Pensions debate in camera
Germany is preoccupied with debates on pensions, while in Austria the issue is discussed behind closed doors, according to Barbara Ottawa
At a glance
• Austria has a pure defined contribution system but there is a lack of political support and faith in funded pensions.
• Long-term returns have been good.
• Improvements are needed in governance and regulation.
In light of the current discussion in Germany about defined contribution (DC) pensions, Austria obviously did its homework years ago.
“Austria already has a pure DC system and the tax framework also allows for a decent supplementary pension provision, even for people in higher income brackets, which is not the case in Germany,” says Sibylle Kampschulte, senior consultant at Willis Towers Watson in Vienna.
But where Austria is lagging is in political support for the topic. Since Pensionskassen were created in Austria in the 1990s, no government has as yet openly stated support for a funded second pillar.
For one, the state pension system is somewhat akin to a Holy Grail. Politicians shy away from discussing the sustainability of the first pillar in case it endangers the support of pensioners, the largest group of voters. Of course, this logic does not take into account the fact that the real problems in the first pillar will only arise for future generations.
Second, many Austrians are prejudiced against capital markets and what they call ‘speculation’. The continued low-interest rate environment has not helped to change this point of view.
But the performance figures for Austrian Pensionskassen are respectable, both long and short term. According to the pension supervisor FMA, the average return for all nine Pensionskassen (including company pension funds as well as multi-employer providers) stood at 4.2% for 2016.
Since the early 1990s, Austrian second-pillar funds have generated over 5.5% on average. However, consolidation and transfer of company pension plans to multi-employer providers have reduced the number of funds considerably from 17 at the beginning.
Because the life-cycle model was introduced in 2005 first by the VBV and then rolled out to the whole system, performance averages only provide a limited picture.
Mercer Austria has been collecting more detailed performance data from the Austrian Pensionskassen for over a decade now.
Dependent on the risk strategy – ranging from defensive with an equity exposure under 16% to dynamic with over 40% in equities – different providers fared well over the last years.
In the balanced segment – 24-32% equities – Allianz was the best performer in 2016 as well as over three, five and 10-years.
VBV did best in the dynamic segment across the board, apart from in 2016 when the APK outperformed its peer group.
The data also illustrates the major downturn that portfolios with higher equity exposures suffered in the financial crisis. Over the 10-year period, dynamic funds in the market returned an average of 2.9% despite a very good 6.6% return for the five-year period.
Conservative strategies – with equity exposure of 16-24% – returned 3.2% over the last decade and just over 5% over the last five years.
Overall, most observers paint a positive picture of the second pillar, even though it covers only 20% of the workforce.
But there is room for improvement in the existing framework. Kampschulte points out that while Pensionskassen are very transparent, employers often still have an issue with relaying information. “DC governance could be improved and information should be tailored to the audience. Pension plans are often set up without proper communication to the employees,” she says.
Kampschulte also criticises the legal framework for second-pillar pensions: “It currently takes a lot of creativity to set up an attractive pension plan under the existing laws in Austria,” she says.
Kampschulte does not recommend the introduction of a mandatory second pillar – for the sake of the employers. She says: “An occupational pension system supported by a good legal and taxation framework can help companies position themselves as an employer of choice. If employees were permitted to make tax-effective contributions the employer’s contribution would be valued more greatly. With a mandatory system the employer’s effort would be worth much less.”
Austria already has a mandatory system with the provident funds (Vorsorgekassen), but they must make all assets available for withdrawal three years after employment ends. For Bruckner this a major problem for investment. “This does not allow for a long-term approach to investments and it rules out a lot of opportunities, thus preventing possible higher returns.
Given their conservative approach, the average return over all nine providers of provident funds was 2.25% last year and just over 2% over the 10-year period, according to Mercer.
“We would welcome more prudent-person approaches and less regulation,” says Bruckner.