The starting point for the Austrian second pillar pension system is associated with the year 1990 when Pensionskassen were introduced and the legal framework for the corporate pension market was established. These privately owned institutions were equipped with generous tax reliefs and a ‘modern’ understanding of funding given a mark-to-market approach for the valuation of assets, and flexible ways of financing liabilities allowing for volatility reserves taking positive and negative values. The only guarantee Pensionskassen had to give to their members was a minimum average return on investment over periods of five years at a level which effectively never exceeded money market rates.
Contrary to this prospect the new Austrian system developed slowly and, as a few years ago equity markets went down dramatically, Pensionskassen came under massive pressure. Not only that they had to reduce their benefits to pensioners, the actual return on investment would have caused the ruin for most of them if the Austrian government had not relaxed the rules for the guarantees to be given. The guarantees now apply only to pensioners and relate to annual pension payments instead of capitalised values.
At this time there was serious concern in Austria about the soundness of the new pension system, and insurance companies were willing to take over the business after transferring the plans to their proper legal and accounting system.
When the long awaited EU pensions fund directive was announced last September it was obvious that the intended ‘level playing field’ for the different institutions providing occupational retirement provisions in Austria had to be reviewed. It took nearly one year for the first draft of the amendment of the Pensionskassen Law to be circulated to the related parties and professionals.
Beside amendments related to cross border issues, members information and a mandatory risk management process, the draft also shows deviations from the original concept:
q negative volatility reserves will be ruled out;
q solvency margins will have to be increased to the level of insurance standards;
q actual solvency margin may remain if guarantees are not given at all.
Knowing the difficulties Austria’s Pensionskassen had to cope with some years ago, these proposals seem to be a reasonable answer to the problem. But isn’t there a misunderstanding between a mark-to-market approach and the concept of complete funding at each point in time? Having already reduced the value of guarantees, is a solvency margin with 4% of total liabilities (as for insurance business with a capital and interest guarantee) appropriate? Finally, as Pensionskassen will try to avoid further capital cost, this will stipulate the market to opt out of all (left) guarantees to members of the pension plans!
On the other hand, no amendment of Austria’s Insurance Law with respect to the directive is currently under discussion. In any case, a lot of work has to be done and time is running short as amendment(s) should be effective as of 1 May 2005 to enable full compliance with the directive next year.
Hubert Schicketanz is auditing actuary for Pensionskassen and consultant with Dr Heubeck GmbH, a member firm of the EURACS Network, in Austria