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Impact Investing

IPE special report May 2018

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Austria: Occupational pensions under pressure

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Celebrating its 25th anniversary, the Austrian pensions sector faces few new regulatory challenges and the rise of a young competitor  

Regulation in summary

• The system’s 25th anniversary has seen minimal regulatory change, with a delayed introduction of an amended PIMAV-PK spelling out new risk-management procedures.
• The new Pensionskonto, an individual account, aims to engage savers by showing the level of their first-pillar savings.
• Consolidation has reduced the number of Pensionskassen to 13, resulting in warnings from government that competition must be maintained between funds.
• Finance minister Hans Jörg Schelling has warned the pensions sector that its entry into direct lending could distort the market.
• Growth in newer provident funds means the funds administering severance pay are growing larger than Pensionskassen.

Established in 1990, this year Austria’s Pensionskassen marked their 25th anniversary. The sector has had its problems over the years and today faces competition from Vorsorgekassen (provident funds), into which most workers have to contribute towards their statutory severance pay.

While there has been little new regulation in the sector over the past year, the amended Risikomanagementverordnung Pensionskassen (PIMAV-PK) will require Pensionskassen to stress test portfolios from 2016 or risk having to cut benefits. The system’s initial design required funds to cut benefits where they failed to meet the minimum requirements set out under the Rechnungszins, or minimum discount rate, currently at 3%.

The regulation tests individual cohorts of beneficiaries based on their risk profile. Funds will be required to assess credit risk to avoid any “excessive dependency” on external credit rating assessments. The reform also requires funds to prove they have complied with the Pensionskassengesetz (PKG) when employing derivatives. 

Prior reforms that are still bedding in include those to the first pillar establishing the Pensionskonto. The Allgemeine Pensionsgesetz (APG), the law that introduced the individual account system in 2005, has mandated that those paying into the first pillar receive tailored information regarding their entitlements.

Austrian retirement assets (€ ’000s)*

The relative lack of regulation does not mean the past year has been without its challenges. Hans Jörg Schelling, the finance minister, issued a warning about consolidation in the industry. 

Speaking at the 25th anniversary celebration hosted by the pension fund’s industry association, Schelling was insistent that competition among the ever-decreasing number of Pensionskassen was vital and must be allowed to continue: “There must be no further consolidation that might hinder competition.”

The warning came as 2014 figures from supervisor Finanzmarktaufsicht showed that Valida, APK and VBV account for nearly three-quarters of the sector’s assets and that the number of funds declined from 16 in 2013 to 13 in mid-July. 

The Victoria-Volksbanken Pensionskasse and its Vorsorgekasse counterpart were sold to the pension provider Bonus in July 2015, which has more than doubled the provider’s pension assets under management.

Austria Country facts

Schelling also suggested that there should be better co-operation between the insurance industry, which provides the Betriebliche Kollektivversicherung, a guaranteed insurance product, and the Pensionskassen sector, which is itself often owned by large Austrian insurers, as a way of building public trust in the system. 

Separately, the finance minister also raised concerns that the involvement of pension providers in the direct lending market could be distorting it. Largely a market occupied by insurance-based pension products, Schelling was worried that lenders were subject to less stringent rules than the banking industry, and that while the one had to take into account the cost of regulation when lending, the other was free of the burden. 

But the real challenge facing Pensionskassen is not regulation or investment but rather the newer provident funds launched in 2003.

Benefitting from mandatory contributions of 1.5% of salary from most employees – both staff and self-employed – the sector is growing larger and could overtake the Pensionskassen’s €20bn in assets. 

It easily outstrips the occupational pension sector’s 20% workforce engagement rate and, with €8bn in assets last year, some Vorsorgekassen are reporting assets under management in excess of smaller Pensionskassen.

In itself, this is not a threat to Pensionskassen, as in all but one case the Vorsorgekassen are owned by the parent companies of those running the pension vehicles

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