Reforms provoke heated debate
Pensions have been a hot topic in Austria during the past few months. Both the public and private pensions sectors have undergone more or less unwelcome reforms and it seems the months to come will continue to add more ingredients to the pensions debate.
In May, thousands of Austrians took the streets to protest against government plans to reform the state pension that could see working life increased and benefits reduced.
Public protests and political tensions were translated into pressure on chancellor Wolfgang Schuessel to make some concessions; in June parliament passed the controversial pensions reform bill. As part of the new legal framework, and on a gradual basis, the age of retirement will be increased from 61.5 years to 65 years for men and from 56.5 to 60 years for women, with those retiring early having their benefits reduced from the current 3.75% to 4.2%. By 2013, and under the new legislation, early retirement will be abolished.
This turmoil regarding the public sector and changes in the law affecting Pensionskasse have meant that Austrians have been too busy discussing their own market to pay too much attention to what has been happening at the EU level.
“The pension industry has been focused on recent changes regarding both the public and the corporate sector in Austria,” says Gerald Moritz, managing director at Vienna-based consultancy IPC. “The directive hasn’t been the centre of discussions but of course it is an important development that will have an impact on the future of the industry.”
Moritz mentions issues regarding solvency protection requirements and investment regulation as some of the points where the directive could influence the way the Austrian pensions market operates. At the moment, Austrian pension funds can invest up to 50% of total assets in equities with a minimum of 35% going into bonds. Although Moritz believes that there will be no changes to these limits in the near future, the principle of the ‘prudent man rule’ contemplated by the directive has increased the debate regarding a more flexible approach to investment in the country.
In the same way that the future of the Austrian state pension is one of reduced benefits, the Pensionskassen sector has also been forced to follow this route. Despite being Austria’s best performing fund last year, Vereignigte Pensionskasse (VPK) has reduced its pensions by up to 10%. VPK is the largest multi-employer pension fund in Austria with around €1.9bn assets under management .
Martin Cech, investment manager at VPK in Vienna, comments that disappointing investment results during the past few years were translated into changes in the approach to asset management.
Regarding the influence the directive could have on the way the fund is managed Cech comments: “I don’t think the introduction of the directive is going to affect our structure in the near future.” He adds: “On the other hand, I see current changes in our own domestic pension law as something that will definitely impact on the way we work.”
Cech explains: “From now on there will be a strong focus on absolute returns, reduced volatility and greater portfolio diversification.”
This view is shared by many in a country that has seen its pension fund industry growing through the past few years. Fritz Janda, managing director at Fachverband der Pensionskassen, the Austrian pension fund association in Vienna, believes this growth will carry on.
“Funded pension funds in Austria have been growing for years and I don’t see any major obstacles for this growth to continue,” he says. Janda agrees with other professionals on the fact that the introduction of the directive will have little impact on the way the Austrian market is developing because the country already has “a modern legislation and consequently no major changes are expected from the directive”.
Although it is true that the industry has greatly developed during the past few years Janda mentions the fact that funded pension funds in the country are voluntary as a limitation to the size of the market. “ Further growth in the industry depends on public opinion on the need for funded pensions,” Janda says. He adds: “Our government should give more incentives to invest in funded systems.”
He highlights the fact that there are still no answers for some of the most important questions regarding the future of European pensions: “What the directive is missing is harmonisation of labour, social and tax law.”