrag, and opting out from capital guarantees both for severance payments and in the Pensionskassen system.
Pensionskassen in Austria have recorded average returns of 4.32%, or 2.4% adjusted to inflation until 2019, compared to average returns for Vorsorgekasse of 2.4%, or 0.64% adjusted to inflation.
But the “counterproductive” Abferigung Neu and the low amount of payments into domestic pension funds obstruct the positive impact of the Pensionskassen on the stability of the pension system.