New product shakes up market
In June the Austrian parliament finally adopted the government bill reforming the country’s severance pay system that will definitely have an important impact on the development of occupational pensions.
The discussions regarding the reform of the statutory severance pay, the Abertigung, started in the late 1990s when the Austrian Trade Union Federation (ÖGB) began calling for changes in the system, arguing that it was not longer up-to-date in terms of labour mobility, and unfair regarding the legal entitlement provisions. These early discussions were mainly focused on the extension of coverage and implementation of an external financing method. But last year, the government stepped into the process and reoriented the whole debate towards the creation of completely new concept that could also provide an additional source of retirement income for employees.
Following the government’s proposal, the reformed severance pay system will be structured under new employee welfare funds, the Mitarbeitervorsorgekassen (MV-Kassen), to which employers will contribute 1.53% of gross pay. Today around 80% of the assets going into the severance pay system are paid out as a lump sum on retirement and the aim of the reform is to create a framework that allows the build up of retirement annuities.
When in March the government announced that the new MV-Kassen would not be run inside the country’s Pensionskassen system but by new financial services providers, professionals in the industry showed their disappointment, considering this decision as too costly and unnecessary, and accusing the government of ‘reinventing the wheel’.
Unwelcome or not, the government’s decision has gone ahead and currently seven providers, including banks and insurance companies, have been authorised to manage the assets of the new system.
At present there are a lot of uncertainties about the future of the MV-Kassen and their providers. First of all, the supervisory bodies are still discussing the final details of the investment strategies of the funds which will restrict investment in equities to a maximum of 40% of total assets. More significantly, the system will have to provide a capital guarantee of 100% of paid contributions into the funds that added to the fact that managers will have to work under a tight management fee, makes the whole idea of jumping into this business not too attractive to professionals in the investment community.
“Those managing the new funds will have to show a significant commitment within the first couple of years in order to survive,” says Gerald Moritz, managing director at Vienna-based consultants IPC Austria. “Two more providers are waiting for approval from the supervisory authorities, so this would make a total of nine companies, and there are some rumours that they could be more.” He adds: “Banks and insurance companies see this as an opportunity to further penetrate the institutional market and as a link to the Pensionskasse sector in Austria.”
Because the new rule applies only to new employment contracts signed after the end of 2001, the future growth of the MV-Kassen in terms of assets will very much depend on transfers of employees with contracts signed in the old system into the new one. At present there is uncertainty regarding the number of employers willing to do this. “There is a lot of expectation regarding the money involved in the new system but it will all depend on how many contracts will be offered. We wouldn’t be surprised in only a small number of employers decide to transfer money into the new system.”
Moritz adds: “During the first few months we won’t see much money going into the MV-Kassen and there will be a lot of uncertainties about the future of the system.”
For those wanting to get a significant market share in the business it is crucial to be there right from the beginning. So most of the active names in the Austrian insurance and banking business have already set up their structures to respond to the new environment. This is the case for instance of Victoria-Volksbanken, that earlier this summer announced the creation of separate entities to manage the new system. And pensions provider APK has also entered the business.
Although it is early days to talk about the impact that the new MV-Kassen system will have on the Austrian institutional asset management market, some things will definitely change. The debate regarding the prudent man rule approach that the new system will follow when added to market underperformance has pushed institutional investors to rethink their overall investment strategies regarding risk, costs and guarantee products, which are being more discussed than ever before.
“At present when we talk to institutional investors we see that they have lost all their risk appetite,” says Gerfried Krifka, fund manager at Volksbanken. “At the moment they are comparing their performance against savings accounts and they are more concerned about the short term results.” He adds: “They are very much asking for guarantee products, although they also want to know more about alternative investments, including hedge funds.”
Krifka, who runs the funds of funds business of Volksbanken, is seeing an important increase in the interest in this type of vehicles among institutions. “The interest in funds of funds from institutional investors in Austrian is growing significantly, especially among the smaller institutions that do not want to stick to a single asset management house but combine the know how of different companies. Also the cost issue related to these vehicles can be easily resolved for institutional clients too, so there is not doubt that these products are becoming more attractive.”
Disappointment with equity performance is also pushing investors into the diversification of their fixed income part of their portfolios. “Corporate and convertible bonds are now more attractive for institutional investors, also we can see some concern regarding the risk of the corporate bond sectors,” says Konran Kontriner, chief investment officer at Innovest in Vienna, with assets under management of E2.2bn.
However, Kontriner points that he hasn’t seen any major changes in asset allocation institutional portfolios during the last year. “On the one hand underperformance in the financial markets is not helping investors to make changes to their strategies. In general they are very reluctant to modify their asset allocation and sell part of their equity portfolio and realise their losses,” he says.
“In the months to come we’ll be focusing on high yield, bonds and other products such as emerging market equities that investors are also asking for.” He highlights that in the months to come it would be interesting to see how the new MV-Kassen system develops and how the capital guarantee impacts in the indusry. “This is a whole new environment and we are working on building up our strategy there.”
Competition among asset management providers in Austria is getting tougher and tougher, mainly because the number of mandates being awarded is quite small, and two years of falling market prices have been translated into reduced revenues across the whole industry. This has also affected foreign providers, who have not found in Austria an easy market to expand their business. Although the need for specialist and a increasing interest in indexation has opened a few doors to international houses, their market share is still reduced and some believe the situation will remain like this for quite some time.
“It is true that we are seeing how certain proportions or categories of the pensionskasse porfolios are being managed by international houses,” says IPC’s Moritz. “But I don’t think we’ll see in Austria what we see in some pension funds in Europe that have most of their assets managed by foreign providers.”
Although foreign names are present in the market and some are being succesful, Moritz believes that at present Austria is not easiest place for those trying to break in or see their existing businesses grow. “However, it will be interesting to see how foreigners are going to participate in the MV-Kassen because a present everything is very uncertain,” he says.
Even though every development in the MV-Kassen will closely follow by the whole industry in terms of new assets coming into the market, it will be necessary to wait for some time before we can measure the impact of the new system in the market.
However other develpments in the Pensionskasse arena will also keep asset managers busy in the months to come. According to figures from the Austrian Pension Funds Association in 2001 the assets under managment by Austrian Pensionskassen increased in 3.6% to a total of E8.2bn. Even though this increase in assets has not been huge, taking into account the current market conditions, this figure is quite significant and a sign of the potential of the industry.
“I think that in terms of assets coming into the market, there is quite a lot of cash out there waiting to be invested,” says Krifka. “We are not quite sure where people are thinking of having it invested in, but I think in general the near future will be brighter for all of us.”