Austria: Are times changing too swiftly?
Austria’s second pillar remains stuck amid inertia, market mistrust, political half-heartedness and global uncertainty
Regulation in summary
• The pension debate has been overshadowed by national and global crises.
• There is still no political commitment to funded pensions and only minor adjustments to the legal framework have been discussed.
• The Supervisor has lowered maximum discount rate to 2.5%.
Austria’s new chancellor, Christian Kern, wants to come up with a plan for ‘Austria 2025’, including the reform of the pension system.
Kern took over from Werner Fayman in May. They are both members of the Social Democratic party SPÖ, which is part of a government coalition with the conservative ÖVP. The appointment came in the aftermath of heavy losses for the two largest parties in Austria in the April elections for a new federal president.
However, since then, a number of national and international crises have kept Kern, the former chief executive at the Austrian Federal Railways ÖBB, from making any further progress on his plans for the future of the country or the pension system.
The presidential election ended in a run-off between the Green and the far-right candidates, and the poll will have to be repeated in October due to alleged irregularities. And the UK’s vote to leave the EU left the capital markets in even more turmoil, making it harder to sell funded pensions in a country with deep mistrust for listed securities.
Meanwhile, Austrian Pensionskassen reported an average return for the first half of 2016 of 0.22%, despite market turbulence. The Austrian pension fund association FVPK took pains to emphasise that “short-term volatility like this has almost no influence over the long-term horizon that matters for pension assets”. For the past five years, the annualised average return was 4.14%. As of year-end 2015, when the performance was 2.36%, the average since inception of the pension fund system in the early 1990s was 5.58%.
At the end of March, the average equity allocation in the portfolios of the 12 pension funds, worth just over €20bn in total, stood at 25.7%. According to statistics compiled by data service provider Österreichische Kontrollbank (OeKB), the bond allocation was 68.3% on average, and the real estate allocation 3.45% . The three largest pension funds – VBV, Valida and APK – cover more than 76% of the market, while the six company pension funds account for less than 10%.
From July 2016, the Austrian financial market authority (FMA) decided to lower the maximum discount rate to be applied to new contracts with Pensionskassen – from 3% to 2.5%. Too-high discount rates are still haunting the Austrian second pillar, as the rate of 6% or more that was applied in the 1990s – mostly to make transfers of book reserves cheaper for companies – can no longer be achieved.
In the almost pure DC system in Austria, members with higher rates are facing cuts in their payouts. However, most of the old pension transfers had been generous promises on top of high first-pillar pensions, as opposed to current contracts, which are mostly top-ups for declining state pensions.
So while global events are developing quickly, the debate on the reform of the pension system once again has been put on hold. The government has failed to make any commitment to a funded pillar, despite obvious demographic challenges.
“While global events are developing quickly, the debate on the reform of the pension system once again has been put on hold. The government has failed to make any commitment to a funded pillar, despite obvious demographic challenges”
Already in 2014, almost one-quarter of government spending went into the first pillar, either to top-up the pay-as-you-go system, or to pay for civil servants’ pensions. Meanwhile, the actual retirement age remains well below the statutory level of 65 for men and 60 for women.
No changes to the law governing the Pensionskassen (Pensionskassengesetz/PKG) were debated before the summer. Only the law governing the insurance-based second-pillar pension option, the collective insurances Betriebliche Kollektivversicherung/BKV, is set to be refined to fit the new insurance supervisory law (Versicherungsaufsichtgesetz/VAG) – or to add exceptions. The new VAG was introduced at the beginning of the year to implement Solvency II.
The BKV is still offered by very few employers as an occupational pension option – mainly because guarantees are relatively costly. However, some consultants say one consideration in favour of this insurance-based vehicle is that employers can be certain they are complying with their duty of care.
Certain growth is still only to be found among the provident funds (Betriebliche Vorsorgekassen/BVK), which manage the mandatory severance pay assets that companies must put aside for each employee. Assets in this segment have grown to €8.3bn since inception in 2003. For 2015, the 10 providers recorded an average return of 1.22%, which amounts to an annualised 2.7% average since inception.
Meanwhile, the number of providers has dropped to nine after the Bonus Pensionskasse bought the Victoria-Volksbanken Pensionskasse and the Vorsorgekasse from the joint owners the Austrian Volksbanken and the Ergo insurance group.
The BVK sector is still hoping that the government will increase the minimum holding period for assets in the provident funds. Currently, most people can withdraw money after three years. This means providers – which all have committed to sustainable investing – have a short-term horizon.
This, in turn, means little risk can be taken. According to the FMA, provident funds allocated just 11.3%, on average, to equities, while allocating 81% to fixed income (as per year-end 2015).