Austria: Something completely different?
A new approach to reform may boost Pensionskassen, which lack broad appeal despite good returns
• Second-pillar amendments are to be introduced via tax reform
• Some Pensionskassen have performed well
• Drivers of return include active strategies, diversification and alternative assets
In retrospect, 2018 could be a turning point for Austria’s second-pillar pensions. The Pensionskassen market has suffered poor growth since its creation in the early 1990s. This is the result of a lack of political commitment to a supplementary pillar combined with Austrians’ mistrust of capital markets.
The first obstacle might be overcome now that Austria has a new government with a positive attitude towards the markets. The new finance minister, Hartwig Löger used to be a board member at one of Austria’s largest insurance companies, Uniqa, until 2017.
In the coalition agreement, the conservative ÖVP and the far right FPÖ made tax reform one of their priorities. This is how some pension stakeholders hope to include reform ideas for the second pillar.
Thomas Wondrak, managing director of Konsequent Wondrak, suggests the sector should demand a new assessment of the system. “The previous government wanted to thoroughly evaluate the three pillars of the pension system but never tackled this,” he says. “Such an evaluation should be taken on by the new government to achieve a clear and transparent structure, especially regarding financial subsidies and taxation in the various pillars.”
Wondrak’s proposals are inspired by developments in Germany where the recent reforms have “set the course for supporting SMEs and people with lower income” when it comes to occupational pensions. “Austria can learn from this,” he says.
Among the steps he feels should be taken are subsidies for companies offering occupational pension solutions to people on low income and tax incentives for the self-employed. Wondrak also wants to make it possible for people to transfer any lump-sum payments they receive upon leaving a job before retirement into a Pensionskasse. He also proposes a tax-neutral way for employees to transfer part of their gross income into a pension fund (Gehaltsumwandlung).
The latter has proved difficult for some: “We need legal certainty when it comes to employees waiving some of their gross income to be put into a pension fund,” says Gerald Moritz, managing director of Moritz Consulting. “The tax treatment for this Gehaltsumwandlung differs from province to province.”
Another problem Moritz would like addressed is the tax treatment of contributions made by employees to pension plans. “These contributions should be tax exempt, just as employer contributions are, and then taxed upon pension payout.”
Meanwhile, Austrian Pensionskassen reported an average return of 6.13% for 2017. In its analysis of the sector, Mercer noted a wide variation in the results. According to the consultancy, the right tactical asset allocation and a focus on emerging markets helped some funds outperform.
“Last year, our fixed-income/credit portfolio was a major contributor to our 7.4% overall performance,” says Günther Schiendl, CIO at the VBV Pensionskasse. Other parts of the portfolio doing well are private-market credit funds and market-based financing instruments. “We are building this exposure which is partly similar to high-yield bonds, but offers a much better overall risk-return trade-off, and there are no ETFs [exchange-traded funds] in this market that could introduce volatility, and it is better diversified,” says Schiendl.
The second-largest Pensionskassen, Valida Pension, reported 5.76% growth. It identified its tactical asset allocation, including sub-fund selection at an asset-class level as well as equities and emerging-market bonds, as the main drivers, says Arnd Münker, head of asset management at the Valida group. This year, Valida implemented a new liability-driven investment (LDI) strategy using asset-liability modelling (ALM) studies to set the strategic asset allocation for different risk portfolios and momentum-driven tactical asset allocation.
In addition, Valida has minimised costs by using more passive mandates and “systematically screening managers in actively managed asset classes”, says Münker.
In some areas, the Pensionskasse is using a hybrid between active and passive in diversified portfolios.
VBV uses ETFs to achieve short-term exposure to certain equity markets. Schiendl emphasises his caution about these products: “ETFs are bringing a lot of volatility to the market and are amplifying trends.”
Another trend Moritz identifies is an increase in exposure to infrastructure: “For example, via direct investments in gas pipelines or Italian motorways, as the illiquidity premium seems to be a good option to be prepared for the future. But these investments need good research and analysis into risks, including political ones.” He adds that the exposures are too small to worry about illiquidity risks.
As part of its new LDI approach, Valida has also decided to “further expand the allocation to illiquid asset classes”. This includes private equity and commodity trading advisers (CTAs) as well as a “step-by-step increase in real estate and infrastructure investments”.
Despite these new assets, bond investments still make up a large part of Pensionskassen portfolios. Therefore, duration management and credit-risk diversification remains a priority.
Valida is also reducing the fixed-income segment, says Münker, while increasing alternatives. “The exposure to euro government bonds was strategically reduced over the last three years and is now controlled tactically,” he says. The exposure to emerging markets government bonds has increased. Together with high-yield bonds, this has lowered the average duration in the credit portfolio.
At VBV, diversification into emerging-market local-currency debt has reduced the average overall duration in the fixed-income portfolio to about three years. Another innovation will be the introduction of ESG criteria, which VBV “likes very much” to the fixed-income allocation. But the Pensionskasse is not using a strict matrix of positive and/or negative criteria. “We want to, step by step, asset class by asset class, integrate this thinking in our daily routines,” says Schiendl. “This is the deep conviction of our investment team.” In a next step, a catalogue for ESG criteria for the bond portfolio – that is, the exposure to countries, will be drawn up. “But returns remain the priority,” he explains, “therefore we cannot completely exclude countries like the US that still have a death penalty.”