mast image

Special Report

Impact investing

Sections

Battle to manage new system

The most discussed issue in the Austrian market during the past few months has been the future of the Abfertigung neu, the reformed severance payment system that is expected to have a huge impact on the development of the country’s corporate pensions market.
Under the current system, employers set aside payments for each employee that guarantee them a proportion of their earnings if they are made redundant or retire. Although the system was originally designed to provide redundancy payments, today 80% of severance payments are paid out as lump sums on retirement. The current reforms aim to create a system that can be use to build up retirement annuities.
The size and complexity of the process have attracted interest among professionals right across the industry. Discussions about how the transition from the current book reserve system into a defined contribution (DC) one should be structured have been intense. But the most important issue was to establish who was going to manage the new system.
The country’s 19 Pensionskassen saw themselves as the natural choice but were disappointed when the government announced a proposal for the introduction of new financial services providers, Mitarbeitervorsorgekassen (MV-Kassen), to take charge of the reformed system. The decision was widely criticised by the Pensionskassen industry, which described this approach as costly and unnecessary. More significant were comments from the Pension Funds Association and the Association of Underwriters, which accused the government of “reinventing the wheel” by introducing new providers to manage these assets instead of allowing the new MV-Kassen to run inside the existing Pensionskassen system.
At the time of the announcement, Fritz Janda, managing director of the Austrian Pension Funds Association said the government was “inventing the Pensionskassen for a second time” and that the government’s decision went back on an agreement made between the social partners last October that the pension funds would play an important part in the development of the MV-Kassen.
Dietrich Karner, president of the Association of Underwriters, also asked why it was necessary to set up a new structure when existing structures could handle the system.
The government has responded to these critics by saying that the new system should have its own administration to simplify the running of the scheme, and that using the existing structure would have involved some 100 outlets rather than the 10 that the government envisages. Finance minister Karl-Heinz Grasser described the the decision as “the most important reform step for Austrian employees for the past 10 years”. Under the new MV-Kassen employees will contribute 1.53% of gross salary and the government expects that within 10 years contributions will total e4bn.
So, despite the unhappiness that some of the proposals brought to the Pensionskassen industry, the reform of the severance payment will indeed be the driver for the consolidation of the second pillar that has flourished in the country during the past decade. According to the Pension Funds Association, at the end of 2001 the total assets of the Pensionskassen industry were e8.2bn, 3.6% higher than the figure registered at the end of 2000. The total number of beneficiaries was 318,000 employees in December last year, a 12% increase since the end of the previous year, showing that private schemes are becoming more and more popular among employers and employees.
According to the association a total of 19 Pensionskassen were active in the market during 2001, of which seven are multi-employer schemes. This number is expected to increase in the near future. The development of second-pillar occupational pensions in the country depends on the ongoing debate regarding the reforms in the first-pillar state retirement provision. Earlier reforms have proved to be insufficient for the long term sustainability of the system, and further measures need to be considered
To raise interest in occupational retirement provisions it will be necessary for the government to provide the system with additional incentives.
As more companies are deciding to move their pension liabilities from their balance sheets into DC schemes, this sector is rapidly developing in Austria, with around 95% of new schemes being set up under a DC model.
Consolidation among the existing schemes will also be an important development. This year saw the announcement of the merger between the Vienna-based ATS3.8bn (e280m) Verbund Pensionskasse, the pension scheme for Austria’s largest electricity company, and the ATS17bn OEPAG Pensionskassen, one of the country’s seven open funds, in an effort to cut costs and concentrate on its core business. Others could follow.
In the months to come the developments in the MV-Kassen system will definitely be much discussed. It will be necessary to wait and see whether the government’s idea of running this system outside the Pensionskassen sector proves to be successful or, as some have forecast, costly and unnecessary.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

Begin Your Search Here
<